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1. Explain 2 differences between a sole trader and partnership

1. Explain 2 differences between a sole trader and partnership. Sole trader is entirely owned by one person; partnership by 2-20. Risks, workload and responsibilities are shared in a partnership More specialisation in a partnership than a sole trader

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1. Explain 2 differences between a sole trader and partnership

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  1. 1. Explain 2 differences between a sole trader and partnership • Sole trader is entirely owned by one person; partnership by 2-20. • Risks, workload and responsibilities are shared in a partnership • More specialisation in a partnership than a sole trader • More access to capital in a partnership than a sole trader.

  2. 2. Explain the importance of establishing a separate legal identity to separate the business from the individual owner • The value is that potential liabilities rest with the company (the separate legal entity) and cannot be passed on to the owners (the shareholders); consequently the owners enjoy limited liability

  3. 3. You can start a business today. All you have to do is tell the Inland Revenue (the taxman). Outline 2 risks of starting a business this way. (4) • You will have unlimited liability because you are technically operating as a sole trader • It sounds too impulsive, business start-up is risky, so it should have some careful preparation/research before rushing in.

  4. 4. Briefly discuss whether each of the following businesses should start as a sole trader, partnership pr a private limited company • This should be started as a private limited company to create a full guarantee of no personal losses beyond Claire’s £40,000; but many people would start this as a sole trader, because the risks of default are very low and everything seems to be within Claire’s control. • It could become a partnership, but the risk profile is so high that it would be foolish not to make this a limited company; 67% of capital is borrowed (compared with 20% for Claire Wells) and big ambition (number one in Sheffield) implies the need for extra inputs of capital in the future

  5. 5. Explain the possible risks to a growing business of making the jump from a private limited company to ‘going public’, then floating its shares on the stock market. (5) • The sudden influx of cash from the float coincides with a sudden increase in external scrutiny and pressure; with the media and City analysts sniffing around, the pressure is on to invest this cash quickly (many of the building societies that ‘floated’ in the 1980’s and 1990’s made staggering mistakes with their early investments – the cash was burning a hole in their pockets).

  6. Rapid growth is always risky; with a sudden injection of a lot of cash, businesses often attempt a great leap forward, perhaps by making their first takeover bid for another company; as most takeovers fail, this is certainly risky. • Lose control of who becomes a shareholder in the business and if not careful the company could be taken over. • Diseconomies of scale – the business could grow too large too quickly creating problems with communication and ordering. • It may be difficult to raise the funds necessary to become a public limited company • More paper work and formalities.

  7. 6. In what way may the type of business organisation affect the image of the business? (2) • It sounds more established/formal to have a Ltd after the company name rather than nothing; and makes the company seem much bigger if it is TIB PLC than TIB Ltd. • Sole traders are usually thought of as small service based businesses which remain small.

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