Types of Businesses

Question 1

Legal structure of business- sole trader

Answer 1

• Sole Trader: A sole trader is a business owned and run by one individual. The owner is responsible for all aspects of the business, including decision-making, profits, and liabilities. It is the simplest and most common form of business ownership.

Question 2

Advantages of a sole trader

Answer 2

• Advantages: Full control over decisions, all profits go to the owner, minimal administrative requirements.

Question 3

Disadvantages of a sole trader

Answer 3

• Disadvantages: Unlimited liability, limited access to capital, high personal responsibility.

Question 4

Legal structure of a business- partnership

Answer 4

• Partnership: A partnership involves two or more people who share the ownership, responsibilities, profits, and liabilities of the business. There can be different types of partnerships, such as general partnerships (where all partners have equal responsibility) or limited partnerships (where some partners have limited liability).

Question 5

Advanatges of a partnership

Answer 5

• Advantages: Shared responsibility, more capital available, diverse skill sets and expertise.

Question 6

Disadvantages of a partnership

Answer 6

• Disadvantages: Shared liability (unless limited partnership), potential for conflict between partners, profit sharing.

Question 7

Legal structure of a business- limited liability partnership

Answer 7

• Limited Liability Partnership (LLP): An LLP is a hybrid form of business ownership that combines elements of both partnerships and limited companies. It offers the flexibility of a partnership, with the added benefit of limited liability for each partner.

Question 8

Advantages of a limited liability partnership

Answer 8

• Advantages: Limited liability for each partner, flexible structure, protection from personal assets being used to pay business debts.

Question 9

Disadvantages of a limited liability partnership

Answer 9

• Disadvantages: More complex legal and administrative requirements compared to a general partnership.

Question 10

Legal structure of a business- Private limited company

Answer 10

• Private Limited Company (Ltd): A private limited company is a business owned by shareholders, but its shares are not available for public purchase. The owners’ liability is limited to the amount they invest in the company.

Question 11

Advanatges of a private limited company

Answer 11

• Advantages: Limited liability, easier to raise capital through private investors, separate legal identity from the owners.

Question 12

Disadvantages of a private limited company

Answer 12

• Disadvantages: More complex legal structure, higher administrative costs, limited ability to raise capital compared to a public company.

Question 13

Legal structure of a business- public limited company

Answer 13

• Public Limited Company (PLC): A public limited company is a business that can sell its shares to the public on the stock exchange. Shareholders’ liability is limited to the value of their shares.

Question 14

Advantages of a public limited company

Answer 14

• Advantages: Ability to raise capital by selling shares to the public, limited liability for shareholders, large-scale operations.

Question 15

Disadvantages of a public limited company

Answer 15

• Disadvantages: Regulatory requirements and public scrutiny, the cost of going public, potential for loss of control over the company.

Question 16

Explain what is meant by limited liability

Answer 16

• Limited Liability: Limited liability means that the owners or shareholders of a business are only liable for the amount of money they have invested in the business. Their personal assets (such as a house or car) are protected in the event of business failure or debt. This is typically associated with companies (e.g., private limited companies or public limited companies).

Question 17

Explain what is meant by unlimited liability

Answer 17

• Unlimited Liability: Unlimited liability means that the owner(s) of a business are personally responsible for all the debts and liabilities of the business. If the business incurs debt or goes bankrupt, the owners’ personal assets can be used to settle those debts. This is typically the case for sole traders and general partnerships.

Question 18

Evaluate the Factors Affecting the Choice of Legal Structure of a Business

Answer 18

• Liability: One of the most important factors in choosing the legal structure is the level of liability the business owner is willing to assume. Sole traders and partnerships face unlimited liability, while limited companies offer limited liability, protecting personal assets.
• Control and Decision Making: A sole trader enjoys complete control over business decisions, while partnerships and limited companies may require shared decision-making. Entrepreneurs seeking full control might prefer a sole trader structure, whereas those open to shared control might opt for partnerships or companies.
• Capital Requirements: Businesses that need significant capital may prefer the limited company structure, as it allows for raising capital by issuing shares (in the case of a PLC) or attracting private investors (in the case of an Ltd). Sole traders and partnerships may find it more difficult to access large amounts of capital
• Growth and Expansion: If a business plans to expand and increase in size, a limited company structure may be the most appropriate, as it provides a clearer framework for expansion, raising funds, and transferring ownership. Sole traders and partnerships may find expansion more challenging due to limitations in resources and capital.
• Taxation: Different legal structures are taxed differently. For example, sole traders are taxed on their personal income, while limited companies are subject to corporate tax rates. The tax implications of different structures may influence a business owner’s decision.
• Legal and Administrative Requirements: Limited companies are subject to more legal and regulatory requirements than sole traders and partnerships. For example, public limited companies face stringent rules around reporting and governance. Sole traders and partnerships are less regulated but may face more risk in terms of personal liability.

Question 19

Evaluate the Impact and Importance of Legal Structure for the Stakeholders of a Business

Answer 19

• Business Owners/Entrepreneurs:
• Sole Trader: Sole traders have complete control over the business, but they face unlimited liability. This means that their personal assets are at risk if the business fails. The simplicity of the structure can be an advantage, but it may limit growth potential.
• Partnership: Partners share the risks and responsibilities. This can ease the burden of decision-making and financial risk but introduces the challenge of shared profits and potential conflict.
• Limited Company (Ltd/PLC): Limited liability protects owners and shareholders from personal financial loss, making it attractive for those who want to limit their risk. However, the business is subject to more regulations, and profits must be shared with shareholders (in PLCs).
• Employees:
• Employees are affected by the legal structure in terms of job security, benefits, and working conditions. In a sole trader or partnership, employees may have fewer benefits and less job security than in a large corporation, which may offer more structured employment terms.
• In a public limited company, employees may have opportunities to own shares and may benefit from a more formalized benefits package, such as pensions and health insurance.
• Investors:
• Investors in limited companies are attracted to the potential for returns without the risk of personal financial loss, thanks to limited liability. Public limited companies, in particular, can offer significant returns through dividends and capital growth.
• Investors in sole traders or partnerships face greater risks, as their investments may not be protected from the owners’ personal liabilities.
• Consumers:
• The legal structure can affect the quality of goods or services, customer service, and the company’s ability to respond to market demands. Public limited companies may have more resources to invest in customer satisfaction and innovation, while sole traders may offer more personalized service but face limitations in scalability.
• Government:
• The legal structure affects how a business is taxed and regulated. Limited companies provide more tax revenue due to corporate taxes, while sole traders and partnerships may offer fewer tax obligations but can be more difficult to monitor and regulate. The legal structure also impacts how businesses comply with employment laws and environmental regulations.

Conclusion
The choice of legal structure is a critical decision for any business and depends on a variety of factors, including liability, control, capital needs, and the business’s future goals. Each structure—sole trader, partnership, limited liability partnership, private limited company, and public limited company—has distinct advantages and disadvantages for both the business owner and other stakeholders. By carefully evaluating the legal structure’s impact on factors such as control, liability, taxation, and growth potential, businesses can make informed decisions that align with their objectives and stakeholder interests.