When a business is being set up, the proprietor(s) will decide what type of business ownership to follow. Business ownership will alter for expansion, liability and legal purposes. In this assignment, I will be addressing each category of business ownership, giving advantages and disadvantages in addition to business examples.
There are six different forms of business ownership, these are:
1. Sole Trader
3. Private Limited Company (Ltd)
4. Public Limited Company (Plc.)
A Sole Trader is any business owned and controlled by one single proprietor. Although the business may only have one owner, the sole proprietor may employ secondary workers. Sole traders do not have a separate legal existence from their owner. Consequently, the owner is personally liable for the business’s debt which may have to be paid out of the owners’ personal capital- this is called Unlimited Liability.
The first thing needed to start a sole proprietorship is to document your trading name. As simple as this sounds, one must be very cautious about choosing a name as the wrong name can get you into difficulties. If you are going to work under an alternative name to your personal birth name you must display the name of the owner and an address where documents and records can be served and at your premises. Design letterheads, business cards and signage accordingly. The registering of a business name must be done via the National Business Register.
Certain words and expressions such as international, federation and registered are restricted under the Business Names Act 1985 and the Company and Business Names Regulations 1995. Companies House and the National Business Register have lists of these words and details of how to obtain approval to use them.
Your business name is not allowed to be the same or too similar to that of another business. If this name does conflict the business of another owner, you could face legal action from the owner of the other business. Check phone books, trade journals and magazines to ensure against any clashes. Also check records of the National Business Register.
If you yourself cannot be sure that you have checked all names similar to your own, contact a solicitor. A solicitor will make all necessary checks and also make sure that no business in the future will not conflict your business by trading under a name that is the same or too similar.
There are few legal formalities in setting up a sole-trading business (the only one being to inform HM Revenue and Customs), which makes starting one simple and quick for anybody. Another advantage is that registration fees are unnecessary and the trader has full control of the running of the business. Also, keeping records and accounts is very simple. Sole Traders can set their own work hours- this allows them to juggle childcare or other careers. Sole Traders also have the ability to make quick decisions as they have nobody to confer with.
Sole Traders have unlimited liability. This means that if the business gets into a lot of debt, the trader’s assets (e.g. home, car etc.) may be taken from them in order to make up the bank’s capital. Banks are reluctant to lend to sole traders, as a consequence- there will be a lack of funding. The sole trader also has full responsibility for the business, which may result in stress. Another downside is that they must produce their own account for Inland Revenue.
Why Would a Sole Trader Change to a Partnership?
There are various reasons as to why a sole trader would change to a partnership. If a Sole Trader became successful, expansion could be easier if joined with somebody else. The workload is shared between the partners, but so is the profit capital. If one partner wants to expand into another field, it would be highly beneficial to employ a partner with expertise in that particular field.
Duke’s (a successful interior painting and decorating sole trader) would find it advantageous to expand into a partnership if he decides to spread his business into exterior decorating, employing a partner with skill in that area. This would help the business to expand and workload would be shared. The fact that this exterior decorator has experience elsewhere means that this business can easily spread into new fields.
Another business example of a Sole Trader expanding into becoming a partnership is a successful plumber by the name of Webber. Although he is benefitting from high salary and choosing his own working hours, his workload is becoming too much for him to handle. It is for this reason why he would want to share his workload by getting a partner to both share the workload thus reducing stress and to invest capital into the business- allowing it to expand.
A partnership is very similar to a sole trader in that they have unlimited liability and are very simple to set up. The only significant difference is that a partnership may have 2 to 20 partners. A contract called a deed of partnership is usually written. This states the type of partnership, how much capital each party has funded, and how profits and losses will be shared. A ‘Sleeping Partner’ can also be involved in partnerships- these are partners that invest in the business but do not deal with the overall running of the business.
There are few legal formalities in setting up a partnership business, which makes starting one simple and quick for anybody. The workload is shared between the partners and if the partners come to an agreement or are friends, they tend to be flexible with one another- which makes the job less stressful. Due to the business having more workers than a sole trader, it has a better chance at generating other sources of finance such as that from loans etc. Another advantage is that, during times of absence such as sick days and holidays, the partners can cover each other very simply.
Unlimited liability is a large downfall in partnerships, which means that they are completely liable for the whole business if it owes money to banks etc. – and although banks will be more willing to lend to partnerships than sole traders, they are still not eager to do so. Profit capital is also shared between the partnership, meaning that the more partners involved, the less salary they will earn. Another disadvantage is that any arrangements or decisions based on the business are legally binding to all partners. Finally, a partnership is terminated if one single partner dies which means that a new partnership must be created after that one partners’ death.
Why would a partnership change ownership to a limited company?
