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7115 · 1.4

Types of business organisation — practice questions

Practice and worked examples for 7115 Types of business organisation. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Two architects want to expand nationally, need $2m for offices and IT. Compare partnership vs Ltd vs PLC.

Show solution outline

Partnership: Unlimited liability risky with $2m debt; limited to partners' personal assets for finance — insufficient.

Ltd: Limited liability protects personal homes; can sell private shares to investors; no stock exchange — harder to raise full $2m quickly.

PLC: Public share issue can raise $2m+; cost and regulation (accounts published, AGM) — justified if national brand ambition.

Recommendation: Ltd initially; convert to PLC when expansion requires public capital — unless private equity available.

Worked example 2

Ali and Ben are in a partnership. Ali invested $60,000 and Ben invested $40,000. Their Deed of Partnership states:

  • Ali receives an annual salary of $15,000.
  • Both partners receive 5% annual interest on their capital.
  • Remaining profits are shared in the ratio of their capital investment. The business made a profit of $80,000 this year before any distributions. Calculate the total amount each partner receives.
Show solution outline

Step 1: Calculate profit after partner's salary Profit before distributions: $80,000 Less Ali's salary: -$15,000 Remaining profit: $65,000

Step 2: Calculate interest on capital for each partner Ali's interest: 5% of $60,000 = 0.05 * $60,000 = $3,000 Ben's interest: 5% of $40,000 = 0.05 * $40,000 = $2,000 Total interest paid: $3,000 + $2,000 = $5,000

Step 3: Calculate profit available for sharing Profit after salary: $65,000 Less total interest: -$5,000 Residual profit to be shared: $60,000

Step 4: Distribute residual profit based on capital ratio Capital ratio (Ali:Ben) = $60,000 : $40,000 = 3:2 Total parts in ratio = 3 + 2 = 5 Ali's share: (3/5) * $60,000 = $36,000 Ben's share: (2/5) * $60,000 = $24,000

Step 5: Calculate total income for each partner Ali's total income: Salary + Interest + Profit Share = $15,000 + $3,000 + $36,000 = $54,000 Ben's total income: Interest + Profit Share = $0 (salary) + $2,000 + $24,000 = $26,000

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