CHAPTER 1
Sole trader → operates a business themselves, keeps profit. Offers a service to the
public in exchange for money. Only person responsible for the management and any
financial difficulties/problems etc. If the business grows much bigger it needs to be
replaced by a partnership or limited company structure → more than one manager.
Relatively informal and easy to set up.
Partnership → business run by two or more people with a view to making profit.
Partners often receive more resources to put into the business. The partners are
responsible for financial difficulties/problems etc. Each partner is liable under the law
for other partner’s actions. Not difficult to set up.
Limited company → legal arrangement for regulating the ownership of a business.
Regarded as a separate person for the purposes of the law. The company is responsible
for financial difficulties/problems etc. Owners are protected from any adverse
consequences of the action → concept of limited liability. Setting up a company
(process of incorporation) involves some legal formalities → therefor it’s more difficult.
Shareholders are liable only for the amount which they have paid into the company in
exchange for shares. Information which could remain private in a sola trader or
partnership organization must be made public by limited companies.
Advantages Disadvantages
- Easy to start up - Bears all consequences of legal
- No legal formalities on start-up action against the business.
- Is self-reliant: does not risk - Remains small-scale
Sole Trader
personality clashes - Bears brunt* of any losses or
- Does not have to share profits business difficulties
- No co-manager with whom problems
- Management is shared, can be shared
complementary skills - No complementary skills
Partnership - Business decisions do not have to
be taken alone - Partners are responsible in law for
- Business risks/losses are shared consequences of each other’s actions
- Bears all consequences of legal
- Limitation of personal liability action against the business. Personal
- Legal structure allows property may have to be sold to meet
shareholders to appoint business debts
professional managers as directors - Shared profit
- Shares can be used to spread the - Required adherence* to strict
Limited ownership amongst many people formal legal requirements and
Company - Shares can be sold and bought so sometimes require professional advice
that transfer of ownership is - Regular filing* of financial
relatively easy and straightforward information with the Registrar of
Companies is a legal requirement →
additional administration and people
have access to information
, Capital introduced → contribution of the founder(s) to a business on start up.
The owners of a business usually take out part of the profits, when their business
grows, as their reward for investing in it. Retained profits → amount of profit left in
the business that the owners did not take out in order for the business to grow.
Lenders need to know that:
- The money they lend will be paid back eventually
- The business will be able to pay a reasonable rate of interest. In order to do so the
business needs to stand a good chance of being profitable.
Cost of borrowing → interest paid on a regular basis to the lender.
Risk/return relationship → assessment of how risky the lending is → different interest
rates.
Secured loan → mortgage, guaranteed pay back.
Overdraft → most likely to be made available to a business if it can prove that the
extra funds are needed only in the short-term → short-term solution → bank can
demand immediate repayment at any time.
Under a leasing arrangement, the business (the lessee) pays a regular amount to a
lessor in exchange for the use of an item which will be used over the medium to long-
term that cost too much at one time.
Hire purchase is similar but once the final agreed payment is made ownership passes to
the purchaser business.
A company (except a partnership or sole trader business) can raise additional finance by
offering more shares.
A venture capital company invests for limited periods in growing companies, in order to
give them a financial boost.
Short term Medium term Long term
Existing resources X X X
Retained profits X X X
Borrowings X X X
Mortgage X
Overdraft X
Short leases X
Long leases and
X X
hire purchase
Grant* finance X X X
Share issues X X
Sole trader → operates a business themselves, keeps profit. Offers a service to the
public in exchange for money. Only person responsible for the management and any
financial difficulties/problems etc. If the business grows much bigger it needs to be
replaced by a partnership or limited company structure → more than one manager.
Relatively informal and easy to set up.
Partnership → business run by two or more people with a view to making profit.
Partners often receive more resources to put into the business. The partners are
responsible for financial difficulties/problems etc. Each partner is liable under the law
for other partner’s actions. Not difficult to set up.
Limited company → legal arrangement for regulating the ownership of a business.
Regarded as a separate person for the purposes of the law. The company is responsible
for financial difficulties/problems etc. Owners are protected from any adverse
consequences of the action → concept of limited liability. Setting up a company
(process of incorporation) involves some legal formalities → therefor it’s more difficult.
Shareholders are liable only for the amount which they have paid into the company in
exchange for shares. Information which could remain private in a sola trader or
partnership organization must be made public by limited companies.
Advantages Disadvantages
- Easy to start up - Bears all consequences of legal
- No legal formalities on start-up action against the business.
- Is self-reliant: does not risk - Remains small-scale
Sole Trader
personality clashes - Bears brunt* of any losses or
- Does not have to share profits business difficulties
- No co-manager with whom problems
- Management is shared, can be shared
complementary skills - No complementary skills
Partnership - Business decisions do not have to
be taken alone - Partners are responsible in law for
- Business risks/losses are shared consequences of each other’s actions
- Bears all consequences of legal
- Limitation of personal liability action against the business. Personal
- Legal structure allows property may have to be sold to meet
shareholders to appoint business debts
professional managers as directors - Shared profit
- Shares can be used to spread the - Required adherence* to strict
Limited ownership amongst many people formal legal requirements and
Company - Shares can be sold and bought so sometimes require professional advice
that transfer of ownership is - Regular filing* of financial
relatively easy and straightforward information with the Registrar of
Companies is a legal requirement →
additional administration and people
have access to information
, Capital introduced → contribution of the founder(s) to a business on start up.
The owners of a business usually take out part of the profits, when their business
grows, as their reward for investing in it. Retained profits → amount of profit left in
the business that the owners did not take out in order for the business to grow.
Lenders need to know that:
- The money they lend will be paid back eventually
- The business will be able to pay a reasonable rate of interest. In order to do so the
business needs to stand a good chance of being profitable.
Cost of borrowing → interest paid on a regular basis to the lender.
Risk/return relationship → assessment of how risky the lending is → different interest
rates.
Secured loan → mortgage, guaranteed pay back.
Overdraft → most likely to be made available to a business if it can prove that the
extra funds are needed only in the short-term → short-term solution → bank can
demand immediate repayment at any time.
Under a leasing arrangement, the business (the lessee) pays a regular amount to a
lessor in exchange for the use of an item which will be used over the medium to long-
term that cost too much at one time.
Hire purchase is similar but once the final agreed payment is made ownership passes to
the purchaser business.
A company (except a partnership or sole trader business) can raise additional finance by
offering more shares.
A venture capital company invests for limited periods in growing companies, in order to
give them a financial boost.
Short term Medium term Long term
Existing resources X X X
Retained profits X X X
Borrowings X X X
Mortgage X
Overdraft X
Short leases X
Long leases and
X X
hire purchase
Grant* finance X X X
Share issues X X
