buss 1 choosing the right legal structure

sole traders

partnerships

private limited companies

public limited companies

Not-for-profit businesses

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  • Created by: imogen
  • Created on: 29-04-12 18:19

Sole Trader

An individual who owns and operates their own business. They make the final decisions about the running of the business. Sole trader is the only one who benefits financially from its success, but they have unlimited liability (take on businesses debts and personal assets can be seized by creditors if they fail to meet outstanding debts). 

Most common form of legal structure in UK. e.g. plumbers, builders and many independent shopkeepers.

+ Complete confidentiality can be maintained because accounts aren't published.

+ No formal rules to follow when establishing it or administrative costs to pay. 

- Limited sources of finance available.

- Long hours of work involved; difficult to take holiday.

- Unlimited liability.

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Partnerships

These exist when two or more people start a business withou forming a comapny. They also have unlimited liability.

+ Additional skills; a new partner may have abilities that the sole trader does not possess. This can help strengthen the business.

+ More capital; a number of people together can inject more finance into the business than one person alone. May make expansion easier as well as more skills

+ Shared strain; new partner will share the worry of the running of the business, as well as taking on a share of the workload. Should reduce stress and allow holidays to be taken. 

- Sharing profit; financial benefits will have to be divided up between the partners according to the partnership agreement made on formation. Can lead to disagreements about 'fair' distribution of workload & profits.

- Loss of control; decision making must be shared.

- Unlimited liability; more worrying to have UL for your partners mistakes. 

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Private limited companies

The start up capital is usually around £100 which can be wholly owned by the entrepreneur or other people can be brought in as investors. The shares cannot be brought and sold without the agreement of the other directors. This means the company cannot be listed on the stock market. 

This means its possible to maintain close control over the way the business is run. Its often run by a family or small group of friends.

Its usually very profit focused. A legal requirement is that they must state LTD after the company name. This warns those dealing with the business that it is relatively small and that they also have limited liability and therefore protects shareholders from business debts. 

This means the cheques of an Ltd company are not as secure as ones from an unlimited liability business. 

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Public limited companies

When a private limited company expands to the point of having share capital of more than £50,000 then it can convert to a public limited company. This means it can be floated on the stock market, which allows any member of the general public to buy shares. This increases the company's access to share capital which enables it to expand more. The term PLC will appear after the company name. (e.g. Tesco plc) 

They must also publish far more detailed accounts than private limited companies. Almost every large business is a plc, yet the process of converting from an LTD to a PLC can be difficult.

- The problem with floating on the stock market is that there is sudden huge injection of cash, which sounds good but then the business is forced to grow more quickly otherwise shareholders will wonder where their money is going. 

- Vulnerable to takeover bid as information is public. 

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Not- for- profit businesses

Mutual businesses

Have no shareholders or owners and exist solely for the best interest of their members (customers). 

Includes many building societies and mutual life assurance businesses.

Charities 

Can include pressure groups such as Greenpeace and Friends of the Earth. Also include conventional charities such as Oxfam. Charitable status ensures that those who fund the charity are not liable for any debts, and it also provides significant tax benefits. 

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