Unit 1.4

1. Unit 1.4 Making the Start-up Effective

2. 10 Questions Enterprise The Marketing Mix Innovation Customer Service Blue Skies Thinking Downside Market Research Patent Unique Selling Point (USP) Trademark

3. Sizing up the business Businesses vary in size, from your small local corner shop or butchers… …tomultinational chains such as Tesco and McDonald’s. The size of a business tends to be related to its type of ownership.

4. Small business ownership There are two types of small private business ownership: • the sole trader or proprietor – the ‘one person’ business; • the partnership – between two and twenty people sharing ownership of a business.

5. Sole Traders Sole traders are the most common form of business. In Britain, 63% of all businesses are owned and run by one person. Sometimes the sole trader, or proprietor, will need to employ other people, but often they work alone. Sole trader businesses typically include plumbers, florists, hairdressers, newsagents, electricians and photographers.

6. The factors of production

7. Choosing a trading name Sole traders can use their own name, or make up a trading name under which their business will be known. The name does not have to be registered, but it must be original.

8. What’s in a name? Do you know the origins of the names of these famous British companies? Imagine you are setting up as a sole trader in one of these areas. Think of an original, suitable name for the business: • Picture framing • Photography • Plumbing • Hairdressing • Cake-making • Floristry

9. Voice Data Fone: Provision of voice and data services by mobile phone His Master's Voice: The name was coined in 1899 as the title of a painting of a Jack Russell Terrier dog Nipper listening to a wind-up gramophone. Tesco: Name after the founders: T EStockwell and Jack Cohen

10. A risky business? In law, there is no distinction between a sole trader and their business; they are regarded as one and the same thing. The sole trader is therefore personally responsible for all activities anddebtsof the business. Sole traders have what is known asunlimited liability. This means that if their business fails, they would have to sell their personal belongings if necessary in order to pay off debts owed by the business. What do you think business debts might include?

11. A risky business? Debts incurred in a business could include: • capital borrowed from the bank • money owed to suppliers • employee wages. If these debts are not repaid, the sole trader can be taken to court and madebankrupt. Small-business owners therefore stand thegreatest riskby putting their own money into the business. However, if the business is a success, it is the sole owner who gets all theprofits!

12. Sole trader advantages and disadvantages

13. Small Business Ownership Sole Trader • A sole trader business is owned by …….. • Typical sole trader businesses include plumbers, …… and …….. They can make their own decisions They have to work long hours They keep all the profit they make It may be difficult to raise the money needed to start up They have unlimited liability: they are responsible for all debts It is easy to set up Business Name Origins

14. Unlimited liability Fred has just been made redundant. He has £10,000 of savings and decides to set up his own business. He calculates this is not enough to start-up his own firm. He sets up as a sole trader and borrows £5,000 from his bank. He sets up “Removals R Us” and prospers for the first 5 years. Each year Fred keeps all the profit he makes.

15. Unlimited liability Then the housing market slumps and the firm starts to make a loss. Fred owes money to his suppliers the suppliers want paying! He has to close his business and sell all his business assets in order to pay the debts.

16. Unlimited liability But, there still isn’t enough money to pay all the debts. Mr Grumpy supplier is still wanting his money and there isn’t any! So what happens? Mr Grumpy supplier can then get paid! But poor old Fred is back to square one. Fred’s family possessions HAVE to be used to pay off the debts.

17. Unlimited Liability Unlimited liability means that the owner of the business is responsible for paying the business debts. Using the information provided, answer the following question: What would happen if a sole trader could not pay the business debts? • Business closes down • Business assets are sold • Money used to pay debts • If not enough, personal possessions used

18. Small business ownership There are two types of small private business ownership: • the sole trader or proprietor – the ‘one person’ business; • the partnership – between two and twenty people sharing ownership of a business. • Partners usually sign a “Deed of Partnership”

19. Partnership • A partnership business is owned by …….. • To identify how the profit and debts are shared, partners usually sign a ……… They share the decisions They have to share the profit they make The partners may disagree They have unlimited liability It is easy to set up They share the workload

20. Examination Questions • Alfie is a gardener and has run up debts of £50,000. In addition, he owes £10,000 to the bank. He invested £75,000 in his business. How much of the business debt is he responsible for paying? • £75,000 • £50,000 • £60,000 • £10,000 1 Mark • Would you recommend setting up as a sole trader business? Give reasons for your decision and discuss the advantages and disadvantages in your answer. 7 Marks

21. Large business types Along a typical high street there will be many different types of large businesses and organizations, includingfranchises, limited companies,co-operativesand businesses in thepublic sector. Each of these large business types involve different responsibilities and involvement for the owners.

22. Limited companies Limited companies are very different from partnerships and sole traders. With a sole trader, the owner is the business. In contrast, limited companies are: • owned byshareholders– people who invest money in shares of the company; • run bydirectors– people appointed by shareholders to control and make the strategic decisions for that company. A limited company is therefore set up as aseparate bodyfrom its owners.

23. Limited liability Owners and shareholders in a limited company are protected bylimited liability. This means that they have limited responsibility for the business debts. They cannot lose any more money than they have invested in the company, and cannot have their personal possessions claimed in order to pay back debts that are owed. For this reason, setting up a limited company is relatively low risk. How is this different from the responsibilities in sole proprietorships and partnerships?

