Types of Business Ownership IB Business & Management

Learning Objectives To understand the difference between Private Sector and Public Sector Businesses To understand the features of sole traders, partnerships, private and public limited companies To know the advantages and disadvantages of each of the 4 types of ownership

Why do people start businesses What do you think are the key motivations for people to start their own business? Think about both financial and non-financial reasons to start up a business

Reasons why people start their own business Spotting a gap in the market To become wealthy To be their own boss Flexible Working Hours To use a hobby or talent Redundancy/windfall Unable to find a job Commitment to a Idea/product To ‘do good’

New Businesses What do you think your chances of success would be if you opened your own business? Over 30% of new businesses fail within 2 years More than half will fail within 5 years WHY?

Leading 10 Reasons for Failure No Business Plan Under Funded Not setting goals or objectives Running out of money (cash flow) Not understanding the market and customers No differentiation Bad Marketing Underestimating competition Not cost competitive Poor People management skills

Ownership of Business Ownership Types Private SectorPublic Sector Unincorporated Sole Trader Partnership Incorporated Private Limited Company Public Limited Company Public Corporations Local Authorities Central Government depts

Private Vs Public Sector In the UK there are 2 types of organisation: Public Sector – These businesses are owned and run by the government. They are often not-for-profit businesses Private Sector – These businesses are run by individuals or groups of people with the aim of making a profit

In IB we are mainly concerned with Private Sector Businesses. There are 4 types of ownership that a private sector business can have: Sole Trader Partnership Private Limited Company (Ltd) Public Limited Company (Plc)

Unincorporated Businesses Sole traders and Partnerships are Unincorporated. This means that the owners are fully responsible for any business debts. This is known as Unlimited Liability. If the business fails or gets sued then the owners of the business are responsible for paying from their own personal funds Thus could mean having to sell their home/car etc.

Sole Trader A sole trader (also known as Sole Proprieter) is a person who operates in business as an individual (they may have employees but they are in sole control)

Sole Traders Sole traders are the most common type of business ownership They are very easy to set up Finance usually comes from personal savings Sole traders have unlimited liability

Benefits of being a sole trader Few legal formalities to set up compared to other types of ownership The sole trader gets to keep all of the profits No shared decision making Financial information is private

Drawbacks of Sole traders Unlimited Liability Sources of finance may be limited or expensive Heavy workload High costs of production due to small size of the business Reliance on owner

Partnerships A partnership exists when two or more people own a business together with a view to making a profit

Partnerships Between 2 and 20 partners All partners (unless they are sleeping partners) have unlimited liability Partners may wish to draw up a DEED OF PARTNERSHIP. This sets out: Who are the partners The duties of each partner How much capital each partner has contributed How profits will be shared out How many votes each partner has

Benefits of Partnerships Easy to set up More than one person contributing start up capital Division of labour and specialisation Shared decision making Financial information can be kept private

Drawbacks of Partnerships Unlimited Liability Profits are shared Large amount of trust needed Risk of arguments Decision making can be slower than in a sole trader business No continuity – difficulty if a partner leaves the business

Sole Trader Partnership

Limited Companies Limited Companies have a separate identity in law from its owners (they are INCORPORATED)

Incorporated Businesses Private Limited Companies (Ltd) and Public Limited Companies (Plc) are Incorporated This means that the business has a separate legal identity to it’s owners Owners can only lose the money that they originally invested if the business fails This is known as Limited Liability

Features of Limited Companies The owners of a company are called SHAREHOLDERS Shareholders have LIMITED LIABILITY Companies have a board of Directors who are appointed to run the company on their behalf The owners and managers of a limited company can be different Every limited company must be registered with the Registrar of Companies. Before it can begin trading it must complete: Memorandum of Association Articles of Association Once these documents have been completed and an application fee paid then the business can get it’s Certificate of Incorporation

Memorandum of Association This must include: The company name The address of the company’s registered office A statement that the shareholders have limited liability The amount of shares it can issue The objects of the company

Articles of Association This sets out the rules for running the company. For example: The voting rights of the shareholders When the AGM will be held How profits will be distributed The number, rights and duties of directors

Types of Limited Companies There are two types of limited company Public Limited Company Private Limited Company

Special Features of a Private Limited Company Has the letters Ltd after it’s name Shares are only sold between friends and family Accounts have to be shown to registrar of companies and shareholders

Flotation Once a Private Limited Company becomes sufficiently big they may chose to become a Public Limited Company This process is called FLOTATION This process involved selling part of the business to external investors by advertising and listing on the STOCK EXCHANGE

Special Features of a Public Limited Company Has the letters PLC after it’s name Shares are sold to the public via the stock market Accounts must be available to the general public

Shareholders Why do Shareholders chose to invest in businesses? Capital Growth Dividends Voting Power (sometimes)

To Float or not to Float? Advantages Can bring in large amounts of long term capital for expansion Raises the profile of the company Disadvantages Financial Information becomes public (disclosure) An expensive process Dilutes ownership of the business Short termism of Shareholders

Task Page 34 Mars Incorporated Case Study

Factors affecting choice of ownership type Amount of Finance Size Limited Liability Degree of Ownership/Control Type of business activity Risk Ease of Set up

Partnership Private Limited Company

Non Profit Organisations Non-profit organisations are run like a business but without profit being the major objective. Objectives might be: To provide a service To promote a cause To raise money for a cause

Types of Non-profit Organisations NGOs Non- Government organisations that help to support society Pressure Groups Groups established by members to address a special interest of the group Charities Organisations with the key function of collecting donations off individuals and organisations to help causes QUANGOs Receive Govt funding but are independently run

National Trust Amnesty International Green Peace NSPCC National Union of Teachers PETA ACE (Animal Care in Egypt)