1.5.4 Forms of Business

The 5 main forms of business are

• Sole trader.
• Partnership.
• Private limited company.
• Public limited company.
• Franchise.

Sole trader

🔗 A person who is an exclusive owner of a business, retaining all of the profits, whilst being liable for the business's debts.

• Keeps all of the profits
• Full control of the business and doesn't have to consult anyone for decisions, so faster.
• Unlimited liability, the owner is liable for all debts in business.
• Limited sources of finance.
• Physically and mentally exhausting, due to working long hours.

Partnership

🔗 Where two or more individuals share the responsibility, management and profits of the business.

• Share costs of start-up.
• Share the risks, responsibilities and expenses of the business.
• Unlimited liability, owners are liable for all debts in business.
• Profits are shared.
• Possibility of arguments and disagreements over decisions.

Private limited company

🔗 A company that sells shares privately and has limited liability.

• Limited liability so one person isn't solemnly responsible for debts.
• Capital can be raised easily by selling shares.
• Shareholders can give their perspectives on situations and help with decision-making.
• Time-consuming and more expensive to set up than a sole trader or partnership
• Owners can no longer make decisions as there is a separation of ownership and control.
• Dividend payments

Public limited company

🔗 A company which publicly offers shares to the public 📝 (E.G via a stock exchange) with limited liability.

• Easy to raise a significant amount of capital by selling shares to the public
• Significant size -> Enables PLC to benefit from large economies of scale with high levels of growth and develop reputation due to brand loyalty and exposure -> Cost competitive and high market share from retention sales
• Greater public scrutiny on the performance of the company -> Accounts available to the public and competitors -> Competitors can use this to their advantage
• Divorce of ownership and control -> Shareholders are unable to exert pressure on senior managers, who might pursue their own objectives to the expense of shareholders, due to the large number of shareholders -> May deter shareholders from investing more money or stagnate business decisions due to approval required

Franchise

🔗 Where a business (franchiser) sells the rights to use its brand, reputation and products to entrepreneurs (franchisee). Method of expanding.

Pros and cons to the franchisor

• Fast method of growth.
• Receive royalty payments on a monthly basis. Good injection into cash flow.
• Don't receive all of the profit.
• Risking reputation in the hands of franchisee.

Pros And Cons To Franchisee

• Supported by the franchisor with staff training.
• Establishment, as the brand is likely to be well known.
• The high initial cost to purchase a franchise.
• Royalty payments to the franchisor on a monthly or annual basis.
• Restricted with decision making, due to the franchisor's model.

Other Forms Of Business

Limited partnerships

🔗 A partnership where some members contribute to capital and enjoy a share of profit, but do not participate in the running of the business. At least one partner must have unlimited liability.

• Good with no conflict in decision-making and empowerment for one individual
• However, lack of other perspectives and potential synergy. Also, a partner with unlimited liability may be burdened with a large amount of work

Limited Companies

🔗 A business that has a separate legal entity to its owners.

• Capital is raised by selling shares to shareholders who vote on decisions and receive dividend payments
• Limited liability for the owners -> Only lose the money they have invested, not forced to use personal assets to pay off debts
• Run by a board of directors elected by shareholders and can be voted out if a company performs badly
• Memorandum of Association – A document that registers a limited company with details of its external details
• Certificate of interpretation – Allows a company to trade

Social Enterprises

🔗 Non-profit organisations that aim to improve human and environmental welfare.

📝 e.g. Charities – Organisations that raise money for various causes. Rely on donations for revenue and fundraising events.

Lifestyle Businesses

🔗 A business that aims to make enough money to support a particular lifestyle of the owner

• Makes enough money for a lifestyle, without sacrificing time in the entrepreneur's personal life
• Often small businesses that are less stressful to run, possibly home-based
• May be an alternative to retirement

Online Businesses

🔗 A business that uses the internet as a trading base 📝 (e.g. eBay)

• Customers access the business via its website/platform
• No legal requirements or formal procedures to start an online business
• Low set-up cost
• Generate revenue from paid advertising

Stock Market Floatation

🔗 When a company offers shares to the public for the first time. Also known as an initial public offering. 📝 (E.G Uber recently)

• The prospectus must be published to advertise the company to potential investors. Contains information such as:
  • History of company
  • List of directors and key personnel
  • Strategy
  • How money will be spent
  • Description of operations
  • How to buy shares and an application to buy shares
• Costly process due to the appointment of lawyers, paying an investment bank to sort it out and advertising costs to attract investors
• Requires trading certificate to begin selling shares or either stock exchange or alternative investment market (AIM)
• High-profile flotations attract a large amount of attention and high demand causes stock prices to rise