1.5.4 Forms of Business - legal structures Flashcards
Business forms
- A business form is the legal structure that it takes (in the UK). It could be a sole trader, a partnership, a private limited company (Ltd) or a public limited company (PLC).
- Most (but not all) businesses in the UK are a Ltd – this is so that they can sell shares to friends and family to raise money to expand AND they get the benefit of limited liability
Limited liability
• Limited liability means that the owner of the business has no personal liability for business debts. The owner has a separate legal identity from the business and is NOT liable for payment of the debts from their own personal funds.
Unlimited liability
- If a business gains debts, or goes bust or is sued this could be a problem for the owner
- If there is no money in the business then the owner would need to pay using their own savings, finances, they may even have to reportage their home or even sell their car to pay the debts
- This is unlimited liability
Sole trader
▪ Business owned by one owner, but they can take on staff
▪ Also known as a sole proprietor
▪ Can employ people but they will not be involved in control of business
▪ Tend to be small businesses
▪ Has unlimited liability
▪ Examples include; small shops, accountants that work from home, online traders, plumbers etc
Advantages of Sole trader
- Easy to set up – no complicated forms
- Make decisions quickly
- Less capital needed
- All profits kept by the owner
- Can offer personal attention to customers
- Don’t have to make any information about the company public
- They are their own boss
Disadvantage of Sole trader
- Unlimited liability, this means that if the business has financial difficulties the sole trader could lose their own assets like their savings, house or car
- Difficult to raise money – seen as a risk
- Don’t have economies of scale (buying in bulk)
- No one to take over for ill-health or holidays
Partnerships
- Two or more people – ie the partners - share the risks, costs and responsibilities of being in business
- The profits and gains of the partnership are shared among the partners, unless the partnership agreement states otherwise
- Each partner is personally responsible for paying tax on their share of the profits and gains, and for their National Insurance contributions
- Partners raise money for the business out of their own assets and/or with loans
- The partners themselves usually manage the business, although they can delegate certain responsibilities to employees
Advantages of Partnership
- Easier than a sole trader to raise extra capital, as partners all have their own sources of finance e.g. savings
- Profits go to partners, which is very motivating
- Smaller business means good working relationships
- No need to make public any information
- Partners contribute with range of skills
- Shared problems and decisions
DisAdvantages of Partnership
• Unlimited liability • Partners may have disagreements about: • Control of business • Sharing of profits • Withdrawal from the partnership • Inviting new partners into the business
Private limited company (ltd)
- Sole traders may grow and expand and want to become a ltd company
- Friends and family can buy shares in the business, this will make them part owners
- Shares cannot be bought by the public
- Owners control who buys the shares
- Expand by selling more shares, giving the business more capital
- Normally medium sized businesses
- Have the benefit of limited liability, those that own or buy shares in the business can only lose their original investment, their private assets remain safe
Advantages of private limited company
- Limited liability
- Can raise extra capital by selling more shares, to friends and family, making it easier to expand
- Can employ managers to run business if the owners don’t want to do it themselves
- Has its own legal status – separate from the shareholders
DisAdvantages of private limited company
• Accounts of the company cannot be kept private
- Audited each year
- Copy sent to Registrar of Companies
- Available for public to see
• More difficult and expensive to set up - more administration
• Cannot sell shares on stock exchange, which limits the amount of capital that it can raise
What is a franchise?
Imagine a company has a great and successful business. It wants to expand but it doesn’t want the problems and expense of opening more stores – so it sells the business idea.
• If you buy a franchise it is a “business in a box”, as well as signage and training you get support of a national company and a brand that customers already know.
Franchisee
This is the business owner who is buying the rights e.g. Gurdeep
Franchisor
this is the business that is selling the rights e.g. Subway
