1.4 Factors which inform business ownership

Private Sector Ownership

Sole trader - owned by one person, all profits/losses kept by this person, unlimited liability
Partnership - owned by more than one person, profits/losses are shared according to the partnership agreement, unlimited liability
Private limited company (Ltd) - owned by shareholders, shares sold privately, limited liability
Public limited company (plc) - owned by shareholders, shares sold on the stock exchange, limited liability
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Ownership in other sectors

State/government owned - public services are owned by the government such as the armed forces (known as Public sector)
Charity/not-for-profit - there are no owners of charities, the management is performed by trustees
Community interest companies (CIC) - set up as a private limited company but with a community purpose i.e. not to make huge profits

Sole trader
e.g. plumbers, electricians, window cleaners etc.

Advantages -
Quick to set up
Cheap to set up
All profits are kept by the owner
All decisions are made by the owner

Disadvantages - Unlimited liability means personal possessions can be seized to pay business debts
No cover when owner is ill/on holiday
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Partnership
e.g. Accountants, legal firms

Advantages - Cheap to set up
Easier to set up than a company
Workload can be shared amongst the partners allowing for holidays and cover for illness

Disadvantages- Unlimited liability means personal possessions can be seized to pay business debts
Decisions must be agreed by all partners and can often lead to arguments
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Private limited company (Ltd)
e.g small family owned businesses

Advantages -Limited liability protects the owners (shareholders) from business debts
Shareholders can choose who to sell their shares

Disadvantages - Expensive to set up
Time consuming to set up
Administrative burden to maintain a company each year
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Public limited company (plc)
e.g large corporate businesses

Advantages - Limited liability protects the owners (shareholders) from business debts
The ability to sell shares on the stock exchange provides access to further funds

Disadvantages - Expensive to set up
Time consuming to set up
Administrative burden to maintain a company each year
Financial statements shared on the internet
Shareholders do not choose who to sell their shares
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State/government owned (Public sector)
e.g Southampton City Council

Advantages - Funding available from the government - no need to search for income streams
Less likely to be closed down when failing

Disadvantages - Accountable to the government and inspectors
Level of funding can change each year
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Charity/not-for-profit
e.g. Oxfam, Cancer Research UK etc

Advantages -
Small voluntary groups are quick and cheap to set up
All monies raised can go immediately to support those in need

Disadvantages -Formal charities are expensive to set up as they must be registered with Companies House
Trustees are normally volunteers and therefore these roles are difficult to fill
No formal income - the charity needs to raise this from donations
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Community interest companies (CIC)
e.g. The Art House Southampton

Advantages - Limited liability
Reputation may to improved due to their “social purpose”

Disadvantages - Time consuming and costly to set up
Administrative burden to maintain the company
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Factors which inform business ownership

When an individual or group decides to start a business, the choice of legal structure (e.g., sole trader, partnership, limited company) is a critical decision. This choice is influenced by several interrelated factors

Factor - Legal Status

Definition- How the business is legally recognised and registered.

Impact on Ownership- Separate Legal Entity from : The business (e.g., limited company) is legally distinct from its owners, allowing it to be sued, own assets, and make agreements in its own name.
No Separate Legal Entity: The owner(s) and the business (e.g., sole trader, partnership) are legally considered the same; the owner is personally responsible for the business's actions and debts.

Why it matters - A separate legal entity can offer greater protection to personal assets and can simplify the transfer of ownership if the business is sold.

Liability

Definition- To the extent to which the owner(s) are personally responsible for the debts and obligations of the business.

Impact on Ownership- Unlimited Liability: If the business fails and cannot pay its debts, creditors can claim the owner's personal assets (e.g., house, car, savings). This carries significant personal risk.
Limited Liability: If the business fails the owner's’ personal assets are generally protected if the business incurs debts or goes bankrupt.

Why it matters- Protecting personal assets is a primary driver for many entrepreneurs and so they may choose a limited company structure, especially as the business grows and takes on more risk.
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Factor-Funding (Capital Requirements)

Definition- This is the amount of money needed to start and run the business, and the sources from which this money can be obtained.

Impact on Ownership- Sole Traders/Partnerships: Typically rely on personal savings, loans from friends/family, or bank loans. Access to large-scale external funding (e.g., venture capital, issuing shares) is limited.
Limited Companies: Have greater potential to raise capital. Private limited companies can sell shares to a limited number of individuals (friends, family, private investors). Public limited companies can raise substantial capital by selling shares to the general public on a stock exchange. This allows for significant growth and expansion.

Why it matters- The ambition for growth and the scale of investment required will heavily influence the choice of ownership structure.

Factor- Control / Decision- Making

This relates to who has the authority to make day-to-day operational decisions and strategic choices for the business.

Impact on Ownership- Sole Trader: The owner has complete control and makes all decisions independently and quickly.
Partnership: Control is shared among partners and decisions require all to agree. This can sometimes slow down the process but brings diverse perspectives.
Limited Company: Control is vested in the directors, who are appointed by the shareholders. While shareholders own the company, day-to-day control is delegated. In smaller limited companies, the owners often are also the directors, retaining significant control. In larger public companies, individual shareholders have less direct control, often limited to voting at AGMs.

Why it matters- Entrepreneurs must weigh the desire for full control against the benefits of shared responsibility or the need to dilute control to raise significant capital.
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Factor- Legal/ Administrative Requirements

(Ease of Setup)
Definition- This encompasses the legal formalities, paperwork, reporting obligations, and regulatory compliance associated with establishing and running a particular business structure.

Impact on Ownership- Sole Trader: Very simple and inexpensive to set up, with minimal ongoing legal requirements.
Partnership: Relatively easy to set up, but a formal partnership agreement is highly recommended to avoid future disputes.
Private Limited Company: More complex and costly to set up, requiring registration with Companies House along with ongoing statutory obligations (e.g., annual accounts, confirmation statements, record-keeping, strict accounting standards).
Public Limited Company: The most complex and expensive to set up and run, with extensive regulatory requirements from Companies House and the stock exchange, demanding high levels of transparency and corporate governance.

Why it matters- The complexity and cost of compliance can be a significant deterrent for new or very small businesses, making simpler structures more appealing initially. As a business grows, the benefits of limited liability and easier access to funding often outweigh the increased administrative burden.
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