Limited liability v Unlimited liability Sole trader v

Limited liability v Unlimited liability Sole trader v Private limited company (ltd) The problems of setting up in business! 1. 4. 3 T HE IMPORTANCEOF LIMITED LIABILITY 1. 4. 3 LIMITED LIABILITY

S OLE TRADERS A sole trader is an individual who owns and runs their own business. The simplest form of business. A sole trader has unlimited liability - they are personally responsible for all debts run up by the business. They could lose their home and all of their assets to pay off any debts that they are unable to pay. Can you define asset and debt? 1. 4. 3 LIMITED LIABILITY

S OLE TRADERS B ENEFITSAND DISADVANTAGES OF BEINGA SOLE TRADER Benefits Cheap and easy to set up All profits go to you! Drawbacks Unlimited liability Limited finance Difficult to find cover when ill Competitors can’t see your accounts Few specialist skills – the Highly motivated You are the boss! 1. 4. 3 LIMITED LIABILITY A sole trader has to wear a number of ‘hats’ – a variety of jobs! owner has to do everything or ‘buy in’ expertise How many hats might a sole trader wear? List all the different jobs a sole trader running a newsagents may have to do.

B ECOMING A SOLE TRADER Sarah has always dreamt of being her own boss and at the age of just 22 an opportunity arose. Patricia, the owner of the gift shop where Sarah worked, was due to retire and close the business that she had operated as a sole trader for over 40 years. Sarah wondered whether she had the necessary skills to run the shop herself and finally plucked up the courage to talk to her boss about her buying the shop. Question Time 1. What is meant by the term ‘sole trader’. 2. Explain one advantage of Patricia running the shop as a sole trader. 3. Explain one disadvantage of Patricia running the shop as a sole trader. 4. Identify and explain three skills Sarah would need to operate the shop as a sole trader? 1. 4. 3 LIMITED LIABILITY

P ROVERBS Can you work out what proverbs these abbreviations stand for? APSIAPH GMTA Clue: when is the last time you and a friend had the same silly idea? TMCSTB 1. 4. 3 LIMITED LIABILITY Clue: you and I are thinking the same thing! FSD Clue: when things aren’t going to plan do you ever chat to a friend about it? Clue: the soups burnt thanks to everyone involved

P RIVATE L IMITED C OMPANIES 1. 4. 3 LIMITED LIABILITY Private Limited Companies have Ltd. after the company name. They can have one or more members e. g. shareholders They must have at least one director (at least 16 years old) The shareholders are often family members and have a say in the running of the company Can you define the word shareholder?

P RIVATE L IMITED C OMPANIES Private Limited Companies exist in their own right. The owners and the company are separate legal entities. Therefore, the company’s finances are separate from the owner’s personal finances. Shareholders are the owners of Private Limited Companies. Shareholders have limited liability – they are not responsible for the company’s debts. Shareholders can only lose the money that they have invested in the business in the form of shares. 1. 4. 3 LIMITED LIABILITY

P RIVATE L IMITED C OMPANIES Incorporation Private Limited Companies must be registered (Incorporated) at Companies House. They must send to the Registrar of Companies the following: 1. A Memorandum of Association – name, registered office and what the company will do 2. Articles of Association – the rules of running the company They must deliver to Companies House each year a true and fair set of accounts 1. 4. 3 LIMITED LIABILITY

P RIVATE L IMITED C OMPANIES B ENEFITSAND DISADVANTAGES OF BEINGA P RIVATELIMITEDCOMPANY Benefits Limited Liability Increased sources of finance More expertise available Difficult for hostile takeovers to occur Why might one firm want to see the accounts of another? 1. 4. 3 LIMITED LIABILITY Drawbacks Competitors can see financial information Difficult to sell shares for individual shareholders – other shareholders have to agree Greater legal constraints Can’t sell shares to the general public

30 S ECOND C HALLENGE How many businesses can you name with ltd after its name? End 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1 2 3 4 5 6 7 8 9 1. 4. 3 LIMITED LIABILITY

T EAM C HALLENGE 1. 4. 3 LIMITED LIABILITY Instructions Split class into teams of 3 Each team should have 3 sheets of paper, preferably 3 different colours Each sheet represents one type of ownership e. g. blue might be a sole trader, yellow a franchise and red a company Each team member takes one sheet and writes down something about that type of ownership Fold it over and pass on to next person Keep doing this until the sheets have been passed to each person 3 times Winning Each sheet should now have 9 statements on it Count up how many correct but different points have been made The team with the most points wins

2 M INUTE T EST 1. 4. 3 LIMITED LIABILITY State 2 advantages of being a sole trader State 2 disadvantages of being a partnership What 2 items must a private limited company provide to Companies House? State 2 benefits of being a private limited company State 2 stakeholders that will be affected by changing from a sole trader to a Ltd. company End

MULTIPLE CHOICE 1. Which two of the following would be a reason to set up as a private limited company rather than a sole trader? Select two answers □ A To sell shares on the Stock Exchange □ B Access to increased finance □ C Reduced legal requirements □ D Less expertise available □ E Limited liability 1. 4. 3 LIMITED LIABILITY