Fig. 1 shows a repair studio used by Rewear Loop, a small business that collects damaged outdoor clothing, replaces zips and sells the garments online. Its ...
Question 1 Report
Fig. 1 shows a repair studio used by Rewear Loop, a small business that collects damaged outdoor clothing, replaces zips and sells the garments online. Its founder, Nadiya, currently operates as a sole trader. She has invested $18,000 of her own savings. During the first year, the business made sales revenue of $64,500 and had total costs of $51,600. Nadiya wants to buy industrial sewing equipment and is considering inviting two investors to form a private limited company. She has read that businesses such as IKEA, LEGO and Kraft Heinz use different ownership arrangements as they expand. Nadiya must select the option that gives her finance but still allows effective control of the business.
(a) State two features of a sole trader business. [2]
(b) Calculate Rewear Loop's profit for its first year. Show your working. [2]
(c) Explain two reasons why Nadiya may change Rewear Loop from a sole trader to a private limited company. [6]
(d) Analyse whether forming a private limited company is the best option for Nadiya. Use the information in Fig. 1 and the case study to support your answer. [10]
Answer Details
(a) Features of a sole trader: any two of the following gain credit: it is owned by one person; the owner keeps the profit; the owner has unlimited liability; and it is relatively simple to set up with few legal formalities. Unlimited liability means Nadiya's personal assets may be at risk if the business cannot pay its debts. [2]
(b) First-year profit
\[\text{Profit}=\$64,500-\$51,600=\$12,900\]
Rewear Loop made a $12,900 profit. [2]
(c) Reasons to change to a private limited company
- A private limited company can sell shares to the two investors. This raises capital for industrial sewing equipment, so Nadiya need not rely only on her $18,000 savings or borrowing. More equipment could increase repair capacity and sales. [3]
- Shareholders have limited liability. If expansion fails and the company cannot pay its debts, Nadiya's personal assets have greater protection, reducing her personal financial risk. [3]
The business would also have a separate legal identity, which can allow it to continue if Nadiya leaves or dies and can support long-term planning.
(d) Whether forming a private limited company is best
Forming a company could provide the finance needed for industrial sewing equipment by selling shares to the two investors. This could increase the number of garments repaired and sold. Limited liability reduces Nadiya's personal risk, and a company may appear more established to suppliers and lenders.
However, Nadiya would share ownership, decision-making and profit. Investors may expect dividends, reducing funds retained for expansion. Incorporation also brings administration, reporting requirements and possible professional costs. Remaining a sole trader preserves Nadiya's full control and lets her respond quickly to online customer trends, but she must finance growth herself and retains unlimited liability.
Forming a private limited company is likely the best option if the two investors contribute enough to fund equipment and Nadiya accepts some shared control. If preserving control is her main priority, borrowing may be preferable. A judgement must be linked to the finance required for equipment and the trade-off between finance, risk and control. [10]
Download The App On Google Playstore
Everything you need to excel in your exams
