Understanding Different Business Forms

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

Unlimited Liability 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 AdvantagesDisadvantages Quick & easy to set up – business can always be transferred to a limited company once launched Simple to run – owner has complete control over decision- making Minimal paperwork Easy to close / shut down Full personal liability – “unlimited liability” Harder to raise finance – sole traders often have limited funds of their own and security against which to raise loans 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 AdvantagesDisadvantages Limited liability – protects the shareholders (the big advantage) Easier to raise finance – both through the sale of shares and also easier to raise debt Stable form of structure – business continues to exist even when shareholders change Greater admin costs Public disclosure of company information Directors’ legal duties

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, TeachFirst

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