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Unit 36 - Starting a Small Business - P4 M3

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  • Unit 36 - Starting a Small Business
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  • Pearson (PEARSON)
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  • BTEC Level 3 National Business Student Book 2

A well written, detailed assignment which meets the criteria for P4 and M3 - Unit 36 Starting a Small Business. BTEC Level 3 Extended Diploma in Business. P4 - Describe the legal and financial aspects that will affect the start-up of the business. M3 - Assess the implications of the legal and finan...

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Document information

  • May 18, 2017
  • 17
  • 2016/2017
  • Essay
  • Ccunningham
  • P4 m3

Subjects

  • btec
  • level 3 business
  • p4 m3
  • starting a small business

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  • Unit 36 - Starting a Small Business
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Conor Cunningham P4 M3


Introduction

This business proposal will provide a description of the legal and financial aspects that will
affect the start-up of my small business Frozo. In this proposal, the implications of the identified
legal and financial aspects that will affect the start-up of my business will also be assessed. The
ways in which these legal and financial aspects will impact on my business plan will also be
investigated throughout.

Legal aspects

There are many different legal aspects that will affect the start-up of my small business. Below,
these legal aspects will be described as well as their implications on Frozo and their impacts on
my business plan.

Legal status

There are many different forms of ownership or legal structure that a business such as Frozo
can take and this is one of the first decisions I must make as I start up my own business. My
main options included;

Sole trader – This is a business that is owned by one person who takes full responsibility for the
running of the business. Quite often, sole traders are individuals who provide a specialist
service such as plumbers, electricians, beauticians and hairdressers. Sole traders do not have a
separate legal existence from the business and in the eyes of the law, the business and owner
are the same. As a result, the owner is personally liable for the firm’s debts. Advantages of
being a sole trader are that it requires little paperwork and finance to set up. One person is in
charge meaning that decisions can be made quickly with little discussion and profits do not
need to be shared with other owners. This is good for me as a business owner as I receive all
the profit as a reward for the work I put into the business. Disadvantages of being a sole trader
are that one person has all the responsibility for the running of the business meaning long
hours and little opportunity to take time off with sickness or holidays. It may also be hard to
keep up with the growth of the business as one person may lack the skills and finance to allow
the business to reach its full potential. A huge disadvantage of being a sole trader is that the
owner has unlimited liability. This is risky for me starting up my own business as I could lose
everything I have invested in the business as well as personal items such as my car and house if
the debt incurred was significant enough.

Partnership – Partnerships are a business owned by two or more people who share
responsibility for the running of the business. Doctors, dentists and solicitors are typical
examples of professionals who may go into partnership together and can benefit from shared
expertise. Advantages of me starting up my business as a partnership would be the introduction
of additional capital and skills to the business. This is because there is more than one person
which makes it advantageous in this regard when comparing with a sole trader. Also, the
responsibility of running the business can be shared, creative opportunities for one partner to

,Conor Cunningham P4 M3


take time off for whatever reason. However, partnerships have disadvantages too such as
profits having to be shared between owners. There may also be disagreements between
owners which slows down decision making. Partners are also likely to have unlimited liability
which can mean they lose more than they actually invested into the business.

Limited company – A limited company has special status in the eyes of the law. These types of
company are incorporated, which means they have their own legal identity and can sue or own
assets in their own right. The ownership of a limited company is divided up into equal parts
called shares. Whoever owns one or more of these is called a shareholder. Because limited
companies have their own legal identity, their owners are not personally liable for the firm's
debts. The shareholders have limited liability, which is the major advantage of this type of
business legal structure. Another advantage of a limited company is that it is easier to generate
more finance from investment of different shareholders which can help the business grow and
succeed. Disadvantages of a limited company include the setting up of the business as it is more
complicated due to more paperwork and can be more expensive. Also, accounts need to be
published annually, addition to costs and giving competitors access to company information.

For Frozo, I have decided that the business structure will be a private limited company. This is
because the company’s finances will be separate from my finances so I do not run the risk of
losing personal possessions in the event of bankruptcy or administration. There is also added
creditability for LTD’s which can make it easier for Frozo to borrow money, raise capital and
achieve financing without any personal risk for me. LTD’s may bring addition taxes benefits and
are subject to lower corporation tax. This will allow me to maximise my profits which is
important for me as a first time business owner. The decision to start up a private limited
company impacts on my business plan as it will involve different planning such as where I will
raise capital to start up the business. It will also impact me as a business owner as I have more
protection due to limited liability and so will have more confidence as being the owner of the
business with this structure. This also has implications for Frozo as I can introduce more
shareholders if I wish to generate more finance from investment which would allow Frozo to
grow in the future.

Legal liabilities

The type of legal structure chosen for a business affects the liability of its owners for any losses
that may be incurred from its operations. Employers’ liability insurance is compulsory.
Employers' liability (EL) insurance enables businesses to meet the costs of damages and legal
fees for employees who are injured or made ill at work through the fault of the employer.
Employees injured due to an employer's negligence can seek compensation even if the business
goes into liquidation or receivership. Frozo will need this insurance as I will be employing staff
and there is always the risk of them becoming ill or injured at work so to keep my business
covered, this insurance will be in place. Due to members of the public or customers coming to
my premises or me going to theirs, taking out public liability insurance will definitely be
considered. Public liability insurance covers any awards of damages given to a member of the

, Conor Cunningham P4 M3


public because of an injury or damage to their property caused by you or your business. It also
covers any related:
 legal fees
 costs
 expenses

Products which are sold at Frozo must be 'fit for purpose'. I am legally responsible for any
damage or injury that a product you supply may cause. If I supply a faulty product, claimants
may try to claim from me first, even if I did not manufacture it. I will be liable for compensation
claims if:
 my business' name is on the product
 my business had repaired, refurbished or changed it
 I imported it from outside the European Union
 I cannot clearly identify the manufacturer
 the manufacturer has gone out of business

As identified above, sole traders and partners are forced to accept unlimited liability which
means that they will be personally liable for any debts that the business generates such as
loans, overdrafts and payments to creditors. In extreme cases, this could mean having to sell off
personal possessions such as their car or house in order to raise the finance to cover the debt
incurred. This was a huge reason which I decided against those types of business structures
when deciding on the structure of Frozo. As a first time business owner and the owner of Frozo,
I will enjoy limited liability. This means that my losses are limited to the amount I have invested
in the business. If the business ever becomes insolvent, I as a shareholder am not personally
liable to repay the debts as the company is seen as being a separate entity. Having this legal
liability has implications for my business as it makes it easier for limited companies to attract
investments. It also impacts my business as there is a much lesser risk associated with potential
shareholders investing money in it and this helps me as a business owner to raise finance and
see Frozo grow.

Trading terms and conditions

It’s extremely important for a business - particularly a new business such as Frozo - to have a
clear idea of the terms and conditions under which it trades, both in buying in goods and
services from suppliers and selling these products and services to consumers. As a business
owner, I must ensure that I take record of details such as sales price, discounts for paying early
or buying in bulk, credit periods or delivery terms that are agreed between Frozo and its
suppliers. This can help to avoid any future disputes or resolve any that do arise.

This legal aspect has implications for Frozo starting up as I must ensure that all trading terms
and conditions are drawn up and agreed upon between suppliers and consumers. This will
impact on the business plan of Frozo as there must be a section dedicated to the trading terms
and conditions in which the business operates within. This will mean for me as the business
owner, I must look carefully at creating a legally binding document of trading terms and

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