24. Setting up a limited company Unlike sole proprietorships and partnerships, which are simple to set up, limited companies must produce paperwork and follow certain procedures when setting up. All limited companies in the UK have to register with the Registrar of Companies atCompanies House.In return, they are issued with a Certificate of Incorporation. This is an official document which shows that the company has come into existence. In addition, a limited company must produce: • aMemorandum of Association, which states who they are, where they are based and what they do. • Articles of Association– an internal ‘rulebook’, which sets out how the business will be run.

25. Documentation

26. Types of limited companies Have you ever seen the letters ‘Ltd’ or ‘PLC’ after acompany’s name? Do you know what they stand for? There are two types of limited company: • ‘Ltd’ or ‘Limited’ after a company’s name tells you it is a • private limitedcompany. • ‘PLC’ after a company’s name tells you it ispublic limited • company.

27. Types of limited companies The difference between a private and public limited company lies in the ownership of theirshares. In a private limited company there is restricted ownership. Shares in the company can only be sold if all the shareholders agree to it. Shares in public limited companies are sold on theLondon Stock Exchangeand can be bought by members of the general public. A private limited company can start up with as little as £1 inshare capital, whereas a public limited company must have at least £50,000 worth of shares to begin trading.

28. Private limited companies Private limited companies tend to be smaller than public limited companies. The main shareholders in a private limited company are often also the directors of the company. Private limited companies typically include recruitment consultants, building firms, estate agents and caterers. Many private limited companies are family-run businesses. Why might people setting up a business decide to become a private limited company rather than form a partnership?

29. Limited Companies 1. Limited Companies are owned by ………………... 2. The shareholders elect a …………….. to run the company. 3. Every year the directors hold an …………….. 4. Limited companies can be private (Ltd) or public (PLC). 5. A private limited company usually sells shares to ……………………….. 6. A public limited company sells shares on the Stock Exchange to the …………………. Annual General Meeting Shareholders Friends and family General public Board of Directors

30. Fred has just been made redundant. He has £10,000 of savings and decides to set up his own company. He calculates this is not enough to start-up his own firm. He persuades his friends to invest in his company. They all buy £5,000 of shares each. He sets up “Removals Ltd” and prospers for the first 5 years. Each year the shareholders receive a share of the profit. Fred gets 2/5 and his friends get 1/5 each.

31. Then the housing market slumps and the firm starts to make a loss. The company owes money to their suppliers the suppliers want paying! He has to sell all his company’s assets in order to pay the debts

32. But, there still isn’t enough money to pay all the debts. Mr Grumpy supplier is still wanting his money and there isn’t any! So what happens? Mr Grumpy supplier doesn’t get paid! Fred’s family possessions are safe – they cannot be used to pay off the debts.

33. Limited Liability Limited liability means that the owner of the business is NOT responsible for paying the business debts. The most they can lose is their investment. Using the information provided, answer the following question: What would happen if a private limited company could not pay the business debts? • Business closes down • Business assets are sold • Money used to pay debts • If not enough, debts are not paid

34. Private limited companies: pros and cons

35. Starter Activity … Sort the statements into three columns: Sole TraderPartnershipLimited Company

36. Complete the business ownership table and stick it in your exercise book

37. Unlimited Liability and Limited Liability • If a business cannot pay their debts, the business goes into administration and the business assets are sold in order to pay the debts • If there is not enough money to pay the debts, a sole trader or a partnership must use their own savings to pay the debts (unlimited liability) • Shareholders in a company have limited liability and do not lose their personal possession

38. Example: Sole TraderUnlimited Liability • £220,000 is owed by the sole trader • Assets are sold and £50,000 is available to pay the business debts • Sole trader will still owe £170,000 • The sole trader’s personal possessions must be sold to pay the £170,000 debt

39. Example: Limited CompanyLimited Liability • £220,000 is owed by the limited company • Assets are sold and £50,000 is available to pay the business debts • The company will still owe £170,000 • The shareholders’ personal possessions cannot be sold to pay the debts

40. Being a shareholder in a limited company reduces the risk compared to being a sole trader or partnership.You could lose your investment, but you will never lose your personal possessions.

41. People that might be owed money by the company Unsecured Bank Loan £10,000 Utility Bills £2,000 Secured Bank Loan eg Mortgage £200,000 Supplier £8,000 Assets are sold and £50,000 is available to pay the debts. Who gets paid? Shareholders

42. Who gets paid first? • Secured bank loan • Unsecured bank loan • Utility bills: gas, electric, water • Suppliers • Shareholders (if there is any money left)

43. Page 98 and 106: Multiple choice questionsPage 99: Read the case study and answer questions 1-3.

44. 10 Questions One person Shareholder Board of Directors Dividend PLC 2-20 partners Limited Liability Ltd Unlimited liability AGM (Annual General Meeting)

45. Legal Start-up Issues and TaxLesson Objectives • Understand the need to create a suitable name • Understand the need for a new business to keep careful records • Understand the implications for a small business: VAT, income tax, national insurance and corporation tax

46. Business Names • The name should be different from any other business • The name should promote the business • A limited company must register their name and the name must be unique • A private limited company must put “Ltd” after their name – this is a warning to other businesses that the shareholders have limited liability.

47. Sole Traders: Limited Companies:

48. Create a positive impression …

49. Think of an InnovativeBusiness Name: • A Chinese restaurant • A plumbing company • A mobile disco • A travel agency • A butchers • A hairdressers/barbers Your group has 3 minutes to think of a name

50. When you set up a new business, you must register with HMRC (Her Majesty’s Revenue & Customs).