2. Answer the following questions.

1. What is a business entity?

2. What are the main forms of business organizations?

3. What kind of business organization is a sole trader?

4. What are its advantages and disadvantages?

5. What kind of business organization is a partnership?

6. What are its advantages and disadvantages?

7. What is the difference between a sole trader and a partnership?

8. What kind of business organization is a company?

9. What are its advantages and disadvantages?

10. What is limited liability?

Text 2. COMPANY TYPES

1. Before you read discuss the following questions.

1. What types of companies do you know?

2. What business organization would you prefer to start up?

There are two main types of companies:

• Private company: the shares are private in the sense that they cannot be bought by members of the public. The vast majority of companies fall into this category. They’re often smaller companies, with shares held by a few business associates or family members.

• Public company: the shares are openly traded on a public stock exchange. These are the large, often well-known businesses. The word ’public’ should not be confused with ‘state-owned’. A ‘state-owned enterprise’ (SOE) is owned by the government.

Many large businesses in the UK are public limited companies (plc), which means that the public can buy and sell their shares on the stock exchange. Examples include Marks & Spencer, British Telecom and the National Westminster Bank. The minimum share capital for a public limited company is 50,000.

Why are companies referred to as Ltd., Inc., GmbH, or S.A.?

The key factor in owning any company is the guarantee called limited liability, the owners of a company never have to pay more than they have invested in the company. Their liabilities are limited. When a company goes bankrupt, the owners can never be required to pay its unpaid bills.

The worst that can happen to investors in a limited liability company is losing their initial investment if the company fails. By limiting the downside risk for shareholders, companies are able to attract equity investors and raise large amounts of funds called equity capital through sales of shares rather than by borrowing money at potentially high interest rates.

The names of companies around the world reflect this guarantee of limited liability. The abbreviations ”GmbH” in Germany, “Inc.” in the United States, or “Ltd.” in most other English- speaking countries indicate that the firm is a limited liability company and investors have nothing more to lose than the money invested in their shares. The “S.A.” in French-and Spanish-speaking countries also refers to limited liability by defining shareholders as ‘anonymous”. Since the identity of shareholders can be kept secret, the creditors of a bankrupt company have no right to pursue them for the company’s unpaid debts.

Since most companies make a clear distinction between public and private companies,

they use separate designations, such as AG and GmbH in Germany, or Plc and Ltd in Britain.

In the United States where little distinction is made between public and private companies, most companies simply bear the title “Incorporated.”

FRANCHISING

Franchising became very popular in the 1970s, and this growth continued in the 1980. Franchising is a business system in which a company (or franchisor) wishes to expand into other locations by granting a franchise to another party (or franchisee) to operate a similar business.

In other words, he sells a franchisee the right to operate a business using the franchisor’s established system or format.

The objective of franchises is to achieve efficient and profitable distribution of a product or service within a specified area.

The franchisor will make sure that the franchisee is a suitable person to run the business and is equally important for the franchisee to make full and careful investigation of how successful the particular franchise is and to talk to existing franchisees.

As part of the franchise agreement the franchisee pays an initial sum of money, a franchise fee or front end fee, to the franchisor and agrees to pay a royalty or management services fee for continuing advice and assistance, which is usually calculated as a percentage of annual turnover. The franchisee may also pay an advertising fee to contribute to the franchisor’s annual advertising and marketing costs. The franchisee will have to deal with all the matters in relation to raising finance, preparing a business plan and establishing a legal entity.

The franchisor provides an operations manual which contains all the information that the franchisee needs to run his or her business. A franchisor may appoint a master franchisee to supervise the business in a particular area.

The main advantages of a franchise are that a lot of the initial problems of setting up a business will be relieved by the help and experience of the franchisor and that you are working with an established business. The element of risk in setting up your business is therefore reduced.

The main disadvantage is that, while it is your own business, there will be a significant level of control by, and you will be paying a proportion of your income to the franchisor.

You may wish to take greater risks in establishing your own business in the hope of higher rewards.

Before entering into any franchising agreement it is essential that you obtain professional advice from your accountant or solicitor.