1.5.4 Forms of Business

What are the different forms of business?

• Sole trader

• Partnership

• Private LTD company

• Public LTD company

• Franchise

• Social, lifestyle & Online

Sole trader

• A business that has a single owner with unlimited liability

• Sole traders are common in household maintenance such as plumbers, handyman business and window cleaning

Advantages:

• Easy and inexpensive to set up

• The owner has complete control over the business

• All profits belong to the owner

• Simple tax arrangements

Disadvantages

• The sole traders is responsible for any debts the business incurs

• Limited access to finance and capital

• Limited skill set of the single business owner

Partnership

• Two or more people join together to form a business, sharing decision-making and risk

• Examples of this type of business include lawyers and accountants

Advantages:

• Easy to set us and inexpensive

• Shared responsibilities and decision-making

• More sills and knowledge are available

• Increased access to finance and capital Limited skill

Disadvantages:

• Partners have unlimited liability

• Potential for disputes between partners

• Profits are often shared equally, regardless of contribution

• Difficult to transfer ownership

Private limited company

• The ownership of the business is broken down into a specified number of shares, owned by shareholders with limited liability

• These shares can be sold by the owner, usually to friends and family or to venture capitalists

• Decision-making often rests with the person appointed rot run the company, often called the managing director or CEO

Advantages

• Limited liability, meaning the owners are not personally responsible for the company’s debts

• Access to greater Finance and capital

• Easier to transfer ownership

• Can have professional image and reputation

Disadvantages

• More expensive and time-consuming to set up

• More complex legal requirements and regulations than sole traders

• Annual financial reporting and auditing are required

• Shareholders have little control over the company, as the founder usually imposes their agenda

Franchising

• Franchising is a business model in which an individual buys the rights to operate a business model, branding and support from a larger company in exchange for an initial lump sum plus ongoing fees called royalties

• The franchisee operates the business under the franchisor’s established system and receives training, marketing support and ongoing assistance

Advantages:

• Lower risk of failure because the franchisee is using an established brand and proven business model

• Support and training provided by the franchisor, which makes running the business easier

Disadvantages:

• High initial costs and ongoing fees (royalties) reduce profit margins

• Less independence, as the franchisee must follow strict rules and cannot make major changes without approval

Social enterprises

• A social enterprise is a business that has the primary purpose of creating a social or environmental impact

• Profits are usually reinvested back into the business, used to created positive social change or address an environmental issue

Advantages:

• Ability to combine making money with achieving a positive social or environmental impact, which can be personally rewarding

• Stronger customer loyalty and community support, as people may be more likely to buy from an ethical business

Disadvantages

• Access to finance can be difficult, as investors may be cautious about limited profit opportunities

• Balancing social goals with financial sustainability can be challenging and may limit growth

Lifestyle businesses

• Lifestyle businesses are typically small, owner-operated businesses that prioritise a specific lifestyle or personal interest that proprieties a specific lifestyle or personal interests of the owner over profits

• These businesses are often run from home or in a location that allows the owner to maintain a particular lifestyle or work-life balance

• E.g yoga instruction, personal training, business coaching

Advantages:

• Owners can prioritise personal goals, such as work-life balance, travel or flexible hours, rather than focusing purely on maximising profit

• Opportunity to run a business based on personal interests or passions, making work enjoyable and motivating

Disadvantages:

• Limited potential for growth, as expansion might conflict with the owner’s lifestyle objectives

• Financial returns may be lower compared to other business models, especially if the owner chooses to sat office rather than maximise profit

Online businesses

• Online businesses often have low overhead costs and can operate from anywhere with an internet connection

• These businesses are still required to have legal structure, such as a sole trader or a private limited company

• E.g e-commerce stores, online courses and software as a service companies

Advantages:

• Lower stat-up costs compared to a physical location, as there is no need to rent or maintain premises

• Ability to reach a wide customer base beyond the local area, as products can be sold nationally por even internationally

Disadvantages:

• High competition online make it difficult for a new business to stand out

• Reliance on technology and delivery services, meaning website issues or shipping delays can harm customer satisfaction

Benefits of becoming a public limited company

• Access to capital

  • Significant amounts of capital can be raised very quickly

  • This is often a more cost-effective way to raise capital than borrowing money from banks or other lenders

• Shared risk

  • This risks associated with ownership are spread among a larger group of shareholders

  • This reduced the financial risk to any one individual

• Increased liquidity

  • A company’s shares becomes more liquid on a public stock exchange

  • This can increase the value of the company’s shares and make it easier for shareholders to by/sell shares

• Extended decision-making

  • The company will have a board of directors made up of independent directors made up of independent directors and representatives from major shareholders

  • This can extend the decision making process and bring in additional expertise and perspectives that can help the company grow and expand

• Greater public profile

  • Becoming a PLC can raise a company’s public profile and increase its visibility with customers, suppliers and potential investors

  • This increased visibility can help the company attract new business and grow its customer base