There are many advantageous reasons as to why a partnership would change ownership to a limited company. Firstly, they would be able to raise extra capital through selling parts of their company. Secondly, they have the added advantage of limiting their liabilities. Limited liability is an important legal protection for shareholders as they only risk losing the amount of money that they have invested in the business and not their own personal assets.
Once the business has changed ownership, this means that if the business fails, the shareholders only lose the money invested in the business; their own personal assets, such as their home, are not at risk. This makes people more willing to invest their money in the business as the risk is reduced but shares cannot be sold on the Stock Exchange. Another very good advantage is that the death or resignation of any director does not affect the structure of the company. This is a strong advantage because the company continues to trade as before.
Pictured left is a deed of partnership.
A deed of partnership is a legally binding agreement between the partners who are in business together. It describes how the partnership will be run, the rights of the partners and the percentage of profits each member will earn. Although ultimately an agreement between the partners, a solicitor is usually hired to write up the final deed so that any loopholes are covered.
An example of a partnership is Axholme estate agent partnership- Grice and Hunter. Although Grice and Hunter will benefit from having up to twenty partners allowed in this type of ownership to invest capital and share the workload, the business would benefit from investors to expand. For example, they may want to open a third, non- local, office in Doncaster. By selling private shares, they can raise the capital to expand the business and also reduce the risk for shareholders with the benefit of Limited Liability.
Another example of a partnership is the Yorkshire Dental practitioner Partnership- Holloway and Jones. This partnership is becoming very successful and has decided to change ownership to a Private Limited Company to raise enough capital from private investors to move the business to a more high-end business with its premises on Harley Street, London.
Many other local partnerships exist as they tend to be small-scale businesses due to their unlimited liability. More examples of these include Lake and Marr (a local fish and chip shop) and Harvey and Scholl (a local newspaper shop)
The definition of a Limited Company as a whole is that the ownership of the enterprise is divided into equal parts called shares- the owner of any number of shares is called a shareholder. The shareholders all have Limited Liability which means that the firm is liable for no more than the amount of capital that they have invested in the firm.
There are two types of Limited company- Private Limited Companies (ltd) and Public Limited Companies (Plc.). The one difference between these two are that Ltd.’s only have private shareholders, (the shareholders must apply directly through the business to purchase shares) whereas Plc.’s are floated on the stock exchange and any member of the public may buy shares in it.
Private Limited Companies-
Usually small businesses such as petit independent stores, although shares can be sold directly to investors that have contacted the business and requested shares, the shares in this type of business do not float on the stock market therefore cannot be traded on the stock exchange.
The obvious advantage of a Private Limited Liability Company is the financial security that comes with business. The Company’s shareholders will only be liable for any debt the company has got from capital invested in the business. This can provide a comfortable feeling of security for investors in the Company. Tax advantages for limited Companies are only taxed on their profits- this means that they are not subject to the much higher personal tax rates placed on sole traders or partnerships which can reach 40%.
In the case of Private Limited Companies specifically, the Directors are also usually the main shareholders of the Company, thus both the ownership and control of the business remain in their hands. Decisions can be made quickly and easily, with little fuss, allowing for a more successful business management platform. Also, Ltd.’s are subject to restricted raising of capital. This means that they have a restricted amount of shares allowed to sell to raise capital.
Why would a Private Limited Company go Public?
The fundamental reason as to why Private Limited Companies go public is to raise capital. This is done by the owners selling their shares on the stock exchange to public investors and injecting their profits back into the business. Also, Public Limited Companies receive quite a lot of publicity which can be very beneficial if respectable. This publicity tends to come from analysts of the stock market and investors generally come to hear of it. Because of the simple one way money that Public Limited Companies receive from public investors, this means that the business can avoid borrowing capital from banks, private lenders etc., which must be paid back- usually with added
Although various Private Limited Companies struggle to acquire capital from investors- there are many which are very successful and wish to remain private. Examples of these are Virgin, Warburton’s and Littlewoods- all of these make a very large profit and, because they are able to choose who can invest into the business to purchase shares, they have fewer investors to share the profits with. Nevertheless, businesses such as Scunthorpe United FC may wish to change their ownership to Public to become more successful. This would be achieved by floating the business on the stock market, thus gaining capital to buy better players and ultimately ascend from the first division to the premiership. However it is risky as a takeover could occur similar to that of the takeover of Manchester United which floated on the Stock Market until Malcolm Glazer, already the owner of Tampa Bay Buccaneers at the time, bought over 50% of the shares and thusly took over the whole business.
Pictured left is a memorandum of association for Nebulas Limited- a small Private Limited Company based in the Isle of Man. This, as with all Memoranda of Association, states the company’s name, the names of its shareholders and their number of shares, the location of its head office, the type of liability that the shareholders have, the objectives, and the authorized share capital (maximum price of securities that a business can legally give out).