Sources of finance

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brief description of the main sources

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Sources of finance

  1. 1. Types of Business
  2. 2. DEFINITION OF A BUSINESS <ul><li>A business is an organisation which produces or sells goods and services usually to make a profit </li></ul><ul><li>BUT </li></ul><ul><li>What sort of businesses are there???? </li></ul>
  3. 3. HOW WE CLASSIFY BUSINESSES <ul><li>businesses are usually classified according to who owns them. </li></ul><ul><li>i.e. a sole trader has only one owner whereas a partnership has two or more owners </li></ul>
  4. 4. SOLE TRADER <ul><li>The simplest form of business </li></ul><ul><li>Only one owner </li></ul><ul><li>Has un limited liability – if the business goes bankrupt and owes money then the owner is liable (or responsible) for all of the debt </li></ul><ul><li>Examples – corner shops, barbers, window cleaners but can be larger businesses </li></ul>
  5. 5. Re-cap <ul><li>A business is an organisation which produces or sells goods and services usually to make a profit </li></ul><ul><li>businesses are usually classified according to who owns them. </li></ul><ul><li>A sole traders is the simplest from of business, has one owner and un limited liability </li></ul><ul><li>The main advantage off a sole trader is that the owner gets to keep all the profit and is his/her own boss </li></ul><ul><li>The main disadvantage off a sole trader is that the owner cannot share the burden of running the business with someone else and they have unlimited liability </li></ul>
  6. 6. PARTNERSHIPS <ul><li>A partnership exists when there are between 2 and 20 partners in a business. Partners are the joint owners of a business </li></ul><ul><li>Partners in an ordinary business also face unlimited liability - if the business goes bankrupt and owes money then the owners are liable (or responsible) for all of the debt </li></ul><ul><li>A deed of partnership is often drawn up outlining the legal position of each partner </li></ul><ul><li>Tax – less than £50,000 sales and no VAT is paid </li></ul><ul><li>Examples – doctors, solicitors, dentists, accountants </li></ul>
  7. 7. Deed of partnership <ul><li>In many partnerships, partners do unequal amounts of work or invest different amounts of money in the business </li></ul><ul><li>Many partnerships therefore, get a solicitor to draw up a deed of partnership </li></ul><ul><li>This includes details on; how much money each has invested in the business; how the profit should be shared; and what happens if one of the partners wants to withdraw from the business </li></ul>
  8. 8. Advantages of a partnership <ul><li>Easy to set up and run (as with a sole trader) </li></ul><ul><li>Share ideas – can have different areas of expertise </li></ul><ul><li>Can raise more money or capital </li></ul><ul><li>Tax advantages – no VAT if sales are less than £50,000 </li></ul>
  9. 9. Disadvantages of a partnership <ul><li>Unlimited liability (same as sole trader) </li></ul><ul><li>Disagreements between partners </li></ul><ul><li>long hours (same as sole trader) </li></ul><ul><li>Lack of a deed of partnership (some partnerships are set up without a deed leading to big arguments) </li></ul>
  10. 10. Re-cap <ul><li>A partnership consists of 2- 20 partners or owners of business </li></ul><ul><li>Partnerships are usually set up when a business wants to grow bigger or when people want to share responsibility or their skills </li></ul><ul><li>Partnerships are sometimes set up with a deed of partnership and also face unlimited liability </li></ul><ul><li>The main advantages of a partnership are that the owners get to share ideas and the responsibility of running the business and can raise more capital </li></ul><ul><li>The main disadvantages of a partnerships are that the partners may disagree with one another and the business still faces unlimited liability </li></ul>
  11. 11. Private limited companies (1) <ul><li>A private limited company is a different form of business organisation compared to sole traders and partnerships, in that it exists in its own right – legally it is separate from its owners (the shareholders) </li></ul><ul><li>Private limited company also face limited liability - if the business goes bankrupt and owes money then the owners are only liable for the amount of money they have invested in the company i.e. the value of their shares </li></ul><ul><li>Private limited companies issue shares- usually to the family and friends but not the general public </li></ul>
  12. 12. Private limited companies (2) <ul><li>If the company becomes insolvent, the assets of the business will be used to pay the debts. </li></ul><ul><li>The company must be registered at The Registrar of Companies, and two documents, the Memorandum of Association and the Articles of Association sent there </li></ul><ul><li>Examples of limited companies are any companies with Ltd. at the end of their name e.g. Morris Travel Ltd., Old Oak Insurance Brokers Ltd. </li></ul>
  13. 13. The memorandum of association <ul><li>Gives details about: </li></ul><ul><li>Name of the company </li></ul><ul><li>Address of its office </li></ul><ul><li>Type and amount of share capital </li></ul><ul><li>The acknowledgement that shareholders will have limited liability </li></ul><ul><li>Description of what the company does </li></ul>
  14. 14. The articles of association <ul><li>Gives details about: </li></ul><ul><li>Voting rights of the shareholders </li></ul><ul><li>Duties of the directors </li></ul><ul><li>How profits will be shared out </li></ul><ul><li>Arrangements for the annual general meeting (AGM) </li></ul>
  15. 15. Registrar of companies <ul><li>Before the business can start trading the registrar of companies has to issue the certificate of incorporation </li></ul><ul><li>Every year limited company has to send audited accounts to the registrar of companies – by the accounts that have been checked by registered accountants </li></ul><ul><li>These can be seen at Companies House </li></ul>
