Study Notes on Business Ownership and Business Structures

Overview of how businesses are set up.
Focus of upcoming chapters on the tax system and business financing.
Structure of the chapter:
- Section 1: Types of Business Entity
- Section 2: Pros and Cons of Limited Companies
Content reflects UK examples, applicable principles in other countries.
Exam topics include knowledge of business structures and advantages/disadvantages of various business structures.

Four main types of business entities:
1. Sole Trader
2. Partnership
3. Limited Company
4. Limited Liability Partnership (LLP).

Definition: A business owned by one person, not registered as a limited company.
Liability: Unlimited legal liability for business debts. Personal wealth at stake for business obligations.
Description:
- Often a one-person operation (e.g., window cleaners, freelance journalists).
- Can also have employees.
- Owners have full control over business operations and financial decisions.
Legal and Accounting:
- Minimal documentation is necessary to establish; typically requires a normal tax return.

Definition: A business owned by two or more people, not a limited company.
Description:
- Partnerships can be small or large (hundreds of partners).
- Ownership can be equal or unequal.
- Partners may actively participate in business operations or be 'sleeping partners' (only providing capital).
- Money drawn can vary relative to profit shares.
Liability: Unlimited liability, with partners jointly and severally responsible for debts. Each partner liable for the whole amount; they can be sued for all business debts.
Legal and Accounting:
- Most partnerships require a "partnership agreement" outlining terms.
- Need for accounts to determine individual tax liabilities; partners pay income tax.

Definition: A business with a separate legal identity from its owners.
Description:
- Owns property, handles contracts, can sue or be sued.
- Shareholders own the company and appoint directors to run it.
- Managers may be directors (executive) or not (non-executive).
- Shares can be bought/sold without shareholder consent (more applicable to public companies).
- Profit calculation and dividend declaration, paid proportionally based on shares.
Liability: Limited to the share value. If shares are fully paid, no liability beyond that is incurred. If partly paid, shareholders liable for outstanding amounts only.
Legal and Accounting:
- Must have a Memorandum of Association and Articles of Association.
- Defines internal management and operations without restricting company purpose.
- Certificate of incorporation issued after submitting necessary documents.

Introduced in the UK in 2001, combines limited liability with traditional partnership traits.
Description:
- Composed of two or more members pursuing profit.
- Recognized as a separate legal entity without directors or shareholders.
- Able to contract and hold properties, enduring membership changes.
Liability: Members' liability is limited, but negligence or fraudulent actions can lead to personal liability.
Legal and Accounting:
- Governed by partnership agreement; if absent, default provisions apply.
- Registration at Companies House is required; accounting and audit rules align with conventional partnerships.

Sole Trader: Unlimited liability; personal wealth is at risk.
Partnership: Unlimited liability; personal wealth at stake for the partnership.
Limited Company: Limited liability; creditors cannot pursue personal assets beyond paid shares.
Limited Liability Partnership: Members' liability limited to their capital contributions.

Limited liability facilitates capital raising.
Investment Appeal: Investors prefer limited companies to mitigate personal wealth risks associated with partnerships.
Transparent accounting gives investors confidence. Share valuation is straightforward when public.
Necessary for ventures potentially incurring substantial debts; crucial for capital-intensive businesses.
Enables diverse investor participation with minimal investment risk.
Separation of ownership and management permits smooth ownership changes.

For creditors: Once assets are exhausted, no further claims can be made.
For customers: Risks in transactions with pre-paid services or goods.
For the company: Limited liability can lead to short-term focus amongst investors, disregarding long-term health.
Agency Problem: Managers might act against shareholders' interests, focusing on personal benefits or inefficient corporate behaviors.
Information asymmetry may hinder stakeholders from having equal insight into company performance. This exists due to lack of transparency in reporting practices.

Introduction of limited liability spurred growth in large industries.
Essential for scaling operations beyond classic family-run scenarios; enables capital-intensive production benefits.

Public Limited Companies (PLC): Offers shares to the public, requiring at least £50,000 in issued share capital.
Private Limited Companies (LTD): Not allowed to publicly offer shares, smaller internal ownership.
Other Company Types:
- Companies limited by guarantee.
- Companies established by Royal Charter.
- Close companies controlled by fewer than six members.

Defined by their social/environmental mission rather than legal structure. Requires generating over 50% of income from trading, with profit reinvestment for community benefit. Not focused solely on maximizing owner value.