CHAPTER 2: SETTING UP A

NEW ENTERPRISE
LEARNING OBJECTIVES OF CHAPTER 2 :
■ students need to understand the six stages of
enterprise process.
■ students able to describe, compare and contrast
different types of business organisation.
2.1 : THE ENTERPRISE PROCESS
Key Terms

● Action Plan - a plan that outlines the actions

required to achieve particular aims and
objectives which provides a way of monitoring
progress.

● Enterprise process - the six stages that are

involved in the setting up of a new enterprise.
 1. Identifying the problem or need or want

2. Exploring creative solutions

Enterprise 3. Action Planning

Process 4. Implementing the plan

5. Monitoring progress

6. Evaluation of successes and

failures
1. Identifying the problem or need or want

● The problem or need or want needs to be identified before a solution can

be found.
2. Exploring creative solutions.
● These solutions may require creative and imaginative approaches with an
enterprise having to go outside of the box.
● This behaviors can help businesses create products, services and other
offerings that differentiate themselves from their competitors
3. Action Planning

● Help to focus on ideas and to decide and prioritise the steps that need to
be taken to achieve goals of an enterprise.
4. Implementing the plan

● An effective action plan will provide a clear timetable and set clear
defined steps to help to reach the objectives .
5. Monitoring progress

● To judge how well the plan is being implemented and how well the
objectives are being achieved.
6. Evaluation of Successes and Failures

● Evaluation will identify the factors that affected the success or failure of a
plan, which enable recommendations for improvements to be made.
● Monitoring is a progress of a plan , which helps to
ensure that the solution is being implemented as
expected. Evaluating is the solution has been
implemented and provides indication of the successes
and failures of the plan
Summary Questions 3 (20M)
1. Describe Action planning (2 M)
2. Identify six stages of enterprise process ( 6M)
3. Describe Step 1 and Step 2 ( 4M)
4. Explain why exploring creative solutions is an important stage
in the enterprise process. ( 4M)
5. What is the differences between Monitoring and Evaluation ?(
4M)
2.2 Types of Business Organisations
What is meant by business organisation?

● An entity formed for a purpose of carrying on

commercial ( profit) enterprise.
● an organisation that has been established to producing
and selling particular goods and services.
There are six types of business organisation

● Sole -trader
● Partnership
● Limited Company
● Co-operative
● Franchise
● Social Enterprise
Sole -Trader & Partnership ( key terms)

● Sole -trader- a person who responsible for setting up and running an

enterprise that he or she runs alone.
● Unincorporated enterprise - an enterprise that does not have a separate
legal identity from the owner.
● Unlimited liability - the need for sole-traders and partners to pay the
debts of an enterprise out of their own personal funds.
● Partnership- a type of business organsation that is owned by two or more
people.
Who is sole trader ?

❖ People who runs what is usually a relatively small business, although they may employ a number of people.

❖ The legal status of sole trader enterprise is that is an unincorporated enterprise, it is not a separate legal entity from the owner.
Advantages & Disadvantage of Sole Trader
Advantages Disadvantages

● Sole trader enterprises are relatively ● Unlimited liability - where the owner is
simple to establish and there is usually responsible for the debts and can be
no need to obtain special legal forced to sell personal possessions to
documents. pay them .

● The sole trader ( owner ) can take ● Difficulties in raising finance - less
decisions independently and so have likely to be loaned money than larger
complete control of the enterprise. enterprises. This will lead to
bankruptcy.

● Any profit made after tax can be kept ● The owner lack of skills or experience
by the owner. to make the key decisions.

● There can be greater flexibility in the ● The life of the business is limited.
hours of work.
Who is Partnership ?
❖ a form of business where two or more people ( maximum 20) share ownership, as well as the responsibility for managing the company and the income or losses the
business generates.

❖ The legal status - unincorporated and partner have unlimited liability.

Advantages & Disadvantage of Partnership
Advantages Disadvantages

● Easy to form. They usually require a ● .Any decision made by one partner is
legal contract, signed by all the legally binding on all of the partners.
partners, called a deed of partnership.

