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1.3.1 Legal Structures

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There are 6 different types of business ownership:

  • Sole Trader
  • Partnership
  • Franchise
  • Private Limited Company (Ltd)
  • Public Limited Company (PLC)
  • Cooperative

Sole Trader

A sole trader is when a business is owned and operated by one person.

Unlimited liability means that the owners of a business are personally liable for the debts of the business. The owner can lose their personal belongings such as their house or car.

Limited liability is when the owners’ personal belongings are not at risk if the business cannot pay its debts — the owner can only lose what they invest.

  • Owners: 1
  • Liability: Unlimited liability
  • Decision Makers: One owner
  • Distribution of profits: One owner keeps all the profits
  • Funding sources: Soletraders savings, loans, overdraft mortgage

Advantages

  • Quick and easy to start up
  • Keep all the profits
  • Little paperwork
  • Simple to run
  • Easy to shut down

Disadvantages

  • Unlimited liability
  • 1 owner might not have all the skills needed
  • Heavy workload
  • Difficult to raise finance

Partnership

A partnership is a business owned and operated by 2-20 people.

  • Owners: 2-20
  • Liability: Unlimited liability
  • Decision Makers: Both partners equally unless there is a deed of partnership stating otherwise
  • Distribution of profits: Both partners equally unless there is a deed of partnership stating another split
  • Funding sources: Partners personal savings, loan, overdraft or mortgage

A deed of partnership is a legal document that outlines the conditions of the partnership. It will outline who is responsible for what and the percentage each partner owns of the business.

Advantages

  • Easy to startup & little paperwork once the deed of partnership complete
  • Partners can specialise in different areas and make up for skill shortages in other partners
  • Shared workload
  • 2+ people to raise finance & losses shared to reduce risk

Disadvantages

  • Unlimited liability
  • Disagreements may occur
  • Longer decision-making — all partners must agree
  • Profits are shared

Franchise

A franchise is a legal agreement with another business to sell its products.

Franchisor – the brand that owns the Business plan.

Franchisee – a separate entity that pays for the business plan and trade under their name.

  • Owners: The franchisor owners the idea, the franchisee pays a licence fee to use and sell the products
  • Liability: Limited or unlimited liability
  • Decision Makers: The franchisor will have the overall say over the running of the business, however, the franchisee will have some say with how the individual business is run, such as the number of employees, opening hours and so on
  • Distribution of profits: The franchisee earns the profits and pays the franchisor a licence fee and a percent of the profits
  • Funding sources: Franchisee’s personal savings, loan, overdraft or mortgage
  • Examples: KFC, McDonald’s, Hilton Hotels

Advantages

  • Access to an established & recognised business
  • Easy to grow the business
  • Less risk as the business is already proven to work
  • Startup and ongoing support from head office

Disadvantages

  • Less control over business direction
  • Loss of independence
  • Startup licence fees can be expensive
  • Have to pay a percentage of profits to the franchisor for the duration of business (royalty payments)
McDonald’s recently hosted a virtual festival featuring popular music artists. All McDonald’s franchise stores benefited indirectly from this sponsorship event even though it was funded by the franchisor, McDonald’s. McDonald’s hopes it will drive up franchisee’s sales and in turn increase their royalty payments.

Private Limited Company (Ltd)

A Private Limited Company is a business owned by shareholders that are family and friends.

  • Owners: Shareholders — family and friends
  • Liability: Limited liability
  • Decision Makers: Directors employed on behalf of shareholders
  • Distribution of profits: Dividends shared amongst shareholders
  • Funding sources: Sale of shares to family & friends or loans

Advantages

  • Limited liability protects owners’ personal wealth
  • Easier to raise finance through the sale of shares to family and friends
  • A stable form of ownership — business carries on if owners change
  • Original owners likely to maintain control

Disadvantages

  • Shareholder disagreements can occur
  • Higher admin costs than sole trader or partnership as there is a legal process of incorporation
  • Finance through the sale of shares limited to family and friends
  • Financial information publicly available
  • Directors have strict legal duties

Public Limited Company (PLC)

A Public Limited Company is a business owned by shareholders that have bought shares on the open stock market, that is open to the general public.

  • Owners: Shareholders — the general public
  • Liability: Limited liability
  • Decision Makers: Directors employed on behalf of shareholders
  • Distribution of profits: Dividends shared amongst shareholders
  • Funding sources: Sale of shares to the public or loans

Advantages

  • Ability to raise funding through the sale of shares
  • Limited liability protects owners
  • Increased business reputation from being legally registered
  • Better buying power

Disadvantages

  • More complex legal recording procedure
  • Risk of a hostile takeover
  • Financial information publicly available
  • Shareholders have an influence on the running of the business

Cooperative

A cooperative is a business owned by the community closest to the business, for example, its employees or customers – these are known as the members.

There are 3 types of cooperatives:

Type of CooperativeExample
Consumer cooperative — owned by the customers.Image result for coop food
Coop Food
Worker cooperative — owned by the employees.Image result for Jphn lewis
John Lewis
Producer cooperative — owned by the makers of products.Image of Birds Eye Garden Peas 800g
The Green Pea Company
  • Owners: Community members closest to the business
  • Liability: Limited liability
  • Decision Makers: Directors employed on behalf of the members unless there is a big decision which may require a membership poll
  • Distribution of profits: Shared amongst the members
  • Funding sources: Investment from the members or loans

Advantages

  • People closest to the cooperative are more satisfied as they receive a percent of the profits
  • Members get to make the decisions about the direction of the business
  • Limited liability
  • Social service and moral cause for the members

Disadvantages

  • Difficult legal structure to form
  • Financial information publicly available
  • The members might be inexperienced and not have adequate business acumen
  • Decision-making can take a long time as big decisions might require a membership poll

Quiz

1.2.3 Non-Financial Aims and Objectives

1.3.2 Structural Characteristics