1.4 Making the business effective (Types of Business Ownership - Limited…
1.4 Making the business effective
Types of Business Ownership - Sole Traders
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.
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.
Types of Business Ownership - Partnerships
More people means more experience and more ideas. Decisions can also be better as the owners can discuss pros and cons with each other.
It is easier to raise money because banks are more likely to lend to a partnership than to a sole trader. More investments means increased access to finance for the firm and this supports quick growth.
Good employees can be made into partners and this means it is easier to retain the best employees.
The profits are shared, so if a sole trader decides to go into business with another person, they may end up with a lower profit for themselves.
Like sole traders, partnerships have unlimited liability.
Partners may disagree about business decisions and this can be unpleasant, especially if it is a family-based partnership.
Each partner is liable for the actions of the other partners. This may lead to further friction between partners.
Types of Business Ownership - Limited Companies
Owned by shareholders
Limited liability companies are owned by shareholders. The shareholders of limited companies can have nothing to do with the day-to-day running of the business.
The more shares a person owns, the more control they are likely to have relative to other shareholders.
Limited company is incorporated
A limited company has a separate legal identity from the owners.
This means that cash, property and debt is in the company’s name and is property (and therefore responsibility) of the company and not the individual shareholders.
Being incorporated means that the shareholders are protected by limited liability. Limited liability means that the shareholders are only legally responsible up to the amount that they have invested.
E.g. if a shareholder invests £10,000 in the purchase of shares, they won't be liable for any debt if the company fails (£10,000 is the maximum they can lose).
Types of Ownership - Private Limited Companies
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.
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
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.
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.
Unlimited vs Limited Liability
Can change legal structure
As businesses grow, their legal structure often changes. This is because businesses often need more capital (money) to grow.
Most private limited companies become public limited companies because selling the shares on the stock exchange allows them to raise finance to fund their company’s expansion.
Access to finance
It is normally easier for limited companies to get bank loans than sole traders or partnerships.
This will help them raise more capital to grow. Because of this, sole traders and partnerships often decide to incorporate the business.
Changing Legal Structure - Marks & Spencer
In 1884, a sole trader named Michael Marks set up a market stall in Leeds.
In 1894, Marks went into partnership with Thomas Spencer.
Public limited company
In 1926, Marks and Spencer became a public limited company. This meant that they no longer had unlimited liability.
Going public also allowed them to raise funds to invest in the company’s growth.
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.
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 limited liability.
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.