Ch 2 - Business ownership Flashcards
Name 5 types of business entities
1) Sole trader
2) Partnership
3) Limited company
4) Limited liability partnership
5) Social enteprise
Sole Trader
Business which is:
-owned by 1 person
-not a limited company
-has unlimited liability for business debts (total personal wealth is at stake in event of being sued)
-can draw out money from the business as needed
-no specific documentation needed to legally establish this form of business entity
Partnership
Business which is:
-owned by more than one person (in equal or unequal amounts)
-not a limited company
-may have sleeping partners*
-can w/draw money from business (normally as share of profits)
-owners have unlimited liability (jointly or severally [individually] liable)
-legal docs: partnership agreement which sets out the rights of individual partners (tax, decisions)
*sleeping partners are those who provide capital but take no part in day2day operations
Limited company
Business which has a:
-legal identity separate from the owners of the business
-co owned by SH
-liability is limited to the fully paid value of their shares
-dividends might be paid (profit as proportion of # of shares owned)
-all co’s above a certain size (i.t.o turnover, assets & # of employees) must produce audited accounts each year
-tax
-legal docs:
>MOA (memorandum of association) = short doc recording the intention of the people concerned to form a company
>AOA (articles of association) = sets out in detail the internal rules for running the co.
(no longer necessary for either document to set out the purpose of the company unless specified)
*shares give the right to vote at company meetings
*SH will appoint directors who are responsible for the control of the co. on behalf of the shareholders
*managers elected as directors = exec
*directors not involve= non-exec
Limited liability partnership (LLP)
Business vehicle that gives the benefits of limited liability whilst retaining other characteristics of a traditional business partnership
-2/more members (not partners)
-no directors or SH’s
-separate legal identity
-members are free to agree amongst themselves the relationship between them]
-LLP is responsible for its assets & liabilities
-legal docs: governed by partnership agreement
>needs to be registered at Companies house (incorporation doc must be submitted & signed by at least 2 persons)
-taxed as regular partnership
*Actions may be taken against individual members who are found to be negligent or fraudulent in their dealings
Name the 2 forms of limited companies
1) Public limited co.
2) Private limited co.
*difference comes in how they register themselves
Public limited company
Sells shares to the general public & has an issued share capital of at least 50000 (pounds). Can apply for a listing on the stock exchange. (co. name must end with PLC)
-correctly registered at Companies house
-each issued share must be paid up to at least a quarter of its par value plus the whole of any premium on it
-normally a large co with multiple SH’s
Private limited company
Company which is not a PLC. Must end in LTD or ltd & isn’t allowed to offer its shares to the public. Cannot be listed on the stock exchange.
-normally small co’s with a range of SH’s
List 3 types of less common companies
a) Companies limited by guarantee
b) Companies established by Royal Charter
c) Close company (under control of 5 or fewer people)
Social enterprise
Business with a clear social or environmental aim. (Defined by this, rather than the legal form of the business)
-maximising owner
value subject to ethical, cultural, legal or political constraints
(e.g low-cost loans to small farmers, low-cost private schools, vaccination programmes)
-could be a partnership, LLP or limited co
-variety of capital & legal structures
-can issue shares & dividends can be paid
-majority of their income must be made from trading
-cannot rely totally on donations or volunteers to operate
(distinguished from std businesses by how they use their profits»_space;reinvest by social or environmental means)
limited returns means they are likely to be insignificant in the investment strategy of most financial insurers & PF’s.
Advantages & disadvantages of a limited company
Adv:
-limited liability makes it easier to raise capital (especially when business ventures involving a risk of incurring substantial debts & when businesses require large amount of capital)
-allows large number of people to invest small amounts of money with relatively minimal checking of the comapny’s prospects. In turn, this allows investors to diversify their exposure to sectors and to the risk of failure
Disadv:
>to creditors (once the company’s assets have been exhausted, trade creditors have no way of ensuring payment)
>to the company (allows people to invest in shares w/o taking an active interest in the LT needs of the co.)
>to the SH (managers of a company may have aims which are not in the best interests of the SH - ‘agency problem’)
>Also that of info asymmetries
Set out the main factors you would consider when deciding whether to set up as a partnership or a company if you were starting up a new business with a friend
-need for finance & the amount of finance you are able to contribute (the more you need and the less you have, the more likely it is that you will need to setup a company)
-the ease of raising finance in the future (the greater your plans to expand, the more likely to set up a company)
-liability for debts (the greater the possibility of running into debt, the more likely you are to consider setting up a company)
-ease of setting up (the quicker & cheaper you want to be, the more likely you are to setup a partnership)
-disclosure ( the more reluctant you are to disclose info about the business, the more likely you are to setup a partnership)
-control of the business (the greater the amount you want to retain, the more likely you are to setup a partnership. however, you could setup a pvt limited company with just a a few(2) shareholders if you wish to retain tight control)
-roles & responsibilities (the firmer you wish the roles & responsibilities to be defined, the more likely you are to setup a company. however, you could have a firm partnership agreement - this is linked to the trust you have in your friend)
-the type of business (the greater the need to display commitment in order to gain trust, e.g accountants, solicitors, the greater the tendency to setup as a partnership)
