The Small Business Game - Resource

UNDERSTANDING BUSINESS STRUCTURES

THIS DOCUMENT INCLUDES Page Teacher resources 2 Outline 2 Activity 1 - Quiz 3 Activity 2 - Sources of Finance 6 Activity 3 - Case Study - Sole Trader 8 Activity 4 - Crossword Activity on Partnerships 9 Student notes 11

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. Understanding Business Structures LESSON OUTLINE Suggested Timeframe 2-3 hours Learning Intention The purpose of this lesson is for students to become familiar with the concepts of sole trader, partnerships, limited companies, co-operatives and franchises in order to apply this knowledge to The Small Business Game. Success Criteria By the end of this lesson students will be able to:  Describe what a sole trader is and does  Describe what partnerships in a business context means  Describe what limited companies do and are  Describe what co-operative companies do and are  Describe what franchises do and are  Understand the benefits and drawbacks of each business concept  Apply the above knowledge within the context of The Small Business Game

Questions to help students link to prior knowledge about the topic  What are all the different business structures you know of?  How do you know the difference between these different business structures?  Do you know of any businesses that come under the following categories:  Sole trader  Partnerships  Limited companies  Co-operatives  Franchises

Game link Students can choose to change the legal structure of the business. When they start the game they are a sole trader, but have the option of ‘upgrading’ to a partnership or company. Clicking on the filing cabinet in the office provides this option. Forming a company is a one off game action. The impact is an increase in credibility, easier to get a bank loan, and later in the game the option to accept venture capital.

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Understanding the concepts of sole trader, partnerships, limited companies, co- operatives and franchises This cooperative learning activity is based on a resource from “Cooperative Learning” by Spencer Kagan Get students working in teams of 4 by randomly pulling names out of a hat or select them yourself. The following quiz set up is a great way to ensure all team members are involved in the learning activity. The order by which things are done is important. In preparation, each team should have a piece of paper with their team name on it and placed on a table at the front of the class. This will be the team’s answer sheet and needs to be separate from other teams. 1. Students number themselves off from 1-4 2. You can now use these numbers to call up particular students. In this scenario we are simply running a quiz but there are other ways to use the numbered heads too! 3. Each team has a copy of the Business structure notes provided in the student resources section of this lesson. Each team member is given a particular business structure e.g. Number 1 is given the notes on sole trader, number 2 is given the notes on partnerships and so on. 4. The teacher asks a question from the quiz sheet provided for the teams to answer. There is no calling out instead teams put their heads together and decide on the best answer. Put the pressure on and keep the timeframe short and sweet but achievable. 5. You can then call a number at random e.g.: “number 3 come up and write your answer on your team’s answer sheet!” 6. The student who has been allocated the number goes up to the front of the class to write the answer on the team’s answer sheet and turns it over. 7. The teacher then glances over the answers quickly and gives one point to each team if they have it correct. 8. The next question is asked, heads together, random number called…and so on.

Questions to help clarify the learning: Feel free to add some relevant but slightly random questions in there just for fun e.g. a question about a local sports team or an event that happened on a popular TV show. The point of this learning activity is as much about the content as it is about the WAY the students are cooperating in their learning.

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. Understanding Business Structures Quiz answers What is the name of the business structure Sole trader when a business is owned and run by one person? In a franchise business structure, what does the The business idea and the name of franchisee use? the business What is the name of the business structure Limited company where people invest money into the business in return for shares in the business? In a co-operative business structure, who makes Everyone the decisions, controls the business and shares the profits? What is it called when a business is set up and Partnership run by two or more people?

