1.2 Business Ownership

Legal Structures of Businesses

A business must be legally registered, but can choose the best legal structure for itself.

It is possible for a business to change legal structure, but it is complicated and few businesses do this.

A business must decide which structure best suits its needs. Factors it must consider are:

Liability — if the business fails or is sued, how personally liable will the owners be?
Control — how much ongoing control do the owners want over the business?
Finance — how much investment do the owners need to raise?
Business size — how big do the owners expect the business to be?

Sole Traders

Being a sole trader means running a business as an individual, assuming complete control over decision-making and keeping all profits.

However, it also entails bearing unlimited personal liability for business debts and obligations. Many tradespeople are sole traders.

Advantages

Being your own boss
Making your own decisions
Easy and cheap to set up
Keeping all profits

Disadvantages

Heavy workload — you're on your own!
You may lack skills for some tasks
Unlimited personal liability — you are personally responsible for business debts and legal action
Difficult to raise finance
No holiday or sick pay

Partnerships

A business partnership involves two or more individuals sharing the responsibilities, risks, and profits of a business venture.

With each person bringing their own skills, partnerships can offer a diverse skillset; pooled resources; and shared decision-making. Like a sole trader, each has unlimited personal liability for debts.

Advantages

Workload is shared
Easier to raise finance than being sole traders
Each partner can bring a different skill
May be able to cover each others holidays and sickness

Disadvantages

Disagreements between partners
Unlimited personal liability — you are personally responsible for business debts and legal action
Each partner is jointly liable for the actions of the other partner(s)

Companies, Shares, and Shareholders

Instead of being a sole trader or partnership, someone can set up a company.

Companies are incorporated, which means they have their own legal identity which is separate from its owners. This means:

The business can own items
The company, not the owners, are responsible for debts and legal liabilities
If the business fails, the owners are not liable for debts — although they may lose money they have invested

Both private and public limited companies are owned by shareholders.

Each shareholder owns a share – a proportion – of the business.

Shareholders have a say in how a business is run and are entitled to a share of its profits.

Example: if a business is made up of four shares, and each share is owned by a different person, then each person owns a quarter of the business and is entitled to a quarter of any profits.

Private Limited Companies (Ltd)

An incorporated business which is owned by shareholders and managed by directors.

Advantages

Limited personal liability – owners are not personally responsible for company debts
Seen as being more trustworthy
The business exists after the owner's death
Business can be sold by owners
It is easier to raise finance compared to being a sole trader or partnership
Share ownership can be controlled – all shareholders must agree to shares being sold to others

Disadvantages

It is more difficult, and more expensive, to set up a limited company than a sole trader or partnership business
Accounts must be published annually

Public Limited Companies (PLC)

Like a private limited company, it is owned by shareholders and their personal liabilities are limited. However, shares can be publicly traded on a stock exchange. Public limited companies tend to be very large organisations.

Advantages

Limited personal liability – owners are not personally responsible for company debts
Potential to raise lots of finance – especially from shareholders
Higher public profile – many PLCs are household names

Disadvantages

Very difficult and expensive to set up and administer
Accounts must be made public
There are usually lots of shares, and each shareholder is entitled to a percentage of profits and a say in how the business is run
Anyone can buy shares – a shareholder could buy enough shares to takeover the company!

Not-For-Profit Organisations

The goal of most businesses is to make a profit. But some businesses, such as charities and social enterprises, are not permitted to make a profit. Any funds remaining at the end of the year are put back into the business to be used the following year.

Not-for-profit organisations can be one of several different types of legal structure. They can also be difficult to manage, as they are often reliant on donations and volunteers.