Different Forms of Business

What are sole traders?

• The most common type of business form

• They are an individual who owns the business on his/her own

• They can also employ people - but these people are not business owners

• They own all the business assets and are personally responsible for the business debts. A sole trader has unlimited liability

What are advantages of sole traders?

• Quick and easy to set up - business can always be transferred to a limited company once launched

• Simple to run - owner has complete control over decision-making

• Minimal paperwork

• Easy to close/shut down

What are disadvantages of sole traders?

• Full personal liability - ‘unlimited liability’

• Harder to raise finance- Sole traders often have limited funds of their own security against which to raise loans

• The business is the owner-the business suffers if the owner becomes ill, loses interest etc

• Can pay a higher tax rate than a company

What are partnerships?

• Where a business is started and owned by more than one person

• The legal partnership agreement sets out how the partnership is run, covering areas such as:

  • How profits are to be shared

  • What the partners have to invest in the business

  • How decisions are taken

  • What happens if a partner wants to leave or dies

• The partners between them own all the business assets and owe all business liabilities

• Partners, therefore, also have unlimited liability

What are the benefits of partnerships?

• It is quite simple- certainly the simplest way for two or more people to form a business together

• Minimal paperwork once the Partnership agreement is set up

• Businesses benefit from the expertise and efforts of more than one owner

• Partners can provide specialist skills

• Greater potential to raise finance- partners each provide the investment

What are the drawbacks of partnerships?

• Full personal liability-’unlimited liability’

• A poor decision by a partner damages the interests of the other partners

• Harder to raise finances than a company

• Partners are bound to honour the decisions of others

• Complicated to sell or close

Why is an incorporated business a company?

• A company is a separate legal entity

• The owners of a company are shareholders

What are limited companies?

• They are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued

• Companies are owned by their shareholders and run by directors. The shareholders appoint the directors (often the same people) who run the company in the interests of the shareholders

• Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company

What are the advantages of operating as a limited company?

• Limited liability- protects the shareholders

• Easier to raise finance- sale of shares and also easier to raise debt

• Stable form of structure- business continues to exist even when shareholders

What are the disadvantages of operating as a limited company?

• Greater admin costs

• Public disclosure of company information

• Directors’ legal duties