Chapter (3)

Sole Traders, Partnerships, Social Enterprises and Franchises

Definition

1. Entrepreneur: a person with the know-how and willingness to take the risks and
decision necessary to set up and run a business.
2. Unincorporated businesses: a business organization where there is no legal difference
between the owner and the business.
3. Incorporated businesses: a business organization with a separate legal identity from that
of its owners.
4. Unlimited liability: the owner is responsible for all the business’s debt. If the business
fails, the owner can be forced to sell personal possessions to repay any business debts.
5. Limited liability: the legal responsibility of the owners of a business to repay its debts is
limited to the amount of capital they invest in business.
6. Sole trader: a business organization owned and controlled by one person having
unlimited liability.
7. A partnership is a legal agreement between two or more people, usually up to 20, to
jointly own, finance and run a business, and to share its profits.
8. 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.
9. Franchise – an agreement by one company with another business organization to permit
the distribution of its goods or services using its trademark or brand name.
10. Social enterprise: a business that aims to improve human and environmental welling
being rather than make a profit for owners.
11. Cooperative: a company or factory or organization in which all the people working their
own an equal share of it.
 Basic Critical thinking

1. Advantages and disadvantages of Entrepreneur

Advantages Disadvantages
Make use of personal ideas, skills, and Risk of failure, especially with poor
interest planning
Independence: choose how to use time and Increased responsibility
money
Increased motivation Longer hours of work
Potential to earn higher incomes (than No steady income from regular employment
regular employees) in another business (opportunity cost)
May become famous and successful if their Need to invest own money and possibly
business prospers also find other sources of capital

2. Unincorporated business Vs. Incorporated business

Unincorporated business Incorporated business

Does not have a separate legal identity from Is a separate legal identity from its owner(s)
its owner(s) / shareholder(s)
Owners have unlimited liability Owners have limited liability
Types: sole trader / proprietor, partnership Types: private limited company, public
limited company

3. Risk (liability):
 Having the same legal identity as the business means the owners have greater
financial + legal risk (than owners with a business that is a separate legal
entity)
 Financial risk = unlimited liability for the debts of the business
 Legal risk = owner can be sued for damages from business’s activities +
products
 4. Keywords / Criteria (for type of business organization):
 O- ownership → owners bear profits + control + risks + responsibilities
(PCRR)
 L – liability (risk) → limited and unlimited
 C – control → management, handle problems and coordination
 F – financing → fixed and working capital
5. Sole trader:
 O- one owner, bears all PCRR alone (owners can employ people, but
employees are not owners)
 L – unlimited liability
 C – completely control by owner (management, decision-making, etc.)
 F – banks are usually unwilling to loan as it is considered a risky
enterprise

Advantages Disadvantages
Simple, easy, and not expensive to set up: due to Lack of capital and financing for expansion, limited to
few legal requirements and low start-up capital owner’s savings, profits, and small bank loans
required
Owner has full control and freedom: no need to Full responsibility and control: may mean long work
consult others when making decisions like choosing hours and no one to discuss business matters with
holidays, prices, and employees
Owner receives all profits after tax and so has the Unlimited liability: fully responsible for debts and
incentive to work hard may have to sell own possessions to pay the debts if
the business cannot pay
Personal contact with customers: increases customer Owner may lack the necessary skills and experience
loyalty, owner able to respond quickly to changes in for success
demand
Don’t have to share business matters, can keep Business legally stops existing after the owner dies
business plans + financial details private (i.e. no continuity)
 6. Partnerships:
 O– 2-20 owners sharing the PCRR
 L – unlimited liability
 C – partners share in management and decision-making
 F – more finance as partners can contribute capital

Advantages Disadvantages
Simple and easy to set up: few legal requirements If one partner is inefficient or dishonest, other partners
have to suffer the costs
More capital invested: more financing from partners Business growth is limited to the amount of capital 20
to allow expansion partners can bring in
Shared work, responsibilities, and losses, and one Disagreements on business decisions, slower decision-
on leave can be covered by other partners making as partners have to discuss
New skills and ideas shared between partners, and Business legally stops existing if one partner dies (i.e.
partners could specialize in different tasks no continuity

7. Limited liability partnerships (LLPs):

 Limited liability for partners
 Separate legal unit which still exists after a partner’s death
 Partners still retain right to manage business directly (unlike incorporated
businesses)
8. Franchise:
 A business that distributes the products and uses the brand names,

logos, and strategies of an existing successful business

 Many well-known international businesses use franchising to expand

into new overseas markets → combine large, well-known brand name

+ local knowledge of franchisees

9. Franchisor:

 Existing business, usually well-known, with an established brand name and

market for its products

 Provides franchisee with staff training, supplies, equipment, promotional

materials

 Monitors the performance of the franchisee

10. Franchisee:

 Buys the license to operate the franchisor’s business and use its brand name,

production methods, and promotional materials

 Pays the franchisor an initial fee and a regular royalty fee (usually a

percentage of revenue)
 11. Advantages and disadvantages of Franchisor & Franchisees

To the Franchisor
Advantages Disadvantages
Faster way of expanding the business (franchisor Franchisee keeps most profits they make from their
does not have to finance all outlets) outlets
License and royalty fees from franchisee Bad reputation for the whole business, if one
franchisee fails to maintain good-quality goods and
level of service
Products and supplies need to be bought by the
franchisee
Management responsibility and costs minimized as
franchisees manage their own outlets
To the Franchisee
Advantages Disadvantages
Reduce risk of business failure as the brand name is Pay license and royalty fees (a percentage of revenue)
established and well-know
Less decision-making because franchisor has Less control compared to an independent business,
decided the prices, product range, and store layout cannot make certain decisions, e.g. cannot make new
products to suit local area
A single source (the franchisor) provides supplies, Performance regularly monitored by franchisor
advertising, and training for staff and management
Easier to obtain bank loans as franchises are seen as
less risky
12.