7: Choosing the right legal structure for the business

Question 1

Sole trader

Answer 1

An individual operating a business on their own. Self- employed.

Question 2

Advantages of being a sole trader:

Answer 2

• Simple & quick to set up.
• Inexpensive to set up.
• Any profit made is owners to keep, or reinvest.
• Owner has complete control over business.
• Often a close relationship between business and customer can be built because of the size and simplicity of the business structure.
• Hours of work etc. can be tailored to suit the entrepreneur.

Question 3

Unlimited liability

Answer 3

A feature of unincorporated businesses where the owners are personally liable for all debts incurred by a business. All sole traders and most partnerships have unlimited liability.

Question 4

Drawbacks of a sole trader:

Answer 4

• Unlimited liability. (Personally liable for all debts incurred).
• Difficult to raise additional finance, because sole traders often have limited finds of their own and very little security against which to raise more. Banks may be willing to help f there is a good busies plan.
• All decisions rest with the owner, who may not possess all the necessary expertise. E.g. owner can know everything about product, but little on finance or insurance. Big reason why many start-ups fail.
• Business vulnerable is owner becomes ill, or other rings happen in his/her life.

Question 5

Partnership

Answer 5

Two or more people in a business together.

Question 6

Benefits of a partnership:

Answer 6

• Few procedures to follow in order to set up.
• Unlike sole traders, the expertise of more than one person can be brought into the business for decision making and for sharing the work load.
• Often different partners specialise in different aspects of the business.
• There are more sources of finance as each partner can contribute a share of the start-up funds.

Question 7

Drawbacks of partnership

Answer 7

• As with sole traders, UNLIMITED LIABILITY. Each partner is jointly liable for the debts incurred by the business. So a wrong decision by one of the partners can have consequences for all the partners.
• Profits are shared amongst the partners (according to the distribution agreed in the Deed of Partnership)
• The partners are legally bound to honour the decisions of the others.
• The partnership ends on the death or resignation of a partner.
• A maximum of 20 people can join a partnership, thus limiting the size of the business and the source of funds.

Question 8

Private limited companies

Answer 8

The owners are the shareholders, and their ownership of the business is determined by the proportion of the total shares each person holds.
The business must have Ltd in its name.
A shareholder in a limited company has limited liability, which means that they are not liable for the debts the business might incur, beyond what they might have invested into the business. INCORPORATED.

Question 9

Limited Liability

Answer 9

A feature of incorporated businesses such s private or public limited companies, which means that the owners’ liability is limited to the amount they have invested in the business.

Question 10

Benefits of a limited company:

Answer 10

• Access to funds through the issue of shares.
• Higher status of business structure than a sole-trader.
• Limited liability is a benefit for the shareholders, who may see the risk a more acceptable than if the business were unincorporated.
• Incorporation means the business exists, and will continue to exist even if a shareholder resigns or dies.

Question 11

Drawbacks of a limited company:

Answer 11

• More complicated set up process than unincorporated business structures.
• Limited liability might be a benefit for shareholders, but lenders may see it as a risk.
• Some disclosure of accounts is necessary as these must be sent to Companies house.

Question 12

Public Limited Companies

Answer 12

Key feature that distinguished a public limited company from a private limited company is that they shares are bought and sold publicly. Shares are traded publicly and anyone can buy them. This means they have market value.
On any given day, the share price of a plc is important because it indicates how popular the business is, and it can influence how successful future issues of shares might be.
The share price of a plc is also a crucial factor in determining how easy it would be to take it over by buying a proportion of shares.

Question 13

Benefits of a public limited company (plc):

Answer 13

• Main benefit is the scale of the funds that can be raised from a flotation (the initial sale of shares to the public).
  A successful business that wants to grow may find many investors wanting to buy shares in the initial share offer, which means large sums of money can be raised.
• Future funds can be raised because banks and lenders see a plc as a very stable, secure type of business and they are willing to lend large sums of money.

Question 14

Drawbacks of public limited company (plc):

Answer 14

• The process of floatation is expensive. Documents have to be produced to advertise the company and explain its financial situation, there are legal fees, and shares have to be underwritten.
  Company must have a minimum of £50,000 in share capital, of which 25% must have been sold before the plc can trade.
• Not possible to control who buys shares. No stopping competitors, customers or suppliers buying shares. A takeover cannot be prevented if someone is willing and able to buy enough shares.
• Plc must provide regular, detailed and financial information.

Question 15

Non-for-profit business - social enterprises:

Answer 15

Does not have profit as its main objective. This type of business mainly aims to provide a social benefit.
It may make a profit, but often these profits are reinvested back into the business so that the social aims can be met, rather than paid out to the owners.
E.g. The Eden Project in Cornwall is a example of a non-for-profit business.

Question 16

Benefits of non-for-profit structure:

Answer 16

• Entrepreneurs can earn a living doing something valuable, which can be motivating.
• The more successful the social enterprise, the more society benefits.
• Customers may be more willing to buy from a social enterprise.
• It might be easier to recruit, motivate and retain employees in a social enterprise.
• Grants or other forms of finance might be available from sources sharing the same social aim.

Question 17

Drawbacks of a non-for-profit structure:

Answer 17

• Profits and social aims may conflict, leading to difficult choices.
• Entrepreneurs will always have to accept a lower return than with a profit-making business because a proportion of the profits will go towards the social aim.