Different business forms

The legal structure of a business determines the financial impact on the business owners if things go wrong. It also affects the ease with which the business can finance growth.

2.1 Businesses with unlimited liability 

Unlimited liability means that the finances of the business are treated as inseperable from the finances of the business owner - they are one legal body. If the owner cannot pay their creditors, they can be made personally bankrupt. Two types of businesses have this: sole traders and partnerships.

Sole trader: an individual who owns and operates his or her own business.

  • In the eyes of the law, the business and its owner are one legal body meaning that they have unlimited liability for any debts that result from running the firm.  
  • This is the  most common business form of legal structure adopted by UK businesses. It particularly dominates in some areas of the economy eg, plumbers, builders and shopkeepers.
  • Accounts are not published in Companies House and there are no administrative costs to pay to set up; as a result many start-ups adopt this structure.
  • Main disadvantages are the limited sources of finance available, long hours of work involved and the dificulty of running the business during periods of ill health.

Partnerships: when two or more poeple start a business without forming a company.

  • Like a sole trader they have unliited liability.
  • This is usually found in proessions such as law and medicine.
  • The main difference between a sole trader and a partnership is the number of owners.

2.2 Businesses with limited liability

Limited liability means that the legal duty to pay debts run up by a business stays with the business itself, not its owners. They are two seperate legal bodies. If they don't have enough money to pay creditior the business is closed down, but the owners have no personal liability for the remaining debts.

To gain the full benefits of limited liability, the business must go through the process of incorporation to become a company. This creates a seperate legal identity for the organisation…


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