Understanding Different Business Forms pt.1

Types of Business Ownership - Sole Traders

Every business needs a legal structure that defines who owns it. A sole trader is a single person who is the exclusive owner of a business. They can still have employees and the owner is entitled to keep all of the profits after tax but is also personally liable for the business’ debts.

Advantages

• They are the easiest type of business to set up.

• The sole trader gets to be their own boss.

• The sole trader decides what to do with the profit.

• It is easy to change the legal structure if circumstances change.

Disadvantages

• Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.

• It can be hard to raise finance. Banks often see sole traders as riskier.

• All the responsibility for making business decisions is yours. Having someone to share decision making with, can improve performance.

• It can be harder to retain (keep) good employees as they aren’t necessarily given a share of the profits.

Types of Ownership - Private Limited Companies

Private limited companies (Ltds) are companies where ownership of shares is restricted. For the company to sell shares, all the current shareholders must agree to sell them. These companies have Ltd. after their name.

Advantages

• The key advantage over sole traders and partnerships is that shareholders have limited liability.

• The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed.

• It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.

Disadvantages

• Finance is needed to incorporate a business. There is an upfront fee as well as costs associated with paperwork. This means that it may not be possible for smaller firms (or brand new firms).

• Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.

Types of Ownership - Public Limited Companies

Public limited companies sell shares on the stock exchange. This means that anybody over 18 can buy shares (often through brokers). Firms often become public companies when they want to expand because selling shares on the stock exchange allows them to raise finance for investment. In 2017, Snapchat went through this process (which is called a flotation).

Advantages

• Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.

• It is much easier for companies to raise capital (money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).

• Shareholders have limited liability because the company is incorporated.

Disadvantages

• Owners often have very little say over how the business is run. This means that it can be hard to agree on how the business is run.

• Anyone can take over the company if they are able to buy enough shares. When shareholders own more than half the shares, then they will have control over the company.

• The company’s accounts must be made public. This means that competitors can see how well the company is doing.

Not-For-Profit Organisations

Any profit made by not-for-profit organisations is reinvested (put back) in the business. Any profit cannot be kept by the owners. There are lots of types of not-for-profit organisations and they can have different aims:

Charities

• Charities, like Oxfam or Save the Children, are a type of not-for-profit organisation.

• Getting charitable status lets a business get tax relief and lets it apply for certain grants. For a business to get charitable status, they must follow rules and regulations.

Social enterprise

• Social enterprises, like the Big Issue or TOMs are another form of not-for-profit organisation.

• They are more similar to for-profit businesses in that they make a surplus through selling goods or services. This profit is reinvested to support the social enterprise’s aim.

Unincorporated association

• Not-for-profit organisations can choose to be an ‘unincorporated association’ but, like sole traders and partnerships, the people who manage it have unlimited liability.

• This means that they get no profit and they are legally responsible for all of the organisation’s debt.

• Bigger organisations, like Oxfam, tend to be incorporated so that the people running it are protected from unlimited liability.