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4 Types of Businesses
1
米 The main Types of Ownership
米 Deciding on the Business Ownership Model
Public Sector Businesses

The main Types of Ownership

1.41 Your

Risk, Ownership and Limited Liability

When an entrepreneur starts a business, they need to consider what kind of legal structure they
want for their business

Their decision will depend upon a range of factors

The level of personal risk they are willing to

take The advice they receive

The level of privacy they would prefer in running the

business Diagram: types of business

ownership

Businesses can operate as sole traders, partnerships or companies

Sole traders and partnerships are unlimited liability

businesses They are easy to setup and start trading
Information about their financial performance does not need to be shared outside of
the business
Private limited companies and public limited companies offer the protection of limited liability Your
to their owners (shareholders

Setting up a company is a legal process that takes time to arrange

Information about financial performance needs to be shared with Companies House and
is available for scrutiny by any interested third party
 Comparison of Unlimited & Limited Liability

Liability Description Implications

Unlimited The owners are fully responsible for There is no legal distinction
liability all debts owed by the business between the owners and the
business
Owners are also legally responsible
for any unlawful acts committed by As a result, these business owners
those connected to the business may have to use their own personal
assets to pay debts or legal fees

E.g. a sole proprietor may need to

sell their home to pay creditors if
their
business fails

Limited Owners (shareholders) of private Companies are incorporated and

liability limited companies and public limited owners are considered a separate
companies can only lose the original legal entity to the business
amount they invested in the business
This means that if a company fails, the
if it fails
owners would lose their investment
Shareholders are not responsible (shares) but would not have to use their
for business debts assets to meet additional debts or
legal fees
u In most cases, shareholders cannot
be held responsible for unlawful acts E.g. In 2018 construction company
committed by those connected Carillion entered liquidation and
with the business the shareholders lost their
investments

Sole Traders, Partnerships and Limited Companies

Sole traders
When an entrepreneur starts a business, they will often start operating as a sole trader

This is a business that has a single owner, who may choose to hire employees or operate alone

Evaluation of Sole Trader Businesses

Advantages Disdadvantages Your

Easy and inexpensive to setup Unlimited liability, meaning the owner is

personally responsible for any debts the business
The owner has complete incurs
control over the business
Limited access to finance and
All profits belong to the
capital Limited skill set of the
owner Simple tax
entrepreneur
arrangements

Overtime - or if the business requires significant investment - they may change the legal structure
of the business
Partnerships
u A sole trader may join with others to form a partnership

u A partnership is a formal arrangement by two or more entrepreneurs to manage and operate

a business and share its profits

Partnerships are often formed to gain more funding, increase capacity or increase skills
and experience in the business

Businesses commonly established as partnerships include law firms, accountancy businesses

and small-scale construction businesses

Partnerships can often be identified by suffixes such as '& Son' or 'and

Partner' Evaluation of Partnership

Businesses

Advantages Disadvantages

Partnerships are easy and inexpensive to setup Partners have unlimited liability

Partners share responsibilities, decision- Potential for disputes between partners

making and liability for debts
Profits are often shared equally,
More skills and knowledge are regardless of the contribution

available Increased access to finance u It is often difficult to transfer ownership

to new owners
and capital

Private limited companies

An entrepreneur may choose to form a private limited company to provide more financial security, as they will benefit from
limited liability
Your notes
The ownership of the private limited company is broken down into a specified number of shares

These shares can beheld in their entirety by the entrepreneur, sold to friends and family or to
venture capitalists

Decision-making often rests with the person appointed to run the company, often called
the Managing Director or CEO

Evaluation of Private Limited Companies

Advantages Disadvantages
 Limited liability
Becoming a PLCmeans
raises owners
a are not They are expensive and time-consuming to
personally responsible for the set up
The risks associated with
company's debts
More complex legal requirements
Access to greater finance and capital and regulations than sole traders

Easier to transfer ownership to Annual financial reporting and auditing

new shareholders are required

Can provide a professional image Shareholders have little control over the
and reputation company as the founder usually imposes
their agenda

Public limited companies

When a business is growing rapidly, it may require a significant amount of capital to fund its expansion

To secure this funding, it may choose to transition from a private limited company (LTD) to a
public limited company (PLC)

This is a complex legal process which involves undergoing a stock market flotation

Public limited companies sell their shares to the public on the stock exchange, meaning they can
have a large number of owners

Public limited companies must publish their annual reports and hold an AGM each year

u Aboard of directors, whose members are elected by shareholders at the AGM, acts as
the governing body of a company,

