LEGAL PRACTICE COURSE BUSINESS LAW AND PRACTICE PRE-MODULE READING

Learning Outcomes After completing this Section you should have an appreciation of: 1. why businesses are set up; 2. the requirement for a business to raise finance; 3. the different ways of carrying on a business, including some of the factors influencing the choice of business medium; and 4. the concept of commercial risk. Answers to the Multiple Choice Questions are at the back of the workbook. LPC: BUSINESS LAW AND PRACTICE PRE-MODULE READING LAW SCHOOL 5/25/2016 1:32:00 PM Page 8 of 127 1. Why businesses are set up Businesses are generally set up to make a profit. A business generates income by selling products and/or services. In order to sell the products and/or services the business will incur certain expenses. Provided the income generated exceeds the expenses of the business it will make a profit. Once a business has made a profit a proportion of that profit is likely to be given to the owners of the business and the rest will be retained in the business in order to help it grow. 2. Finance 2.1 Why do businesses need to raise finance? A business is likely to need to raise finance for a number of reasons including the following: • to purchase premises from which to operate, stock, plant and machinery, and computer hardware and software in order to be able to manufacture and sell goods, or provide a service; • to employ staff to make the goods and/or provide the services to the customers; • to obtain advice of professional advisers from time to time, particularly accountants; and • to expand and grow, which it may do by acquiring other businesses, carrying out marketing activities and investing in new premises and equipment. LPC: BUSINESS LAW AND PRACTICE PRE-MODULE READING LAW SCHOOL 5/25/2016 1:32:00 PM Page 9 of 127 2.2 How do businesses raise finance? There are four basic ways in which a business can raise money: • the owners of the business may invest in it by making contributions of capital to the business; • outside investors may be prepared to make a capital contribution to the business in order to share in its future profits; • the business may borrow money, for instance, from a bank; and • as already mentioned, a proportion of the profit that the business has generated is likely to be retained within the business to help it grow, rather than being distributed to the owners and investors in the business. 3. Business media overview There are several basic ways in which businesses can be structured. We will look at the most common of these business media in turn below.