Business Structure - Sole Traders and Local Companies


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New Zealand has a large number of Small to Medium Enterprises in its business sector. Though sole traders are the most common type of local company, we also have partnerships, limited companies, co-operatives and franchises.

Become familiar with these terms and what they mean relative to your business and business ideas; what are the benefits and drawbacks of each type? Which one is right for you?

Have students study the local company terminology before breaking into groups for a quiz where each team only has a few moments to discuss the question and give an answer.

Sources of finance - approach this individually or in pairs where you match up the words and their definitions.

Take a look at some case studies and then give students the time to discuss and answer related questions. Make this a marked quiz or a class discussion.


**Student Handout:

Anyone who is in business on their own account is a sole trader. That person, the sole proprietor, provides the capital investment to start the business, owns and controls the business in its entirety, keeps all the profits and takes all the risk.

A business with between two and 20 part-owners can be classed as a partnership, with typical example firms including solicitors, accountants and estate agents. A Deed of Partnership defines how much capital each partner has contributed and how profits and losses are shared. Sleeping partners can invest in the business but do not have dealings in its day-to-day running.

The next step up the ladder is a Limited Company (sometimes known as a LLC – Limited Liability Company), which is owned by its shareholders. Shareholders invest money by buying one or more shares in the company. They aren’t personally liable for the firm’s debts – which is where the limited liability comes into it and if worst comes to worst, they only lose the value of their shares. Sole traders rarely raise the capital to expand and achieve LLC status because of the high risk of investing in them.

Co-ops are owned and controlled by their members, who aim to help each other and commonly believe in social responsibility. If a company is set up to benefit its members who share the profits equally and be controlled democratically by them, it is a co-operative.

This is where an existing company (the franchisor) lets someone else (the franchisee) use its business idea and name. The franchisee buys a licence to carry out the business of the franchisor, who charges a fee usually split into two parts – a purchase price plus a percentage of the franchisee’s ongoing business profits. The franchisee must also agree to run the business in the way required by the franchisor to maintain quality and standards.

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Business Structure - Sole Traders and Local Companies

  1. 1. Understanding Business Structures
  2. 2. Types of Business Structure • Sole Trader • Partnership • Limited Companies • Co-operatives • Franchises
  3. 3. Sole Trader − BenefitsBenefits include:-Easy to set up and run-Only small amount of capital needed-Owner has total control and doesn’thave to share profits
  4. 4. Sole Trader − DrawbacksDrawbacks include:-Unlimited liability-Lack of economies of scale-The business relies on theowner 100%
  5. 5. Partnership − BenefitsBenefits include:-Shared responsibility-Allowing partners to specialise-Partners bring in more capitalinvestment-Decisions, costs are
  6. 6. Partnerships − DrawbacksDrawbacks include:-Each partner has unlimitedliability-Shared responsibility can leadto disagreements-Profits have to be sharedaccording to Deed
  7. 7. Limited CompaniesThere are two types:1. Private Limited Company (Ltd)2. Public Limited Company (Plc)
  8. 8. Private Limited Companies − BenefitsBenefits include:-Company can raise morecapital by selling more shares-Shareholders can keep controlof the
  9. 9. Private Limited Companies − DrawbacksDrawbacks include:-Accounts must be audited-Limited companies are moredifficult to set up-Shares cannot be sold publicly onthe stock
  10. 10. Public Limited Companies − BenefitsBenefits include:-Easy to raise capital forexpansion by selling shares onthe stock market-Economies of scale are betterthan a private Ltd
  11. 11. Public Limited Companies − DrawbacksDrawbacks include:-Expensive to set up (a lot ofcapital is required)-Annual accounts must bemade public-Anyone can buy shares – so it’svulnerable to
  12. 12. Co-operativesThere are two types:1. Worker Co-operatives2. Consumer
  13. 13. Worker Co-operatives……Are owned by the wholeworkforce…Everyone has a say in
  14. 14. Consumer Co-operatives……Are local Co-op shopsowned by the customers…The profit is paid out orused to keep prices
  15. 15. Franchises• An existing company (the franchisor) lets someone else (the franchisee) use its business idea and name• The franchisee buys a licence to carry out the business of the
  16. 16. Franchises (Cont’d)• The franchisee must also run the business in the same way as the franchisor• In return, the franchisor helps the franchisee set up the
  17. 17. Find Out