  16. 16. Shareholders and control <ul><li>A shareholder effectively controls or owns a small part/ share of the company </li></ul><ul><li>Every year at the AGM shareholders get the chance to elect directors of the company </li></ul><ul><li>Directors in turn appoint managers to run the company </li></ul><ul><li>Manager can also be a director and are known as executive directors </li></ul><ul><li>Often in small companies directors and managers and shareholders are the same people </li></ul><ul><li>Non-executive directors are directors are not managers of the company </li></ul>
  17. 17. Advantages of a private limited company <ul><li>Share ideas – can have different areas of expertise </li></ul><ul><li>Can raise more money or capital through the issue of shares </li></ul>
  18. 18. Disadvantages of a private limited company <ul><li>Disagreements between directors </li></ul><ul><li>Have to register the company at the registrar of companies (companies house) </li></ul><ul><li>Produce annual audited accounts, which the public (and competitors) have access to </li></ul>
  19. 19. Re-cap <ul><li>Businesses become private limited companies to raise more capital and to face limited liability </li></ul><ul><li>Limited liability means that owners are only liable for money they invested in the business </li></ul><ul><li>Shareholders are owners of the company </li></ul><ul><li>The memorandum of association gives general details about the company and its business </li></ul><ul><li>The articles of association gives details of the voting rights of shareholders, directors responsibilities etc. </li></ul>
  20. 20. Public limited companies (1) <ul><li>A public limited company is also a limited company i.e. it faces limited liability and exists as a body recognised in its own right (the same as an Ltd) </li></ul><ul><li>But </li></ul><ul><li>Public limited companies issue shares to the public which are traded on the Stock Exchange </li></ul><ul><li>Plcs must have at least £50,000 of share capital although it is likely that this will be £millions </li></ul>
  21. 21. Public limited companies (2) <ul><li>The number of shareholders will be far greater in a Plc </li></ul><ul><li>As with an LTD shareholders control the company and get to vote for Directors at the AGM, however managers will tend to have more power and influence in a Plc. </li></ul><ul><li>As with an Ltd. , a Plc must be registered at The Registrar of Companies, and two documents, the Memorandum of Association and the Articles of Association sent there </li></ul><ul><li>Usually a Plc issues a prospectus for potential shareholders – this is expensive to do </li></ul><ul><li>Examples of Plcs include Manchester United Plc, Marks and Spencer Plc, Tesco Plc etc. </li></ul>
  22. 22. The memorandum of association <ul><li>Gives details about: </li></ul><ul><li>Name of the company </li></ul><ul><li>Address of its office </li></ul><ul><li>Type and amount of share capital </li></ul><ul><li>The acknowledgement that shareholders will have limited liability </li></ul><ul><li>Description of what the company does </li></ul>
  23. 23. The articles of association <ul><li>Gives details about: </li></ul><ul><li>Voting rights of the shareholders </li></ul><ul><li>Duties of the directors </li></ul><ul><li>How profits will be shared out </li></ul><ul><li>Arrangements for the annual general meeting (AGM) </li></ul>
  24. 24. Registrar of companies <ul><li>Before the business can start trading the registrar of companies has to issue the certificate of incorporation </li></ul><ul><li>Every year limited company has to send audited accounts to the registrar of companies – by the accounts that have been checked by registered accountants </li></ul><ul><li>These can be seen at Companies House and are published in the Plc’s Annual Report </li></ul><ul><li>The cost of this information is much greater for a Plc than and Ltd. </li></ul>
  25. 25. Shareholders and control <ul><li>A shareholder effectively controls or owns a small part/ share of the company </li></ul><ul><li>Every year at the AGM shareholders get the chance to elect directors of the company </li></ul><ul><li>Directors in turn appoint managers to run the company </li></ul><ul><li>Manager can also be a director and are known as executive directors </li></ul><ul><li>Often in small companies directors and managers and shareholders are the same people </li></ul><ul><li>Non-executive directors are directors are not managers of the company </li></ul>
  26. 26. Advantages of a public limited company <ul><li>Share ideas – can have different areas of expertise </li></ul><ul><li>Can raise more money or capital through the issue of shares because investors are attracted by the possibility of shares rising in value and of dividends (% of the Company’s profit – same for Ltds, but likely to be smaller!) </li></ul><ul><li>Limited liability </li></ul>
  27. 27. Disadvantages of a public limited company <ul><li>Disagreements between directors </li></ul><ul><li>Have to register the company at the registrar of companies and produce annual audited accounts in a Company report which is very expensive </li></ul><ul><li>Cost of following Stock Exchange rules </li></ul><ul><li>Short term investment is common in Plcs </li></ul>
  28. 28. Re-cap <ul><li>Businesses become public limited companies to raise more capital and to face limited liability just like an Ltd. </li></ul><ul><li>In a PLC, shares are issued to the general public and traded on the stock exchange – more money or capital tends to be raised by selling shares to the public </li></ul><ul><li>A PLC also has to register at the registrar of companies and has to complete a memorandum of association and articles of association </li></ul><ul><li>A PLC has the added expense of having to issue a company report on an annual basis </li></ul>

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