Sources of Finance

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Section 1 – Sources of Finance

There are 4 main types of business ownership:

• Sole trader
• Partnership
• Private limited company (Ltd)
• Public limited company (Plc)

Each of these types of business needs to raise finance for capital investment

Sole Trader
This is a business that is owned by one person. Sole Traders are responsible for raising all the finance to set up and run the business. Usually a sole trader would be for a small business/ (businesses with a flat organisational structure). A Sole Trader can be held responsible for all the debts of the firm. Most owners like to feel in control of their own business, so this may lead to many small businesses to stay as Sole Traders, even though this will limit funding. Sole Traders have no legal formalities to go through, besides registering for VAT if their turnover reaches a certain amount.

Partnership
This is a business that owned by a number of people between 2 to 20. All partners can contribute to the financing of the business to help manage the success of the business. A partnership can also be held responsible for all the debts of the firm. Having more partners in the business will cut down the amount of control that the owners have over the business. Partnerships have no legal formalities but may choose to sign a Deed of Partnership.

Private Limited Company (Ltd)
This is a business that is owned by shareholders (friends and associates). Private limited companies could sell shares to family, friends and associates. The owners of the private limited company can be held responsible up to the value of their investment in the business. Usually when forming limited companies, they have to produce two documents; Memorandum of Association and Articles of Association.

Public Limited Company (Plc)
This is a business that is owned by shareholders (the general public). Public organisations are usually run by the government. Public limited companies can raise finance by selling shares on the stock market.

Sole trader/ Partnership
Personal Capital – this is the money that an individual, partner or shareholder has saved up to help in the process of running the business. If the person uses the money to invest in their own or another business, then the source of finance is classified as personal savings.

|Advantages |Disadvantages | |It is a quick way of funding the business |If the business goes bankrupt then the individual is also to | | |lose the money in the process and will not get the money back | |You wont have to pay it back if you lose the money in the | | |business | |

Retained profit – This is when a business makes a profit and keeps it and doesn’t spend it, the finance department simply call it Retained Profit. The retained profit will be useful for the business in buying important facilities such as new machinery, vehicles, computers and this money will be used to develop the business. Retained profit is also kept for the future just in case the business goes bankrupt.

|Advantages |Disadvantages | |If the retained profit is kept in advance, and then the |If you use the retained profit to develop the business such as | |business goes bankrupt, at least it could use the retained |buying new machinery then you wont be able to reward staff for | |profit to help it in its finance |their hard work and keep them motivated | |Easily accessible and no interest charge on the retained |The...
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