Business Models Flashcards
What are the 3 difference categories of business model?
- Sole trader
- Partnerships
- Companies
Define incorporated
(a business model) that has been formally registered with a government entity, creating it as a separate legal entity from its owners
Define unincorporated
A business model that has not been formally registered with a government entity
What business models are traditionally unincorporated?
Sole traders and certain types of partnerships i.e.:
- ordinary partnerships
- limited partnership
What business models are incorporated?
All companies and limited liability partnerships
What are the difference types of companies?
- Private limited company’s (ltd) - either with share capital or without share capital
- Private unlimited companies - either with share capital or without share capital.
- Public limited companies - These always have share capital and can either be listed on the Stock Exchange or sold to public through other means.
What are sole traders?
An individual carrying on business on own account/for own benefit.
- They often see no advantage in bringing on a partner or incorporating as a company.
- They pay income tax on their trading profits
What are the pros of being a sole trader?
NOTE: CONSIDER FRLF - formation, Regulation and Formalities, Liability, and Raising Finance
Pros
Formation: Simple. No formalities, no delays.
Regulation and Formalities:
- No formalities or obligatory costs involved in set up.
- No restraints on decision-making + privacy maintained.
- regulations do exist i.e. must register with HMRC as “self-employed” and complete a tax return each year but they can still personally retain the profits of their business.
What are the cons of being a sole trader?
(CONSIDER FRLF)
Cons
Liability - personally liable for debts, mistakes, breaches of business (personal contracts involved).
- Thus, some sole traders choose to take out professional indemnity. Some professions e.g. freelance solicitors have restrictions which means they MUST carry insurance.
Raising Finance - must fund business from own pocket, or through loans (either through security or through guarantee from TP).
- Sole traders risk having assets seized if they default on the loan. Guarantor may also risk losing assets if trader is insolvent.
- This makes it difficult to grow business
Compare Ordinary Partnerships and LLPS.
(Consider formation, Regulation and formalities and liability)
Formation
- OPs: simple to create. They can be formed informally or by a formal agreement by two or more persons.
- LLP: must be registered with Registrar at CH. Thus, has separate personality.
Regulation and Formalities
- OP: Simple. regulated by partnership law.
- LLP: Complex. regulated by company law and LLPA.
Liability
- OP: All partners have joint/several, personal and unlimited liability (Con).
- LLP: Members not personally liable for debts and liabilities of LLP (Pro).
What are the 3 main types of partnerships and what legislation governs them?
- Ordinary Partnerships - Partnership Act 1890
- Limited Partnerships - Limited Partnership Act 1907 and Partnership Act
- Limited Liability Partnerships - Limited Liability Partnerships Act 2000 (LLPA)
In terms of control and management, how do the 3 business models differ?
What are some of the pros/cons of these differences?
Sole Trader: Complete control over running of business/major decisions. -
- Pro: flexibility
- Con: adds pressure if no advice or support.
Partnership: Partners consult with each other and decisions are made by majority, unless otherwise specified by partnership.
- Pro: can receive advice
- Con: leads to slow decision making.
Limited Company: Original business owner may need to cede control to other shareholders and directors
- Pro: less pressure with more people providing advice/support.
- Con: slower decision making.
In terms of liability, how do the 3 business models differ?
Sole trader:
- Personally liable for debts of business. If business fails, they may be made bankrupt.
Partnership:
- A partnership (other than LLP) has no legal personality so partners are jointly liable for debts of business. If business fails, they may be made bankrupt.
Limited Company
- Company is liable for it’s own debts. The shareholders liability is limited to either the nominal value of their shares or the value of their guarantee.
In terms of cost, how do the 3 business models differ?
Sole trader:
- No costs involved in setting up, aside from those of running business (ongoing costs).
Partnership:
- initial costs arise if partners choose to have formal, written partnership agreement. Ongoing costs are similar to sole trader.
Limited Company:
- Fee for registering company at CH. The more complex and valuable a company, the more it will cost to administer.
- Ongoing costs arising from duty to comply with reporting requirements.
In terms of profit, how do the 3 business models differ?
Sole trader: All profit goes to owner.
Partnership: Profits divided between partners.
Limited Company: All profits belong to company, but shareholders may receive dividends and directors may receive income.
In terms of financing the business, how do the 3 business models differ?
Sole trader: needs to personally fund business e.g. through owning a valuable asset to act as security or having a guarantor.
Partnership: Broadly same as sole traders.
Limited Company: Company will still need valuable assets to act as security for bank borrowing but the company can also offer floating charges, and raise money by issuing shares.
In terms of tax, how do the 3 business models differ?
Sole trader: Owner pays tax on business’s profits as an individual (i.e. income tax)
Partnership: Each partner taxed individually on any profit they receive each.
Company: Company pays corporation tax on both trading and capital profits. In addition, shareholders are taxed on any dividend income and employees are taxed on salaries.
In terms of regulation, how do the 3 business models differ?
Sole trader: leads regulated business structure but are still subject to some regulation (e.g. tax and data protection etc)
Partnerships: must comply with PA Act 1890. However this is not very prescriptive and allows for some flexibility.
- LLPs must keep PSC Registers.
Company: must comply with complex regulations, including filing of annual confirmation statements.
- Records must be kept in form of local registers and CH must be updated (but local registers will be less important when ECCTA is implemented).
In terms of privacy, how do the 3 business models differ?
Sole trader: less regulatory requirements so easier to maintain privacy.
Partnerships: Same as for sole traders but LLPs are slightly different as they must keep PSC Registers.
Company: Obliged to disclose detailed info, including financial statements. Most data is publicly available on CH. Offers least privacy