Who gets to ‘have a say’ in the running of a Everyone business that is a worker cooperative? In a franchise business structure, what does the A fee for the franchise and a franchisor get? percentage of the franchisee’s profits You often need to invest money into a business. Capital Another name for this is a word beginning with ‘C’. What is the word? If you are a sole trader, who gets to keep the The sole trader profits? A sole trader is an unlimited liability. What does The owner is responsible for the this mean? debts of the business Give 3 ‘typical’ examples of the types of Solicitors businesses that would go into partnership? Accountants Estate agents

In a partnership, each partner has an unlimited Each partner is personally liable for liability, what does this mean? the debts of the business

If the partners of a business had a high amount A limited company (The teacher can of start up capital or wished to expand, what explain why this would be, based on sort of business structure should they consider the notes provided) forming? Who keeps control of a Private Limited Shareholders Company? Who can buy shares in a Public Limited The public Company? Other businesses Financial institutions

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. Understanding Business Structures - Worksheet Quiz What is the name of the business structure when a business is owned and run by one person? In a franchise business structure, what does the franchisee use? What is the name of the business structure where people invest money into the business in return for shares in the business? In a co-operative business structure, who makes the decisions, controls the business and shares the profits? What is it called when a business is set up and run by two or more people?

Who gets to ‘have a say’ in the running of a business that is a worker cooperative? In a franchise business structure, what does the franchisor get? You often need to invest money into a business. Another name for this is a word beginning with ‘C’. What is the word? If you are a sole trader, who gets to keep the profits? A sole trader is an unlimited liability. What does this mean? Give 3 ‘typical’ examples of the types of businesses that would go into partnership?

In a partnership, each partner has an unlimited liability, what does this mean?

If the partners of a business had a high amount of start up capital or wished to expand, what sort of business structure should they consider forming? Who keeps control of a Private Limited Company? Who can buy shares in a Public Limited Company?

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. Understanding Business Structures ACTIVITY 2 Sources of Finance This Learning Activity can be used with the existing groups from the previous Activity or as an individual or pairs task.  Use the ‘Sources of Finance’ sheet provided and cut up the words and definitions to create the resources for a match up activity or alternatively get the students to use the student resource sheet and simply match the definitions with the right words.  You could either choose to allow the students some study time to look over the sheet and use memory strategies for them to remember the definitions. Ask them to articulate the strategies they decided to use after the task has been done…or…. Just let them loose on it and see how they go.  Get the students to mix up all the words and definitions and then attempt to put them in the right order.  If you are using the ‘numbered heads’ groups then randomly call up a numbered students to place the correct word and definition on their teams table at the front. Give a point for a correct pairing. Answers Borrowing a sum of money which then has to be repaid with interest Loan over a period of time, usually in fixed instalments, e.g. repay £100 a month for 3 years Borrowing money from a bank by drawing more money than is actually in a current account. Interest may be charged on the Overdraft overdraft, some banks offer interest free overdrafts. The bank has the power to recall the overdrawn amount at any time Mortgage A loan where property is used as security Legally renting equipment prior to buying it. Pay a fixed amount Hire purchase over a certain period of time, e.g. 2 years at £500 per month. The asset is not owned until the final payment is made Renting equipment or premises. The asset is never owned but the Leasing leasing company are usually responsible for maintenance and repairs Plc’s can sell shares in the company to raise additional finance, the Share issue investor’s reward is dividends A long term loan to a business, normally between 5 to 25 years. Debenture Interest is paid on loan Funds given to businesses that do not have to be repaid. Normally Grants provided by government agencies. This is when a company sells off its equipment or property to raise Sale of assets money, and then usually hires them from another company Retained Part of the profit made remains in the business for the future profit accounting period, e.g. the next year

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. Understanding Business Structures – Worksheet ACTIVITY 2 Sources of Finance When businesses start up, as well as deciding on the control and structure of the company, they must also make sure they have capital to invest. There are various sources of finance that are available for owners to use for this purpose. Write the correct word from the list below, next to the correct definition. Leasing Mortgage Retained profit Loan Sale of Assets Grants Overdraft Debenture Share issue Hire purchase

