Different forms of business

Sole traders:

• The most common type of business form

• A sole trader is an individual who owns the business on his/her own

• A sole trader can also employ people - but these people are not business owners

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

Advantages:

• 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

Disadvantages:

• 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

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

Benefits:

• 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

Drawbacks:

• 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

Incorporated business is a ‘company’:

• A company is a separate legal entity

• The owners of a company are shareholders

Limited companies:

• Limited companies 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

Operating as a limited company:

Advantages:

• 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

Disadvantages:

• Greater admin costs

• Public disclosure of company information

• Directors’ legal duties