What influences a business choice of legal structure:
- Ownership and control of the business
- Responsibility for any debt
- Sources of finance available
- The objectives pursued
Unlimited Liability - The owner has full legal and debt responsibility for a business, even if the business goes bankrupt the owner is responsible for any debt the business had.
Limited Liability - This is when the owner does not have responsibility for the debt and legal obligations of a business. Instead the business acts as a separate legal entity, which means if it went bankrupt the owner would not be responsible to pay the debts.
Sole Trader - This is the simplest kind of business where the business is owned by one person who is fully in control of the business operations, as well as having unlimited liability for the business.
Advantages:
- Few Legal requirements meaning its quick and easy to set up
- The owner has full control of a business, does not have to consult with anyone about the decisions they make
- The owner keeps all the profit (after Tax)
- The financial state can be kept private unlike other structures that have to publish accounts.
Disadvantages;
- The owner is fully responsible for any debts the business has meaning their possessions might have to be sold if the business goes bust and has debts.
- Can be stressful as the owner usually has to be ‘Jack of All trades’ in order for the business to be successful, which could lead to them being overworked
- Hard to raise capital as small businesses are seen as risky investments, which could limit growth
- Larger firms may not want to deal with them as they feel they can’t deliver the same results a bigger business can
- Since the owner is legally the business itself, if she or he dies then the business comes to an end.
Partnerships - Whenever two or more people run a business together it is a partnership, the maximum amount permitted to be in a partnership is 20 owners. Like Sole traders they are not a separate legal entity.
A deed has to written to start a partnership that includes:
- How much money each owner is contributing and how much of the profit they get.
- Responsibilities of each partner
- How decisions are made in the partnership and how the businesses finances are managed.
- Arrangements to cover illness or holidays
How they take in new partners
- Arrangements on how the partnership is dissolved
Advantages:
- Easy to establish
- More partners mean potential for more starting capital
- Work is shared meaning less stress
- Each partner brings different skills which they can specialise in
- Losses are shared
- Financial information does not have to be shared to the public
- All profit is shared amongst partners
Disadvantages:
- Partners have unlimited liability like sole traders
- Decision making is slower as there might be disagreement
- Legal restriction on how many partners there are could mean there is not a lot of room for growth.
Limited Liability Partnerships (LLPS) - All the same features as a partnership however they have limited liability and have to publish their accounts.
Limited companies - These are businesses that are a separate legal entity
Private Limited Company - This is when a business is a separate legal entity to the owners of the business but has limitations to who the ownership of the company can be. Shares are given out to the owners of the business these represent a part of the business. Shareholders(owners) can only sell their part of the business after offering it to the other shareholders as well as this their shares of the business cannot be sold to the public on stock exchange. Usually has LTD at the end of the name. Because there can be potential investors a company has to publish their financial details onto the company's house. (shorten)
Advantages:
- Limited liability business
- Can raise capital through selling shares to investors
- Investors regard Limited companies as less risky, meaning more likely that they will invest
- Continuity of the business, when a owner dies the business doesn’t cease existing
Disadvantages:
- Setting up can be expensive and very time consuming
- Legal documents like the publishing of accounts can be very time consuming
- The added complexity of running this sort of company might mean a need for outside help like and accountant, which is extra costs
- Larger companies are harder to manage due to their just being more people.
- Owners have to vote on decisions meaning control is lost
Public Limited Company - These companies have the same set up as a LTD but their shares can be traded on Stock exchanges to the public. Usually have PLC at the end of their names.
Advantages:
- Limited liability
- Can raise large sums of money by selling shares on stock exchanges
- Continuity of the business
- Less risky for investors
Disadvantages:
- Hostile takeovers of the business can happen
- Company accounts not private
- Owners have less control over business
- Added complexity means added costs
- Money and time consuming to set up
- The business has to be a certain size minimum