Chapter – 3
Sole Traders, Partnerships, Social Enterprises and Franchises
Definitions –
1. Innovator – someone who introduces changes and new ideas.
2. Labour – people employed in a business or used in production.
3. Unincorporated – businesses where there is no legal difference between the owner and
the business.
4. Incorporated – business that has a separate legal identity from that of its owners.
5. Sole trader – business owned by a single person.
6. Unlimited liability – owner of a business is personally liable for all business debts.
7. Partnership – business owned by between 2 and 20 people.
8. Deed of partnership – binding legal document that states the formal rights of partners.
9. Limited partnership – partnership where some partners contribute capital and enjoy a
share of the profit but do not take part in the running of the business.
10. Limited liability – business owner is only liable for the original amount of money
invested in the business.
11. Audits – official examination of company’s financial records in order to check that they
are correct.
12. Franchise – structure in which a business (the franchisor) allows another operator (the
franchisee) to trade under their name.
13. Merchandise – goods that are being sold.
14. Social enterprise – business that aims to improve human or environmental well-being.
15. Cooperative – company, factory or organization in which all the people working there
own an equal share of it.
16. Consumer cooperative – cooperative that is owned by its customers.
17. Retail cooperative – cooperative of retail members, who often work together to assert
their purchasing power.
18. Worker cooperative – cooperative that is owned by its employees.
19. Charities – organisations that give money, goods or help to people who are poor, sick or
in need.
Entrepreneurs
People who set up businesses are called entrepreneurs. They are the owners and without them
businesses would not exist in the private sector.
Entrepreneurs are innovators because they try to make money out of a business idea. Such ideas
might come from spotting a gap in the market, a new invention or market research. However,
many people set up a business by copying or adapting what another business does. Entrepreneurs
are responsible for organising other factors of production. They buy or hire resources, such as
materials, labour and equipment. These resources are used to make their products. Organising
involves giving instructions, making arrangements and setting up systems. Since entrepreneurs
are the owners, they have to make all the key decisions. They may make decisions on how to
raise finance, product design, choice of production method, prices, recruitment and wages.
Entrepreneurs are risk takers. This is because they risk losing any money they put into the
business, and possibly more, if it fails. However, if the business is successful, they will be
rewarded with profit.
Unincorporated and Incorporated Business
Businesses vary according to the legal form they take.
Unincorporated: These are businesses where there is no legal distinction between the owner and
the business. Everything is carried out in the name of the owner. These businesses tend to be
small and owned by one person, or a small group of people.
Incorporated: An incorporated business is one that has a separate legal identity from that of its
owners. In other words, the business can sue, be sued, taken over or liquidated. Incorporated
businesses are often called limited companies and the owners are shareholders.
Features of a Sole Trader
A sole trader or sole proprietor is the simplest form of business organisation. It has one owner
but can employ any number of people. Sole traders may be involved in a wide range of business
activity. In the primary sector, they may be farmers or fishermen. In the secondary sector, they
may be small builders or manufacturers. However, most sole traders are found in the tertiary
sector. Many are retailers running small shops. Others may offer services such as web design,
tutoring.
Setting up as a sole trader is simple because there are no legal requirements. However, all sole
traders have unlimited liability. This means that if the business fails a sole trader can lose more
money than was originally invested. This is because a sole trader can be forced to use personal
wealth to pay off business debts.
Advantages of a sole trader
1. The owners keep all the profits
2. They are independent – owner has complete control
3. It is simple to set up with no legal requirements
Disadvantages of a sole trader
1. Have unlimited liability
2. Long hours and very hard work
3. No continuity - the business dies with the owner.
Features of a Partnership
A partnership exists when between 2 and 20 people own a business together. The owners will
share responsibility for running the business. They also share the profits. Professions such as
accountants, doctors, estate agents and solicitors are often partnerships.
There are no legal formalities to complete when a partnership is formed. However, partners may
produce a deed of partnership. This is a legal document that states partners' rights in the event of
a dispute. It states:
how much capital each partner will contribute
how profits (and losses) will be shared among the partners
the procedure for ending the partnership
how much control each partner has
rules for taking on new partners.
Advantages of Partnership
1. Easy to setup and run
2. The job of running a business is shared
3. Partners can specialize in their area of expertise
Disadvantages of partnership
1. Partners have unlimited liability
2. Profit has to be shared
3. Partners may disagree and fall out
Limited Partnerships
It is possible to have a limited partnership. This is where some partners provide capital but take
no part in the management of the business. Such a partner will have limited liability and can only
lose the original amount of money invested. This type of partner is called a sleeping partner.
However, even with a limited partnership there must always be at least one partner with
unlimited liability.
Features of Franchises
One approach to running a business is to buy a franchise. This may suit someone who wants to
run a business but does not have their own business idea. Owners of franchises are called
franchisors. They have developed a successful business and are prepared to allow others, the
franchisees, to trade under their name. Franchisees pay fees to the franchisor.
What does the franchisor offer the franchisee?
1. A licence to trade under the recognised brand name of the franchisor.
2. A start-up package including help, advice and essential equipment, usually including
branding materials.
3. Training in how to run the business and operate the systems used by the franchise.
4. Materials, equipment and support services that are needed to run the business.
5. Marketing support that is organised on behalf of all franchisees.
6. An exclusive geographical area in which to operate. This means that the business will not
face competition from other franchisees in the same franchise group.
In return for these services the franchisee has to pay certain fees.
1. A one-off start-up fee.
2. An ongoing fee (usually based on sales).
3. Contribution to marketing costs.
4. Franchisors may make a profit on some of the materials, equipment and merchandise
supplied to franchisees.
Advantages to the franchisee
1. Less risk – a tried and tested idea is used
2. Back-up support is given
3. Set-up costs are predicable
Disadvantages to the franchisee
1. Profit is shared with the franchisor
2. Strict contracts have to be signed
3. Lack of independence – strict operating rules apply
Advantages to the franchisor
1. Fast method of growth
2. Cheaper method of growth
3. Franchisees take some of the risk.
Disadvantages to the franchisor
1. Potential profit is shared with franchisee
2. Poor franchisees may damage brand’s reputation
3. Franchisees may get merchandise from elsewhere.
Features of social enterprise
Some businesses operate as social enterprises. These aim to improve human and environmental
well-being rather than make a profit for owners. They are sometimes referred to as not-for-profit
or non-profit organisations.
Generally, social enterprises:
have a clear social and/or environmental mission
generate most of their income through trade or donations
reinvest most of their profits
are majority controlled in the interests of the social mission
are accountable and transparent.
Social enterprises may take a variety of forms.
Cooperatives usually operate as consumer cooperatives or retail cooperatives. They are owned
and controlled by their members. Members can buy shares which entitle them to elect directors
to make key decisions. Any profit made by the cooperative is given to members.
Worker cooperatives are businesses in which its employees share ownership. Examples might be
a wine growing or milk producing cooperative. Workers will contribute to production and be
involved in decision making, share in the profit and provide some capital when buying a share in
the business.
Charities exist to raise money for 'good' causes and draw attention to the needs of disadvantaged
groups in society. Charities rely on donations for their revenue.
They may also organise fundraising events such as cake sales, sponsored activities and selling
greetings cards. Some run business ventures such as charity shops.