Borrowing a sum of money which then has to be repaid with interest over a period of time, usually in fixed instalments, e.g. repay £100 a month for 3 years Borrowing money from a bank by drawing more money than is actually in a current account. Interest may be charged on the overdraft, some banks offer interest free overdrafts. The bank has the power to recall the overdrawn amount at any time A loan where property is used as security Legally renting equipment prior to buying it. Pay a fixed amount over a certain period of time, e.g. 2 years at £500 per month. The asset is not owned until the final payment is made Renting equipment or premises. The asset is never owned but the leasing company are usually responsible for maintenance and repairs Plc’s can sell shares in the company to raise additional finance, the investor’s reward is dividends A long term loan to a business, normally between 5 to 25 years. Interest is paid on loan Funds given to businesses that do not have to be repaid. Normally provided by government agencies. This is when a company sells off its equipment or property to raise money, and then usually hires them from another company Part of the profit made remains in the business for the future accounting period, e.g. the next year

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Small buildings Chris Davenport was made redundant from his job eight years ago. He used his redundancy payment to set up a business making wooden outdoor buildings. These are more substantial than just garden sheds. They are properly insulated, permanent structures, which can be used for anything from an office to a classroom. They are built to be an attractive feature in say, a garden. Because they are well designed using high quality materials, they are more expensive than a typical prefabricated temporary building. Chris has built up his business over time. In the first year, he sold £53,000 worth of products. Today, sales turnover is averaging £300,000 per year. This has not been without its problems. Three years ago, orders seemed to dry up and the business made a loss of £20,000. Without a sympathetic bank manager, who increased the overdraft by £15, 000, the business would have been in serious trouble. However, Chris has never thought of giving up. He enjoys running his own business and being his own boss, even if he does have to work long hours. His 6 workers are highly valued. Without them, he would not be able to deliver the quality product that he guarantees to customers. One problem facing the business is Chris’s age. As he gets older he knows that he might have a period of long illness or even die. None of his family work in the business.

Use examples and evidence from the case study to answer the following questions:  List TWO advantages for Chris of being a sole trader.  List TWO disadvantages for Chris of being a sole trader.  During the period when sales ‘dried up’ Chris considered cutting his prices by reducing quality of his structures. Discuss whether this would have been a good strategy for Chris to adopt.  Suggest how Chris can deal with the potential problem for his business of illness or even death.  Are there any potential disadvantages to your suggestions?

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. Understanding Business Structures ACTIVITY 4 Crossword Activity on Partnerships – Answers 1 D 2P A R T N E R S 3S E L D E O 4T W E N T Y F W P 5P R O F I T S A N R G 6C A P I T A L N 7E Q U A L R S H I P

Questions to help clarify the learning:  Can you name all the different businesses in your local area?  Can you now categorise them into their various business structures?  Which business structure do you think is the most fun?  Makes the most money?  Is the most challenging? .or the easiest? Why?

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Crossword Activity on ‘Partnerships’

Across Down 1 The legal contract which states how a 2 The owners of a partnership partnership is organised 4 The maximum number of people in a 3 The type of partner that is not partnership involved in the day-to-day running 5 These will be distributed according to 4 The minimum number of people in a the Deed of Partnership partnership 6 Another word for the money invested by each partner in the business 7 If there is no deed of partnership the law states each partner is this

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Student notes

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. BUSINESS STRUCTURES - STUDENT NOTES Businesses in the private sector range from those which are owned and run by one person to multinationals which employ thousands of people in many countries. They differ also in the ownership and control, how they raise money and distribute profits. The majority of businesses are owned by sole proprietors, and indeed start as sole- traders, but there are also a number of different types of business ownership which are identified below. Sole trader This is the largest and most common form of ownership. Anyone who is in business on their own account is a sole trader. All sole traders have certain things in common: One person – the sole proprietor – provides the capital and owns the business; That person controls the business and makes all the decisions The owner takes all the risks related to the business and takes all the profit Many businesses start as sole traders. People often set up their own business because they want to be their own boss. Others see a business opportunity and start in a small way. Some grow to be quite big companies. People who start their own business must be hard working, willing to take risks, and enjoy responsibility. They also need to have a business idea. This business idea and the size of the market should be researched before starting the business. Benefits Drawbacks  Usually small and easy to set up and  Unlimited liability – owner is run personally responsible for the debts  Generally only a small amount of of the business capital is needed to invest, which  Difficult to compete with large reduces initial start up companies, lack of economies of scale  Owner has total control over the  The owner is tied to the business. If business and makes all the decisions owner is ill or wishes to take a holiday  Owner does not have to share profits there is no-one to cover