The board of directors appoints a CEO to lead the company

Evaluation of Public Limited Companies

Advantages Disadvantages

Significant amounts of capital The business is required to adhere to a range

can be raised very quickly of legal and financial regulations, which can
be costly and time consuming to comply with

are spread among a larger group of Selling shares to the public creates many
shareholders shareholders, who have a say in how the
company is run

profile and increases its visibility with PLCs are expected to deliver consistent growth
customers, suppliers, and and profits to their shareholders
potential investors
Franchises & Joint Ventures
Franchising
Franchising involves a business (franchisee) buying the rights to operate an existing
successful business model (franchisor)

This right includes the use of its branding and software tools as well as business support,
in exchange for an initial lump sum plus ongoing royalties

our notes

Some of the many food franchises available in the US

The franchisee operates the business under the franchisor's established system and receives training,
marketing support, and ongoing assistance

Franchisors usually require the franchisee to operate as a private limited company

Evaluation of Owning a Franchise

Advantages Disadvantages
 u A ready-made, recognised brand The cost of purchasing a well-known franchise
name which is promoted centrally by is likely to be high, compared to starting a
the business from scratch
franchisor
Core decisions are made by the the
The franchisor provides training, such franchisor, reducing the autonomy of
as how to make pizzas properly, so as to business owners
ensure quality and brand consistency
Royalties linked to the level of sales must
Equipment and consistent supplies be paid regularly, regardless of profit
are provided through the franchisor
Required materials, supplies or equipment sold
The franchisor guarantees an by the franchisor maybe sold to the franchisee
exclusive geographical area or at inflated prices
market to the
u If the franchisee does not follow strict
franchisee so competition is limited
franchise rules or fails to meet quality
Advice, training and the use of expectations, their franchise rights can be
software systems are ongoing removed

The franchisor may also provide

loans, insurance and recruitment
support

Examiner Tips and Tricks

A franchise is not a form of business ownership - it is an alternative to starting up a brand new
business from scratch. In most cases franchisors require businesses to operate as private
limited companies as this ownership type is considered to have more stability than sole traders
or
partnerships

Joint ventures
u A joint venture is a medium- to long-term agreement for two or more separate businesses to
join together to achieve a defined business outcome, such as entry into a newmarket

u A new combined business entity is formed

Risks and returns are shared by the parties involved in the joint venture

Businesses in a joint venture are usually looking to benefit from complementary strengths
and resources brought to the venture

Many European companies have setup joint ventures with businesses in China
Chinese managers and employees understand market needs and consumer tastes, which gives the venture a greater chance
of success
The Chinese government encourages joint ventures rather than foreign direct investment (FDI)

German car manufacturer BMW and Chinese rival Brilliance Auto Group formed a joint
venture called BMW Brilliance in 2003 to produce and sell BMW cars in China

Evaluation of Joint Ventures

Advantages Disadvantages
 Each partner in the joint venture benefits u If the joint venture is successful, profits have
from sharing expertise and resources, such to be shared between the partner businesses
as
distribution channels andR&D expertise Disagreements may occur regarding
important decisions due to the input
Joint ventures are less risky than 'going of managers in both businesses
it alone' if entering a newmarket or
diversification The objectives of each business may
change overtime, leading to a conflict of
Local knowledge can be accessed when objectives between joint venture partners
one of the joint venture partner companies
is u If the joint venture fails, it may need to be
already based in the country dismantled, reorganised or sold, which is
likely to take significant time and
Costs are shared between joint resources
venture companies, which is very
important for expensive projects such
as new aircraft

Deciding on the Business Ownership Model

1.42 Your

Unincorporated Businesses and Limited Companies

u A business maybe unincorporated or incorporated. These terms are closely linked to the concepts
of limited liability and unlimited liability

An unincorporated business does not have a separate legal identity from its owner(s)

u If the business issued the owner is responsible and may need to cover legal costs with
their own money

Unincorporated business types include sole traders and partnerships

An incorporated business is called a company and has a separate legal identity from its owner(s)

u If the business goes bankrupt its owners (shareholders) cannot beheld responsible for
debts and only lose the money they initially invested

Unincorporated businesses include private limited companies (Ltd) and public

limited companies (PLC)

A Comparison of Unincorporated Businesses and Incorporated Companies

Unincorporated Businesses Incorporated Companies

 The owner has no legal separation from u A unique legal entity that is separate
the business from business owners (shareholders)

The owner(s) carry full liability (unlimited Reduced risk and liability of the business
liability) for the business and it's activities to the owners (limited liability)

Can be started with little or no money Can be expensive to incorporate

Recommending a form of Business Ownership

An entrepreneur must choose the ownership structure that suits the business needs,
particular circumstances and the level of personal liability involved

Deciding on the best form of legal ownership requires the owners to consider many different

factors Type of ownership

u Is unlimited or limited liability most appropriate?

u
Is the business based on an original idea or a
franchise?
Your
Desire for control and privacy
How much direct control over decisions does the owner(s)

want? Does the owner(s) want to share the workload?

Does the owner mind if the financial accounts are made publicly available?

