1.4 Making the Business Effective ( (Franchising, Franchising is where a…
1.4 Making the Business Effective
The key advantage over sole traders and partnerships is that shareholders have limited liability.
The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed.
It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.
Which type of company would find it easiest to get a loan?
A Private Limited Company
Finance is needed to incorporate a business.
There is an upfront fee as well as costs associated with paperwork. This means that it may not be possible for smaller firms (or brand new firms).
Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.
Public limited companies sell shares on the stock exchange. This means that anybody over 18 can buy shares (often through brokers).
Firms often become public companies when they want to expand because selling shares on the stock exchange allows them to raise finance for investment. In 2017, Snapchat went through this process (which is called a flotation).
Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.
It is much easier for companies to raise capital
(money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).
Shareholders have limited liability because the company is incorporated.
Social enterprises, like the Big Issue or TOMs are another form of not-for-profit organisation.
They are more similar to for-profit businesses in that they make a surplus through selling goods or services. This profit is reinvested to support the social enterprise’s aim.
Franchising is where a company gives someone the right to sell its products and use its trademarks. The ‘franchisee’ usually pays the business an upfront fee and a percentage of the profits.
Kentucky Fried Chicken (KFC), which is part of the TacoBell Group is an example of this.
Many KFC’s all over the world are not owned by KFC but instead owned by individuals who pay a fee and percentage of the profits to KFC. This lets them use the KFC brand name and the “original recipe”.
Advantages of franchising