choosing the right legal structure
- Created by: amy
- Created on: 17-05-13 09:11
key terms
- UNINCORPORATED BUSINESS- there is no legal distinction between the owner and the business e.g. sole traders and partnerships
- INCORPORATED BUSINESS- there is a clear legal distinction between the owner and the business e.g. private limited companies and public limited companies
- UNLIMITED LIABILITY- where the owners of the business are legally responsible for the debts of the business
- LIMITED LIABILITY- where the liability of the owner is legally limited to the value of their share ownership
- SOLE TRADER- a business owned by one person
- PARTNERSHIP- groups of between 2-20 people who form a business for the purpose of making profit
- PRIVATE LIMITED COMPANY- a small to medium-sized business that is owned by shareholders
- PUBLIC LIMITED COMPANY- a large business that must have a minimum of £50,000 in share capital and for which shares are freely available to the public
unlimited and limited liability
Unlimited Liabiltity -associated with businesses that are unincorporated (sole traders, partnerships..) -debts of the business are also the debts of the owner -when a sole trader or partnership business fails its called bankruptcy
Limited Liability
-associated with companies e.g. Plc's and Ltd's. they are incorporated types of businesses.
-owners are classified as being seperate from the business therefore the debts of the business are not the personal responsibility of the owners. personal posessions are not at risk...
-when a private limited or public limited company fails it enters liquidation
Sole Traders
Positives
- financial affairs remain private
- owners makes all decisions
- keep all the profits
- easy and cheap to set-up
Negatives
- limited capital for growth
- limited skills
- unlimited liability
- need to work long hours
Partnerships
Positivies
- financial affairs remain private
- greater freedom for holidays etc.
- risks and costs are now shared
- greater access to skills and capital
Negatives
- risk of arguments
- profits are shared
- unlimited liability
- partnership ends if a partnet leaves/dies
Private Limited Companies (Ltd)
Positives
- Limited Liability
- Often run by family and friends who can offer valued input
- Continuity of the business should a shareholder leave
- Can sell shares to raise capital
Negatives
- There is a need for some financial disclosure
- Shares cannot be sold to the general public
- Profits are share between the shareholders via dividends
- Lots of directors
Banks and other financial institutions will view Ltd's and Plc's as carrying lower levels of risk and therefore they are more likely to want to invest.
Public Limited Companies
- sells shares to the general public which are traded upon the Stock Exchange
- Must have a share capital in excess of £50,000
- disclose their financial records and accounts
The floatation process for becoming a Plc is a long and expensive one which is why only large businesses seek to apply.
Owners of a Plc need to accept that they will now lose much of their former control as they are answerable to numerous shareholders.
Public Limited Companies
- sells shares to the general public which are traded upon the Stock Exchange
- Must have a share capital in excess of £50,000
- disclose their financial records and accounts
The floatation process for becoming a Plc is a long and expensive one which is why only large businesses seek to apply.
Owners of a Plc need to accept that they will now lose much of their former control as they are answerable to numerous shareholders.
Not-for-Profit Organisations
An organisation with objectives other than the maximisation of profits! (charities, voluntary organisations..)
They often have social, environmental, cultural or ethical concerns...
Key Characteristics
- They are value and not profit driven
- They have an appointed governing body
- They are non-governmental
- They have volunteer and paid staff
Factors influencing the choice of legal structure
- Their objectives e.g. profit or values
- The need for financial investment
- The size of the business
- The level of risk the owners will accept
- The degree of control wanted by the owner(s)
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