Legal forms of Legal forms of businessbusiness

Types of businesses

• Sole Trader

• Partnerships

• Private Limited Company (LTD)

• Public Limited Company (PLC)

• Co-operatives

• Franchises

Sole Trader• An individual which trades under his/her own

name

• Is totally independent

• Makes all the important decisions

• Responsible for paying all of the debts

• Few formalities in setting up

• Can employ as many people as he/she wishes

Advantages of a Sole Trader

• Decisions can be made quickly• Leads to greater interest & more

dedicated & hard working owner• Profits are kept by the sole trader• Paperwork is minimal• Easy to start trading as the sole trader

Disadvantages of a Sole Trader

• Personally liable for all debts that it occurs (unlimited liability)

• Less capital available for expansion

• Taxed at a higher rate than a private company

• May have difficulty in managing all business functions

• When the sole trader dies so does the business

• Raising capital could be difficult for one person

Examples of Sole Traders

• Corner shop

• Coffee shop

• Carpenters

Partnerships• Can have between 2 & 20 partners

• A ‘deed of partnership’ can be used to set out the rights of the partners

• Aim to make a profit

Examples of partnerships

• Doctors

• Accountants

• Solicitors

Advantages of a partnership

• More capital is available than for the sole trader

• Better use of business expertise because each partner can concentrate on what they are good at

Disadvantages of Partnerships

• Group decision making may cause conflict between partners

• Like sole traders, partners have unlimited liability so they are liable for all the debts of the business

• Decision making can be slower which can lead to inflexibility

• Profits must be shared

Your task• Why is it important that a business

has a deed of partnership?

Key termsUnlimited liability

The owners are personally responsible for paying debts if the business goes bankrupt

Limited liabilityIf the company goes into liquidation, the shareholders of the company are not responsible for paying the debts of the business

Private Limited Company (ltd)

• A company that is a legal entity in its own right

• It can be sued and can sue• Shareholders own the business• A group of people who buy the

shares are called the shareholders• Cannot sell shares to the public

Public Limited Company

• Can sell their shares to members of the public through the stock exchange

• No maximum limit of shareholders

• Must issue a prospective detailing the history of the company & inviting the public to buy shares

Public Limited Company

• Shares are bought & sold on the stock exchange

• Accounts must be published and audited on an annual basis

• An annual report must also be compiled each year

Advantages of a public limited

company• Limited liability• Easier than private limited

company to raise capital• They can attract top management

because of their public image• Continuity of existence if a

shareholder dies

Disadvantages of a public limited

company • High formation costs

• Accounts have to be published

• Profits must be distributed to shareholders

• Ownership & control are separated because although the shareholders own the company the Board of Directors make the decisions

Key TermsShares• These are long term sources of finance• Sold to people who become shareholders of the company• A plc is able to advertise its shares for sale to the general

public• A private limited company must sell their shares privately

Shareholders• These are people who own part of the Business

Sources of finance• Internal sources of finance

• External sources of finance

Internal sources of finance

• Retained profits

• Stock reduction

• Assets sale

• Limiting credit to customers

External sources of finance

• Owners capital

• Hire purchase and leasing

• Overdrafts and loans

• Grants

What is a franchise?• Involves paying a fee & agreeing to

produce goods exactly in accordance with the franchise company’s policy

• Payments (royalties) are made on a regular basis depending on profits made

• Training & supervision are provided

Your task• Create a newspaper advert selling

a franchise• Example:

A large McDonald’s restaurant for sale as a going concern to suitable franchiseeExcellent trading figures, full training provided. Price £375,000

The public sector• The public sector includes everything that

is owned by the government

• Examples-army, police force, schools & hospitals

• Public means that they are owned by the government for the benefit of the people who run them

The private sector• The private sector contains all the

businesses owned by private individuals

• Almost all the businesses you can think of are in the private sector

• Private means that these businesses are run for the benefit of the people who own them – usually for profit

Strengths of the free market private sector

• Employers & employees can create their own personal wealth through the profit motive & hard work

• A greater range of products are supplied

• People have greater freedom to choose & but what they want

• Competition helps keep prices down & encourages new ideas

Strengths of the planned public sector

• Public services do not depend on the profit motive & will be supplied even at a loss

• The provision of basic services available to all regardless of people’s ability to pay them