Understanding Different Business Forms 3 1 What is

Understanding Different Business Forms 3. 1 What is Business?

What you need to know • Unincorporated and incorporated businesses (sole traders & limited companies) • Importance of limited liability • Private & public sector • Public limited companies

Business Forms Links Closely With Organisational Structure Shares & Shareholders Business Objectives Stakeholders Business Forms

Business Forms – Mapped! Private Sector Unincorporated Sole Trader Partnership Incorporated Private Limited Company Public Limited Company

Unincorporated v Incorporated Unincorporated • The owner is the business - no legal difference • Owner has unlimited liability for business actions (including debts) • Most unincorporated businesses operate as sole traders Incorporated • Legal difference between the business (company) and the owners • Owners (shareholders) have limited liability • Most incorporated businesses operate as private limited companies

Unlimited Liability • A characteristic of unincorporated businesses • Business owner/s personally responsible for the debts and liability of the business • If the unincorporated business fails, the owners are liable for the amounts owed

Sole Trader • The most common type of business structure • A sole trader is just an individual owning the business on his/her own • Remember that a sole trader can also employ people – but those employees don’t share in the ownership of the business • The sole trader owns all the business assets personally and is personally responsible for the business debts. A sole trader has unlimited liability

Benefits and Drawbacks of Operating as a Sole Trader Advantages Disadvantages Quick & easy to set up – business Full personal liability – “unlimited can always be transferred to a liability” limited company once launched Harder to raise finance – sole Simple to run – owner has traders often have limited funds of complete control over decisiontheir own and security against making which to raise loans Minimal paperwork Easy to close / shut down The business is the owner – the business suffers if the owner becomes ill, loses interest etc Can pay a higher tax rate than a company

Importance of Limited Liability • An important protection for shareholders in a company • Shareholders can only lose the value of their investment • However limited liability does not protect against: – Wrongful or fraudulent trading, or – When personal guarantees have been given by directors

Incorporated Business is a “Company” A company is a legal entity. The owners of a company are shareholders

Limited Company (1) • Limited companies are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued • Companies are owned by their shareholders and run by directors. The shareholders appoint the directors (often the same people) who run the company in the interests of the shareholders • Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company

Limited Company (2) • The company owns the assets and pays the debts. If the company becomes insolvent (i. e. it cannot pay its debts), then the company is closed. • Shareholders are not liable for any debts owed by the company that cannot be settled. That is the importance of limited liability • By far the most common form is a private limited company. Private means that the shares of the company are not traded publicly on a stock exchange • By contrast, a public limited company (“plc” after its name) tends to have a larger value of share capital invested and its shares may be traded publicly.

Benefits and Drawbacks of Operating as Limited Company Advantages Disadvantages Limited liability – protects the Greater admin costs shareholders (the big advantage) Public disclosure of company Easier to raise finance – both information through the sale of shares and Directors’ legal duties also easier to raise debt Stable form of structure – business continues to exist even when shareholders change

Public Limited Companies • A more specialist type of limited company • Shares may be quoted and traded on a public stock market (but don’t have to be) • When traded on a stock market, public companies have substantially more shareholders • Subject to greater regulation in terms of public disclosure of financial and other information

Public Sector Organisations Public Sector Companies / Businesses • A relatively small number of companies are owned or controlled by the Government • E. g. RBS (nationalised), Network Rail Public Sector Organisations • There are many more organisations that provide goods and services which are owned and operated by public bodies • These are funded by central & local government, but may still levy charges for some services • E. g. NHS, Highways Agency, Teach. First

Not for Profit Organisations • Not-for-profit organisations are businesses that trade in order to benefit the community. These business have social aims as well as trying to make money • Examples of social aims are job creation and training, providing community services and fair trade with developing countries • There are many different types of social enterprise, including community development trusts, housing associations, worker-owned co-operatives and even sports clubs