1.5.4 Business Forms

• Unlimited liability for business actions means the owner is personally responsible for all the debts of the business and may have to sell personal possessions to pay them.
• Unincorporated businesses means the owner is the business and there's no legal difference. Most of them operate as sole traders and have unlimited liability.
• Incorporated businesses means the owner and the business have a legal difference and most operate as a private limited company. Owners (shareholders) have limited liability. They may lose the money invested in the business but will not be forced to sell any personal possessions to cover any shortfall.
• Sole traders are owned by one person, they can employ people but won't be involved in control of the business, tend to be small businesses, and have unlimited liability.
• Advantages of setting up as a sole trader is that it's easy to set up, profits don't have to be shared, they're their own boss, have a greater scope to avoid paying tax, don't have to make any information about the business public, can make decisions quickly, less capital needed and can offer personal attention.
• Disadvantages of setting up as a sole trader include: have to have unlimited liability, difficult to raise money as there's only one owner to invest in the business, no-one able to take over for ill-health or holidays, responsible for everything, and don't have economies of scale.
• Partnerships have between 2-20 partners (joint owners of the business), can do decision making themselves or employ managers, have unlimited liability and their profits are shared.
• Advantages of a partnership is that it's easy to set up, more owners so more capital meaning the business can be bigger than a sole trader, no need to make information public, partners contribute with a range of skills, share problems and decision making, and scope to avoid tax.
• Disadvantages of a partnership include unlimited liability, profits have to be shared, partners may have disagreements about the control of the business: sharing of profits, withdrawal from the partnership, or inviting new partners into the business.
• Limited liability is where the owners (shareholders) can lose the money they have invested in the business but won't be expected to sell personal possessions to meet the debts of the business.
• Private limited companies are made up of people who know each other, friends and family can buy shares in the business, this will make them part holders, shares can't be bought by the public, owners control who buys the shares, minimum 1 person and no maximum, can expand by inviting others to become a shareholder giving the business more capital, normally medium sized businesses but can be small or large, and owners have limited liability.
• Advantages of private limited companies is the owners have limited liability, can raise extra capital by selling more shares and easier to expand, and can employ managers to run business if the owners don't want to do it themselves.
• Disadvantages of a private limited company is the account of the company cannot be kept private, more difficult and expensive to set up compared to sole traders/partnerships (more admin), can't sell shares on stock exchange to limit on how much capital could be raised from selling shares, and may be harder to borrow money from banks as the owners are not putting their own possessions at risk so may take more risky decisions and banks may not get the loan made repaid.
• Public limited companies have limited liability, can expand by selling more shares, most shares in a plc are owned by organisations rather than individuals, shares are bought and sold on the stock exchange, company has its own legal status, normally start as a ltd and then become a plc, and multiple people can buy shares: the public, other businesses, and financial institutions.
• Advantages of a public limited companies is that they have limited liability, easier to raise capital than a ltd and are able to issue more shares, banks are more willing to lend money to a well-established company as there's less risk, easier to grow and expand, and shareholders will appoint specialists to manage and run the company for them.
• Disadvantages of a public limited company is that its expensive to set up, have to issue more information about itself, has to prepare annual accounts which are printed and sent to all shareholders and made public for competitors to see, can be divorce of ownership and control, and can be prone to takeover.
• Businesses may wish to change their form for growth. More capital will be needed to expand and becoming a partnership may increase sources of capital. Becoming an ltd or plc allows you to sell shares and can provide funds to increase their size.
• Businesses may wish to change their form for protection of limited liability. As businesses get bigger, the debts a business may take on may be large and more people may need to be involved in decision making. This could be risky if you have unlimited liability. Converting to a plc or ltd protect the owners personal possessions through limited liability.
• Businesses may change their form to gain access to more funds. Sole traders generally rely on their own savings to fund their businesses initially. However, if there's not enough to achieve the business objectives, they need to change to a partnership or become a company to sell shares and raise more funds.
• Businesses may wish to change their form to gain a higher profile by becoming a company. By becoming a company, that means their share price will be quoted on the stock market and movements in the share price and profits of the business will be news worthy. The business is more likely to become more well known.
• Reasons why shareholders buy shares is so that they can get paid dividends from the profits of the business, shareholders can make a capital gain and may be able to sell the shares at a higher price than they bought them for, and shareholders get a role in the decision making.
• Risks of shareholders buying shares is that if the business make no profits, they will be paid no dividends, and if the business goes bankrupt, they will lose their money. The managers could decide to keep profits for reinvestment purposes and end up paying no/little dividends, and share prices can fall.
• Stakeholders include: shareholders, employees, customers, suppliers, creditors, and the local community.
• A franchise is an established business (the franchisor) offers for sale to other businesses or individuals (the franchisee) the rights to use its products, services or logos (usually in a specific geographical area).
• A franchisee is the small business owner who is buying the rights to sell the goods and services of a large well established company.
• A franchisor is a large business who is selling the rights to a small business owner.
• Benefits to franchisee is they're able to sell an already recognised and successful product service, they can take advantage of central services (such as marketing, purchasing, training, stock control, and accounting systems and admin provided by the franchisor), franchisor may have experience in the market that the franchisee can benefit from.
• Disadvantages to a franchisee is that the proportion of revenue is paid to franchisor, the franchisee may not feel like the business is his/her own and may not benefit from personal rewards of entrepreneurship, and the right to operate the franchise could be withdrawn from the franchisor.
• Benefits to a franchisor is that they can expand the business quickly, the franchisor earns revenue from the franchisee's turnover rather than profit so revenue is reasonably certain, risk is shared and most of the cost is met by the franchisee, and the franchisee might have very good entrepreneurial skills, allowing the franchisor to earn more revenue.
• Disadvantages to a franchisor is that there's potential loss of control over how the product/service is presented to customers, may be difficult to control quality as franchise network expands, co-ordination and communication problems may increase as franchise network grows, and some franchisees become powerful as they acquire a number franchises.
• Pros of online businesses include: it's relatively cheap and easy to set up, overheads are low, can be managed from anywhere, can access global market, and can operate 24/7.
• Cons of online businesses include: technical issues may occur, there's no personal contact with customers, harder to persuade customers to buy, some customers may prefer to see or touch the products, and returning products can cost the business money.
• The aim of the lifestyle business is to provide enough profit to have an enjoyable life style, owners will start a business hoping to sustain a certain level of income, they may start doing something they really enjoy, allows an entrepreneur to live how they want and still run a business, and the owner is probably more interested in profit satisficing rather than profit maximising.
• Pros of lifestyle business: offers flexibility, allows a work life balance, and there's lower start up costs.
• A con of lifestyle businesses is that there's limited growth as there's a limited amount of money invested in them.
• Social enterprises are a business that trade for a social and/or environmental purpose. They are not a charity; they achieve a social aim not through donations and grants but through trading.
• Benefits of social enterprises are that entrepreneurs can earn a living doing something valuable, which can be motivating. The more successful the social enterprise is, the more society benefits from it. Customers may be more willing to buy from a social enterprise.
• Drawbacks of social enterprises is that profits and social aims may conflict, leading to difficult choices. The entrepreneur will always have to accept a lower return than with a profit making business because a proportion of the profits will go towards the social aim.