● Partners are in charge of enterprise ● Disagreements between partners can

and can share the decision making make decision making difficult.
and workload.

● The partners keep all the profits. ● Profits have to be shared among all
the partners.

● Partners can specialise in particular ● Like sole traders, partners can be

aspects of the work. sued by customers.
Limited & Co-operative ( key term)

● Incorporated enterprise- an enterprise that has a separate legal identity

from the owner.

● Limited Company - a company that is legally independent from its

shareholder, who as a result have limited liability .

● Limited Liability - a form of legal protection for shareholders and owners that

prevents individuals from being held personally responsible for their

company's debts or financial losses.

● Co-operative - a type of business organisation owned by its customer or its

employees.
What is Limited Company?
❖ It is called Limited company due to the limited liability the company promises to its owners.

❖ Being a separate legal entity apart from its owners, the owners do not take on the liability from the company.
❖ If people put money into limited
company , can only lose this money if the
company goes bankrupt. ( their own
personal possessions are not at risk.

❖ There are Private and Public Limited

companies.
Advantages & Disadvantage of Limited Company
Advantages Disadvantages

● Can usually raise more money than ● The accounts of a limited company
sole trader or partnership must be made available to the public.

● Shareholders have limited liability , ● The original founders may lose control
they cannot lose their personal as people buy shares.
possessions if the company goes
bankrupt.

● The company will continue even if one ● Profits have to be shared among a large
of the owners dies. number of people.

● Able to gain economies of scale , ● Owing to their large size, limited

leading to a fall in the cost of companies may be inflexible.
production.
Cooperative
There are two main types of co-operative :
● A consumer or retail co-operative - an organisation owned, managed and
controlled by consumers themselves. The objective of such stores is to reduce the number of
middlemen who increase the cost of the product, and thereby provide service to the members.

● A producer or worker co-operative - owned by people who produce similar types

of goods or services. The members use the cooperative to more effectively negotiate prices
and to access larger markets. The cooperative can further process member products to add
value and increase producer returns.
Types of co-operative
Consumer
Producer
Advantages & Disadvantage of Co-operative
Advantages Disadvantages

● Shareholders in consumer or producer co- ● The accounts have to be made available to

operative usually have limited liability. the public.

● In producer cooperative, the workers are ● They need a managers to run a co-operative
the shareholders , so they are less likely which will be costly.
to be involved in disputes and more likely
to be well motivated and to work hard.

● In consumer, the enterprise is run in the ● In producer, the workers can find difficult to
customers interest. raise enough capital to set up a new
enterprise.

● Most co-operatives are distinct legal entity ● Shares in co-operative are not usually sold on
and so the death of one member does not a stock exchange . This can limit the amount of
alter its continued existence. capital that can be raised.
Franchise
A Franchise arrangement allows an enterprise to purchase the right to sell a
particular product.

The enterprise, known as the franchisee, makes a payment to the owner of an

established branded product, known as the franchisor

● Franchise: the company gives the right to an enterprise to supply its

products.
● Franchisee: the enterprise allowed by a company to conduct business using
that company’s name and brand.
● Franchisor: allows the company the enterprise to conduct business using its
name and brand.
 Advantages & Disadvantage of Franchise
● The franchisee is able to sell a well- ● Payment needs to be made by the franchisee to the
known and recognised branded franchisor for the rights. This can cause loss to the
product and the revenue received is franchisee.
likely to be significant.

● Some advertising expenses will be ● Initial fee, the franchisee will usually be required to
handled by the franchisor, and this pay a percentage of the sales revenue to the franchisor
will keep the cost down for the every year.
franchisee.

● The franchisee is able to sell a well- ● Franchisor has the power to withdraw the agreement
known and recognised branded and sometimes can prevent the franchisee from using
product and the revenue received is the premises
likely to be significant.

● Some advertising expenses will be ● Initial costs of setting up a franchise are likely to be
handled by the franchisor, and this quite high.
will keep the cost down for the
franchisee.
Summary Questions 5 (20M)