1.2 Different Business Forms
Types of Businesses
Public Businesses are owned and operated by the state and provide essential services. They are funded by taxation and are therefore free at the point of delivery. eg, education, health service.
Private Businesses are owned, run and financed by private individuals. eg, sole traders or multinationals.
Incorporated Businesses have a separate legal entity to their owner (limited liability) and are usually a larger business. eg, Tesco.
Unincorporated Businesses are businesses that don’t have a separate legal entity to their owner (unlimited liability) so there is no distinction between the owner and the business. They are usually smaller businesses.
Types of Liability
Limited Liability is where the owner and the business are separate legal entities so therefore the owner can not be charged for the debt of the business.
Unlimited Liability is where the owner and the business are the same legal entity so therefore the owner can be charged for the debt of the business and their personal items can be repossessed to pay for the debt.
Business Forms
Sole Traders - most common form of business structure, an individual owning the business on their own, they can have employees but they don’t share ownership of the business, they have unlimited liability
positives: control of your own business, profit retention, no transparency, ability to be a specialist, loyal customers, independence.
negatives: unlimited liability, no extra finance, reverse economies of scale, decision making.
Private Limited Companies (LTD) - funded by shares that can’t be sold without the agreement of other shareholders and can’t be bought on the stock market, an incorporated business so they have limited liability and can be identified by the LTD after their name.
positives: limited liability, continuity of existence, minimum of two shareholders, more profit per share as it is capped at 50 shareholders.
negatives: growth may be limited due to the cap on shareholders, shares can not be sold on or transferred.
Public Limited Companies (PLC) - owned by shareholders and can be found on the stock market, they are not limited on the number of shares they sell and shares can be transferred and sold on easily, the can acquire and take over companies and have limited liability.
positives: limited liability, large profits due to unlimited number of shareholders investing money, shares can be sold easily.
negatives: lots of legal formalities, strict controls and regulations, original owners may lose control, management issues may occur.
Not For Profit - a business that trades in order to benefit the community, they have social aims and try to make money that can be reinvested.
positives: tax deductions mean less fixed costs, eligibility for private and public grants, separate legal entity, limited liability.
negatives: takes time, effort and money, shared control, wages and rewards aren’t high, detailed records and files must be kept.
Mutuals - a business that is run for the benefit of its members, such as its employees, suppliers and customers, eg. John Lewis.
positives: some one is hired to monitor portfolios which saves time, they are easy to buy, employee motivation is very high.
negatives: there is a high fee structure and low ability to grow.
Why do Businesses change forms?
Growth - more finance can be available by changing forms, some business owners may desire limited liability, etc.
Privatisation - where a state/government owned business is sold to private investors becoming a LTD or PLC.