Financial considerations

How much start-up finance is required?

How might the choice of finance affect the break even

point/profits? How is finance to be managed?

The aims and stage of business growth

u Is the business new or established?

Does the owner want it to grow?

Examples of Business Ownership Recommendations

Business Description Key Considerations Recommendations

u A private limited company

Sarah wants to setup a Sarah does not have
new pizza business. She much money maybe a better option as it is
has 3 relatively inexpensive to
different options Banks are often willing to setup and provides Sarah with
legal
buy a franchise lend to franchisees due protection
like Dominoes to relatively low risk, but
 this
money has to be The Franchise option is
Start small as a attractive but maybe best
sole trader repaid With a private
bought into after sometime,
limited
company, the owner is once Sarah knows she
Start small but not liable for outstanding actually likes running a pizza
register as a private
expenses if business business!
limited
failure occurs
company
Sarah lacks finance so
starting small and growing
organically maybe the best
way forward

AMF is alarge, fast- u If AMF sells shares, they Going public would
growing private limited lose some control of the provide very quickly access
company to large
(Ltd) that specialises in AMF could investigate
commercial cleaning and This money does
thecost and likelihood of
maintenances services not need to be getting a bank loan before
 AMF is seeking to raise repaid new
finance to continue their they make afinal decision
shareholders would Their final decision
expansion . They can either
 become a Public Limited have high maydepend on how much
Company and sell shares expectations money they need to raise. If
 take out a large bank loan it is significant, going Public
 Bank loan have to be
would be the best way forward
repaid with interest , but
AMF would keep control
of their business

Examiner Tips and Tricks

When assessing the best form of business to be used in a particular situation (or if a business
should change its form), the decision needs to consider any evidence provided about the
business owner, the product, the nature and size of the market, the funds required, and the level
of profitability. For example, a business which generates sales of £30ka year is unlikely to be
ready to become a public limited company, but it may well benefit from transitioning from a sole
trader to a private limited
company

Public Sector Businesses

1.43 Your
The Public Sector
The public sector is a key element of mixed economies
Public sector firms are owned and controlled by the government and are usually funded
through taxation
Their main goal is to provide services such as education, healthcare or emergency services that
may not be provided by profit-focused businesses
 Hospitals, schools and emergency services are often partly or fully provided by the public sector
Public sector firms operate on a local, regional or national government

level Transport for London provides local transport in the London

region

Caribbean Airlines operates across several countries in the Caribbean, with ownership shared
by the governments of Trinidad and Tobago, Jamaica and Guyana

Comboios de Portugal provides train services across the country and into Spain

Governments are likely to retain ownership of organisations in the public sector for several

reasons They are strategically important to the country, such as the defence or justice

systems

They provide essential services such as water, electricity supply or emergency services

They are merit goods that may not be provided insufficient quantities by private businesses,
Your
such as education or health services

Public Corporations
Public corporations are owned by the government

They are usually businesses which were once owned by private individuals and have
been nationalised

u In 2022, the German government nationalised Uniper, the country's largest importer of gas,
to improve energy security as a result of the conflict between Russia and Ukraine

u In 2008, the UK government nationalised Northern Rock, a bank which was on the verge
of collapse as a result of the global financial crisis

Government ministers appoint aBoard of Directors, which manages the corporation

 They are expected to run the corporation according to objectives set by the

government Although they maybe profitable, the aim of corporations is to provide a

public service

Governments should not interfere with day-to-day operations and decisions of the

corporation

Evaluation of Public Corporations

Advantages Disadvantages

Government ownership is essential Due to a lack of competition, public

for some crucial or sensitive corporations may become inefficient or have no
industries incentive to
improve, affecting consumer choice
Examples include water, power
and communications

Important public services, such as TV Corporations may become complacent or have

and radio broadcasting, are often in an unfair advantage over private sector rivals as
the public sector they can access government subsidies to help
them if
Non-profitable but important they are struggling
programming can be made
available to the public

The government can choose to Funding can be cut as a result of political decisions
nationalise industries that maybe in and changes of governments can cause significant
financial trouble disruption to corporation missions and operations
 Jobs can be secured and consumers will
have access to the important good services the
business provides

Other Public Sector Enterprises

u In some cases, profit-making companies are partly owned or controlled by the government

They sell shares on the publicly listed stock exchanges so they area mix of the private and
public sector

u In the US, Amtrak (passenger trains) is a state-owned for-profit enterprise whose shares
are majority owned by the federal government

Other businesses are funded by central and local

government They may still levy charges for some

services

The NHS is free at the point of use for British citizens, but they must pay for
medical prescriptions, some procedures and parking on hospital premises

The French state funds leisure facilities such as swimming pools and public sports venues
but usually charges users a small fee for their use
Due to the constraints of government spending in many countries, many services are
now being privatised or suffer from insufficient funding