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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 15,000.15,000.
  • 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: 80,00080,000 Less Ali's salary: -15,00015,000 Remaining profit: 65,00065,000

Step 2: Calculate interest on capital for each partner Ali's interest: 5% of 60,000=0.05∗60,000 = 0.05 * 60,000 = 3,0003,000 Ben's interest: 5% of 40,000=0.05∗40,000 = 0.05 * 40,000 = 2,0002,000 Total interest paid: 3,000+3,000 + 2,000 = 5,0005,000

Step 3: Calculate profit available for sharing Profit after salary: 65,00065,000 Less total interest: -5,0005,000 Residual profit to be shared: 60,00060,000

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

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

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