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. BUSINESS STRUCTURES - STUDENT NOTES Partnership This is a business set up and run by 2 or more people. Each partner is part owner of the business and has a right to take part in its running. A maximum of 20 partners is allowed in a general partnership. Typical examples of partnership firms include solicitors, accountants and estate agents. A contract called a Deed of Partnership is normally drawn up. This states the type of partnership it is, how much capital each partner has contributed, and how profits and losses will be shared. A partnership can also have a sleeping partner who invests in the business but does not have dealings in the day to day running of the business.

Benefits Drawbacks  Shared responsibility which could  Each partner has unlimited liability – lead to specialisation, where one each partner is personally liable for partner’s strengths complement debts of business another partner’s  Shared responsibility may lead to  Easy way to bring in extra capital. arguments and disagreements Two/three people can raise more  Profits have to be shared in money for starting up the business accordance with the Deed of  There is someone to consult with Partnership business decisions  Costs of the business are shared amongst the partners

If a company has a high amount of start-up capital or wish to expand they may take the next step on the business ladder which involves forming a limited company

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. BUSINESS STRUCTURES - STUDENT NOTES Limited companies Due to the high risk of investing in them, sole traders find it hard to raise capital to expand their business and achieve limited status. A limited company is owned by the people who invest money in return for shares in the business. Whoever owns one of more of these is called a shareholder. The owners (shareholders) are not personally liable for the firm's debts (limited liability) they would only lose the value of the money that they invested in the business. There are two types of limited companies  Private Limited Company (Ltd)  Public Limited Company (Plc) Explanation Benefits Drawbacks Ltd  Usually owned and set up  Company can raise more  Each year accounts by friends and family. capital by selling more shares must be audited  Shares cannot be sold to  Shareholders can keep control  More difficult to set up the public or transferred of business compared to sole without permission of all trader and partnership shareholders  Cannot sell shares on  Each year company must stock market hold AGM (Annual General Meeting) for shareholders and send copy of accounts to Registrar of Companies Plc  Members of the public as  Easy to raise capital for  Expensive to set up, well as other businesses expansion by issuing more and at least £50000 has and financial institutions shares to be raised can buy shares in a Plc  Economies of scale  Annual accounts and  The shares are bought reports must be made and sold through the public Stock Exchange  Anyone can buy shares,  Like an Ltd, a Plc has its vulnerable to takeover own legal status separate from the shareholders. This means that the company can sue and be sued

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. BUSINESS STRUCTURES - STUDENT NOTES Co-operatives This is an organisation which is owned and controlled by its members. The members of co-operatives aim to help each other and believe in social responsibility. Any group set up for the benefit of its members and controlled by its members, and who share the profits and make decisions democratically, is a co-operative The two main types of co-operative Worker Co-operatives – these are owned and run by the whole workforce. Its members believe in co-operation – working together for a common purpose. It tries to ensure that everyone has a say in how the business is run. Consumer Co-operatives – these are the local Co-op shops. They are owned by their customers, the consumers. In the past the profit was divided according to the amount spent; this was the dividend, or the ‘divi’ as it was known. These days the dividend may be paid out or, more usually, used to keep prices down. The Co- operative Insurance Society and the Co-operative Bank are consumer societies.

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Copyright: The Small Business Company | www.tsbc.co.uk | All rights reserved. BUSINESS STRUCTURES - STUDENT NOTES Franchise This is where an existing company (the franchisor) lets someone else (the franchisee) use its business idea and name. The franchisor charges a fee that is usually split into two parts:  A basic fee to buy the franchise  A percentage of the franchisee’s profits from the business In return for the fee, the franchisee buys a licence to carry out the business of the franchisor. The franchisee must agree to run the business in the way required by the franchisor. This means that quality and standards are maintained.

The franchisor will:  Allow the franchisee to use the well-known brand name  Provide training to start the business  Provide equipment and shop fittings  Organise advertising campaigns, including a launch of the new business  Provide advice and loans when needed  Supply stock and materials

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