1.3 Business ownership

The 4 main forms of businesses are

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

Sole trader

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

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

Partnership

Where 2-20 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 solely responsible for debts.
• Money 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.

Public limited company

A company which publicly offers shares to the public (E.G via a stock exchange) so it is owned by shareholders.

• Easy to raise significant amount of finance by selling shares to the public
• Limited liability so one person isn't solely responsible for debts.
• Greater public scrutiny on the performance of the company -> Accounts available to the public and competitors -> Competitors can use this to their advantage

Understanding limited and unlimited liability

Limited liability

• The owners of the company (shareholders) do NOT have to use their own savings to pay off the debts of the company if the business fails.

• Helps businesses to raise extra finance as people investing know they are not risking all of their personal possessions. Unlimited liability

• The owners of the company DO have to pay back all the debts of the business. For example, if it goes bankrupt or if sales do make enough revenue to pay off their debts.

• People may be discouraged from setting up a business as they risk losing their own personal finance.

The suitability of different types of ownerships for different businesses

• Sole trader: Suitable for start-ups that only need a small amount of finance and require limited specialist skills
• Partnership: Suitable for start-ups or established businesses wanting to grow but also wanting to keep control of the business. They need larger amounts of finance and a wider range of skills.
• Private limited company (LTD): Suitable for start-ups and established business wanting to grow but also keep control of the business. They need larger amounts of finance.
• Public limited company (PLC): Suitable for an established business that would like to grow and also needs a very large amount of finance.