1.2

• Forms of business

  • Private Sector
  • Unincorporated
  • Sole Trader
  • Partnership
  • Incorporated
  • Public Limited Company
  • Private Limited Company
• Unincorporated


  • The owner is the business - no legal difference
  • Owner has unlimited liability for business actions (including debts)
• Incorporated


  • Legal difference between the business (company) and the owners
  • Owners (shareholders) have limited liability
• Unlimited liability


  • A characteristic of unincorporated businesses
  • Business owner/s personally responsible for the debts and liability of the business
  • If the unincorporated business fails, the owners are liable for the amounts owed
• Sole trader


  • The most common type of business structure
  • A sole trader is just an individual owning the business on his/her own
  • The sole trader owns all the business assets personally and is personally responsible for the business debts
  • A sole trader has unlimited liability
• Benefits and drawbacks of a sole trader

  • Benefits: Quick & easy to set up, Simple to run, Minimal paperwork, Easy to close / shut down
  • Drawbacks: Full personal liability, Harder to raise finance, The business suffers if the owner becomes ill, Can pay a higher tax rate than a company
• Limited liability


  • An important protection for shareholders in a company
  • Shareholders can only lose the value of their investment
• Company


  • A legal entity
  • The owners of a company are shareholders
• Limited company


  • Separate legal entities to the founders
  • The company owns the assets and pays the debts
  • If the company becomes insolvent, the company is closed
  • Shareholders are not liable for any debts owed by the company that cannot be settled
  • The most common form is a private limited company
  • A public limited company (plc) tends to have a larger value of share capital invested and its shares may be traded publicly
• Benefits and drawbacks of a limited company

  • Benefits: Limited liability, Easier to raise finance, Stable form of structure
  • Drawbacks: Greater admin costs, Public disclosure of company information, Directors' legal duties
• Public limited company (plc)

  • Shares may be quoted and traded on a public stock market
  • When traded on a stock market, public companies have substantially more shareholders
  • Subject to greater regulation in terms of public disclosure of financial and other information
• Public sector organisations


  • Public Sector Companies / Businesses: RBS (nationalised), Network Rail
  • Public Sector Organisations: NHS, Highways Agency, TeachFirst
• Not-for-profit organisations and social enterprises

  • Businesses that trade in order to benefit the community
  • Have social and ethical aims as well as trying to make a financial return
• Types of social enterprise


  • Community development trusts, Housing associations, Worker-owned co-operatives, Sports clubs
• Key issues in relation to different business forms

  • Unlimited and limited liability, Ordinary share capital, Market capitalisation, Dividends
• Ordinary share capital


  The money raised by a business through the sale of new shares to shareholders
• Market capitalisation


  • Represents the total market value of the issued share capital of a company
  • A measure of the size and value of a company, and it can be used to compare companies within the same industry as well as assessing the company's potential for growth
• Dividends


  • Payments made by a company to its shareholders from the profits made by the company
  • Part of the return on investment received by shareholders
• How to calculate market capitalisation


  Number of shares in issue multiplied by share price
• Role of shareholders


  • Responsible for appointing the Board of Directors
  • In a private limited company, the shareholders and Board of Directors may be the same people
  • In a public limited company, there are likely to be more shareholders and so the Board of Directors may be separated from the owners (divorce of ownership and control)
• Why shareholders invest


  To earn returns, which come from dividends and any increase in the share price
• Demand for a share > supply


  Share price should rise
• Falling share price


  Indicates excess supply (more sellers than buyers)
• Significance of share price

  • Can affect the market capitalisation of the company
  • Indicator of the company's financial performance, its growth prospects, and the overall state of the economy
• Effect of ownership on mission and objectives (sole traders)

  • Likely to focus on survival, given that a large proportion of start-ups fail in the first few years
  • Can make all their own decisions as they do not have shareholders to consider
  • Can set their own mission and objectives
• Effect of ownership on mission and objectives (private limited companies)

  • Shareholders likely to be involved in the running of the business
  • May allow for a longer-term view, so objectives will likely focus on market share, customer satisfaction or revenue growth instead of profit maximization
• Effect of ownership on mission and objectives (public limited companies)

  • Shareholders often interested in higher dividends and rising share prices to maximise the returns on their investments
  • Directors could be encouraged to set more ambitious objectives relating to profit maximisation