Business ownership Part 1 This presentation provides an overview of the main types of business ownership. Note for tutors: If you wish to print out these slides, with notes, it is recommended that, for greater clarity you select the ‘pure black and white’ option on the PowerPoint print dialogue box. Part 1

UK business ownership Most businesses in the UK are privately owned. This means: They are owned by private individuals These individuals risk their own money The owners’ reward is the profit they make. The concept of risk is important as this defines an entrepreneur. Obviously the more a person invests, the greater the risk of loss. It is also useful to emphasis that although owners can keep the profit (or share it between them) they must first pay tax to the Inland Revenue!

Private ownership options Sole trader – 1 owner Partnership – 2 people or more Private limited companies – often a family-run business with the protection of limited liability Public limited companies – large organisations whose shares are traded on the Stock Exchange Franchises – small business trading with agreement of large firm Cooperatives – collectively owned by workers/customers Each option can be discussed in more detail and it is useful if students are asked for examples in their own area. Students should be clear that a sole trader can employ staff, eg the owner of a hairdressing business can employ assistants – but there is still just one owner. Even if a worker cooperative cannot be identified, the Coop retail organisation should be known to most students.

Key difference Sole traders and partnerships have unlimited liability. Owners are responsible for all debts and may have to sell personal possessions. Companies have limited liability. Owners can only lose their investment even if the company has huge debts. It is useful to state that sole traders and partnerships can go bankrupt, but companies go into liquidation. A specific example is also useful, for instance, a shareholder in a large plc valued at £50 million may lose a £4,000 investment in shares but a sole trader could lose his house, savings and other personal possessions if the business owned a large amount of money. Students should therefore note that for risky activities, and/or where the stock is expensive the owner(s) may be better with a limited company.

Sole traders Easy to set up and give a personal service Owner independent – can make quick decisions Minimum of paperwork Knows customers – helps to avoid bad debts Unlimited liability Long hours, no cover for holidays/sickness Capital may come from savings Needs business skills Business ends on death Benefits Drawbacks The risk factor of starting up a business and using savings could be discussed. The final point can be used to ask students, therefore, whether this would be an appropriate type of ownership for a husband and wife who are running a business together. This should lead naturally to the next slide on partnerships.

Partnerships Easier to raise capital Problems/ideas can be discussed Greater range of skills/expertise Cover for holidays/sickness Unlimited liability Profits are shared May be disagreements Decisions/actions legally binding on all partners Death of a partner means share needs repaying Benefits Drawbacks Again the main drawback is unlimited liability. This is an obvious time to mention that this is actually a requirement of some professional associations eg for doctors, solicitors, accountants who insist on personal responsibility of members. The relatively new status of LLPs (Limited Liability Partnerships) and the role of sleeping partners may be discussed at this point – depending upon the level of the group. Finally, it is advisable to mention here that serious disagreements (eg over profit sharing) can be minimised if there is a Partnership Agreement, drawn up by a solicitor. This would also cover the circumstances of a partner leaving or dying – normally the share is repaid through life assurance.

Key points about companies Each company has its own identity in law. The company employs staff, not the owner(s). The company owns assets, not the owner(s). The company operates until it is formally wound up or goes into liquidation. The company pays corporation tax on its profits. The concept of risk is important as this defines an entrepreneur. Obviously the more a person invests, the greater the risk of loss. It is also useful to emphasis that although owners can keep the profit (or share it between them) they must first pay tax to the Inland Revenue!

Private limited companies Limited liability Minimum of 1 director and 1 shareholder Easy to set up/affairs still private Easier to raise capital/borrow from bank Share transfers need agreement of all Cannot sell shares to the public More regulations to comply with Accounting procedures may be more costly Death of shareholder has no effect on company Benefits Drawbacks The point should be made that the directors and shareholders are usually the same people, so this form of ownership is ideal for small family businesses. Accounting procedures will be more costly particularly if the books must be audited, but the type of audit depends upon the turnover. It is useful to stress the company has a separate legal identity – so will keep going until it is formally wound up, regardless of the death of a shareholder.

Public limited companies Limited liability Increased capital as public can buy shares Minimum of 2 directors and 2 shareholders Shares increase in value if company successful Operating large scale can lower costs per unit Many regulations to comply with Accounts (and problems) are public knowledge Shareholders may sell shares if dividends poor Original owner may lose overall control Benefits Drawbacks Although the requirement of 2 directors and 2 shareholders means a plc can be quite small, in practice, the Stock Exchange requirement of £50,000 and the confidence of investors means that in practice, most are much larger. The key point to raise is that the shareholders and directors are now different people. Another key point is the fact that most shareholders will be large institutional investors, such as insurance companies and pension fund managers. These are completely separate from the directors who run the business every day, even though some directors may choose to own shares. The concept of unlisted plcs can be mentioned here. These are plcs which choose not to have a listing on the Stock Exchange. This means there is no requirement to have external shareholders, which enables the directors to retain control. This information will be useful for students who will be using the Richer Sounds StudentZone as part of their business investigations. Depending upon the level of the group, the concept of economies of scale can be raised. As a useful example, although Coca Cola spends millions of dollars on advertising, this only works out at about 7p per can because of the huge numbers sold.

Review of main types of private ownership Sole traders – suitable for one person running small business with low risk/little investment required Partnership – suitable for professional groups, husband/wife businesses, small business needing different skills Private limited company – suitable for family business, essential if risk considerable, eg through expensive stock Public limited company – suitable for large national/international operations Good examples to remember each point are: Hairdresser (cost of stock low, all cash payments) Solicitors with partners specialising in family law, property law, criminal law etc Jewellers or car dealership where stock is very expensive Any national supermarket chain, because of finance required.