1 (a) Explain two advantages and two disadvantages of setting up a business as a private limited company. Advantage 1: Advantage 2: Disadvantage 1: Disadvantage 2:

Mark scheme

Marking points from the official mark scheme (May/June 2021). The mark or mark type is shown in brackets.

1. [1] Advantage: Raise capital from the sale of shares.
2. [1] Explanation of advantage: May raise more capital than if a sole trader / partnership.
3. [1] Advantage: Limited liability.
4. [1] Explanation of advantage: Will not lose personal possessions if business fails.
5. [1] Advantage: Separate legal identity.
6. [1] Explanation of advantage: Company can be sued instead of the owners.
7. [1] Advantage: Continuity.
8. [1] Advantage: Cannot be taken over without the consent of the shareholders.
9. [1] Disadvantage: Cannot sell shares to the public / cannot be sold on the stock exchange.
10. [1] Explanation of disadvantage: as can only be sold to family and friends so restricts the capital that can be raised from share issue.
11. [1] Disadvantage: Legal formalities setting up the company.
12. [1] Explanation of disadvantage: Have to complete paperwork to register the company which takes time and money.
13. [1] Disadvantage: Accounts / financial statements are available for the public to see.
14. [1] Disadvantage: Not easy to transfer shares.
15. [1] Explanation of disadvantage: as must have the approval of the other shareholders.
16. [1] Disadvantage: Financial statements need to be audited each year.
17. [1] Explanation of disadvantage: increase in annual expenses.
18. [1] Customers in the area: High footfall in the shopping mall in location A makes high sales more likely.
19. [1] Customers in the area: If high-income customers in the mall, then target market uses the mall and higher number of sales of nursery items likely in location A.
20. [1] Customers in the area: Location B seems to have lower-income customers and may not be the target market for toys sales.
21. [1] Customers in the area: If families visit the area, then higher sales of toys are more likely.
22. [1] Rent: If high rent as in location A then this increases fixed costs – may lead to prices being higher – lower sales.
23. [1] Rent: But if sales of toys are high then the rent per item sold will be low – may not have much effect on prices.
24. [1] Rent: Rent is low in location B giving lower costs – but there may not be sufficient customers in the area to provide higher revenue to make the profit higher in this location.
25. [1] Types of shops nearby: As there are several other toy shops in location A then may lead to lower sales due to competition.
26. [1] Types of shops nearby: However, several competitors in the area may lead to more customers coming to the mall to look for toys – may be a well-known area for toys and attract more customers.
27. [1] Types of shops nearby: If banks and children's playground are in the area in location A then this may attract more customers to the mall leading to higher sales.
28. [1] Conclusion (Location A): The number of shoppers in the area is most important and so Location A is the best one to choose. Without the area being busy and attracting a high number of shoppers the toy shop will not have many customers.
29. [1] Conclusion (Location A): Low rent at location B is less important because high revenue from toy sales will more than compensate for the higher rent in location A.
30. [1] Conclusion (Location A): Other shops nearby are also less important as customers come to the shop specifically to buy toys irrespective of the other shops in the area so this will not affect the choice between location A and B.
31. [1] Conclusion (Location B): The rent is low in location B and this should be chosen for the new toy shop. It will be more affordable for a new business that will be short of funds and will keep the expenses low during the time it gets established and well-known by customers.