Page 3: Types of business organisation
If the initial market research suggests the idea is a good one, then the entrepreneur must consider the practicalities of setting up the business. There are three main types of business form:
- A sole trader is simple to set up - there is no complicated paperwork. The owner of a sole trader enterprise, such as plumbers, window cleaners and professional writers, has complete control of the business. However, there is nothing to prevent a sole trader taking on employees and many do. The sole trader takes all the profits (after tax) but is liable for all debts the business incurs. This means that if the business makes a substantial loss, the sole trader may be forced to sell personal assets such as their house to cover the business debts. In worst cases, sole traders may face bankruptcy.
- A partnership consists of between two and 20 partners. Partnerships are a common form of business for many enterprises offering professional services, such as doctors' surgeries, accountancy practices and design businesses. Partners can bring more capital and a wider range of skills, work and ideas to the business. However, partners can and do fall out. Like sole traders, most partnerships also have full liability for any business debts.
- A limited company is a legal entity. This means, for example, that if a company owes someone money, the creditor can take the company to court. Because of its legal status, it is more complicated and more expensive to set up a limited company. Any new (or small) business choosing this form of structure will become a private limited company. The entrepreneur setting up a new company is likely to retain a large shareholding but may offer shares to some investors in return for capital. However, unlike the public limited companies (plcs) listed on the stock market, these shares cannot be sold to the general public.
A limited company is owned by its shareholders, who are entitled to a share of any profits and a say in the running of the business. The main advantage of this type of business ownership is that it offers shareholders limited liability.
Shareholders are not responsible for the full amount of any debt incurred by the business. The liability of each shareholder is limited to the amount of capital they have invested in the business. This is why this form of business is attractive to many entrepreneurs.