Business Ownership

Types of
Business
Ownership

Learning Outcomes
Students should be able to:

1. Identify and describe the following main types of
business ownership in the private sector:

1. Sole trader
2. Partnership
3. Private limited company
4. Public limited company

2. Analyse and evaluate the main types of business
ownership in the private sector

Learning Outcome 2: Types of Business
Ownership

Identify and describe the following
main types of business ownership in
the private sector:

1. Sole trader
2. Partnership
3. Private limited

company
4. Public limited

company

Sole Trader

• A business that is fully owned by one person
only who has complete control

• A sole trader can have any number of
employees as long as there is only one owner

• Simplest and most common form of business
organisation the UK

• Can you think of any examples of sole traders?

Sole Traders - examples

Hairdresser Tutoring Services
Plumber Catering Establishments
Electrician Consultants
Painter Decorator Computer Repair Shop
Book Keeping Baker/Butcher/Florist/Fishmonger
Accountant Financial Planners
Website Designer Small Shop/Business Owners
Freelance writers Online Selling business

Setting up as a Sole Trader

• Easy to set up
• Just need to register as self-employed

with Revenue and Customs (the Tax
Man!) usually within 3 months of
starting a business
• Some sole traders might need a special
trading licence – e.g. nightclubs,
restaurants, kennels
• When income reaches a certain level,
you have to register for and pay VAT

Advantages of Sole Trader

• Easy to form
• Own boss
• Keep all profits
• Freedom to make all the

decisions
• Personal attention to customers
• Self-employment

Disadvantages of Sole Trader

• Full responsibility – this can be hard sometimes
• Long working hours
• Must bear all losses by the business
• Can be difficult to raise finance
• Has to make decisions entirely by themselves
• Unlimited liability- personally liable for the firm's

debts and may have to pay for losses made by the
business out of their own pocket.
• Can be difficult to compete with larger businesses
• No time to be sick or go on holiday!! The business
must keep running!!

Unlimited This means there that the business owner is
liability personally responsible for all of the debts of the
business, no matter how much they are

If your business fails you will have to pay back
all the debts you owe

This may mean selling your own private assets
such as your house or car so that you can get
the money to pay off your debts

This is a disadvantage of being a sole trader as
there is greater risk involved

Sole Trader One owner
– Key
points Owner keeps all profits

Easy to set up

Unlimited liability – which means that if the
business fails, the owner must pay back all the
debts owed (there is no limit)

Partnership

• Two or more (up to 20) people who jointly
own a business

• ‘joint owners’ will share responsibility for
running the business and also share profits

• If a sole trader takes on a partner, then the
business becomes a ‘partnership’

• Or a new business may form as a partnership

• Can you think of examples of partnerships?

Examples of Partnerships

Professional Services Sometimes very large companies partner with each other:
Solicitors
Legal Firms Examples:
Accountancy Firms
Doctors Spotify & Starbucks partnered together to bring music into all
Dentists Starbucks
Creative Industries
Estate Agents Ikea & Dreamworks – to animate collections of toys
Charities
Retail trade BMW & Montblanc – luxury cars and upmarket luggage

Setting up as a
Partnership

• The partners agree between
themselves how they will run and
organise their business

• Each invests a sum of money – this can
be the same amount or different
amounts

• They are subject to partnership law
which determines how profits/losses
are shared and how the business will
run

• They sign a partnership agreement

• Relatively low start up costs

Partnership Agreement

• Legalises the partnership
• Helps to clear up any disputes that may arsise
• It should contain:

1. Trading name and function of the
business

2. The amount of capital invested by each
partner

3. Profit ratio
4. Seniority and control over the business
5. Rules on admitting new partners
6. Rules on ending the partnership

Advantages of a Partnership

• Relatively easy to form
• Shared responsibility & decision-making
• Each partner can bring different skills &

experience to the partnership
(specialisation)
• Can share workload
• One can cover for the other when sick/on
holiday
• More capital available
• Profits shared between partners

Disadvantages of a
Partnership

• As with sole trader, unlimited liability – this
means that if the partners do not have enough
money in their business to pay their bills, they
have to use their own private money.

• Can be difficult to raise finance or borrow
money

• They may disagree with each other – conflict

• The death or bankruptcy of one partner may
cause the break-up of the business (lack of
continuity)

• Losses must be shared

Recap 2 – 20 owners
Partnership
Unlimited liability

Relatively easy to form – need a partnership agreement

Partners can share decision making and workload
Specialisation can occur more easily– this is where different
partners can provide different skills to the business
Conflict may arise if partners disagree
Easier to raise finance than a sole trader as each partner can
bring money to the business

Limited Company

• Limited companies are legal entities in their own
right i.e. they are not people

• They can be owned by multiple people
• The owners of the company (called shareholders) are

personally protected (limited liability)
• Profits and Losses are shared between shareholders

• Two types:

• Private Limited Company
• Public Limited Company

What does Limited Liability mean?

• This means that the liability of a business owner
is limited to the amount that the owner has
invested in the company.

• They only have to repay what they initially
invested.

Example: AA Polish Building Supplies ltd was set up
by 8 shareholders as a limited company. Each
shareholder invested £25,000 at start-up. Ten years
later they business failed with debts of £500,000.
Each shareholder only had to repay £25,000 , i.e.
the amount they originally invested.

Private A private limited company is a business
Limited which is incorporated and is therefore a
Company separate legal entity from its owners.

Shares in a private limited company
cannot be bought by members of the
general public

Shares are sold to friends/family/private
investors only

Private Limited Company - features

• Where a group of people come together and set up a
business

• Has the letters Ltd. after their name (which means limited)
• Owners are called shareholders
• A separate legal existence from owners – limited liability
• Shareholders might be family and friends
• Governed by two legal documents:

• Memorandum of Association
• Articles of Association
• Controlled by a Board of Directors
• Run by a Managing Director

A Private Limited Company is in the Private Sector

Setting up a • Lengthy legal procedure
Private
Limited • Company must register with the Registrar of Companies
Company
• It must complete the following documents before they can
start trading:
• Memorandum of Association – details about the
company
• Articles of Association – shows voting rights of
shareholders
• Certificate of Incorporation - company has a separate
legal existence from its owners and can act
independently from them

• Shares of private limited companies cannot be bought by
members of the public

Advantages of a Private
Limited Company

• Limited liability
• Greater availability of finance
• Better tax laws
• Responsibility and workloads are

shared
• Specialisation can occur
• Control of the business is retained by a

small group of shareholders

Disadvantages of a Private Limited Company

• More complicated to set up - legal
formalities

• Loss of individual control
• As shares are not available to the

public, it is more difficult to raise
money

Public Limited Company

• Has plc (public limited company) after its name, e.g. Tesco plc
• Owners are called shareholders
• Shareholders can be members of the general public
• Limited Liability
• Governed by two legal documents:

➢Memorandum of Association
➢Articles of Association
• Controlled by a Board of Directors
• Run by a Managing Director

A Public Limited Company is in the Private Sector, meaning that it is not
run by the government.

Difference between Public & Private Limited
Companies

• Main difference is that public companies can buy and sell their shares
on the Stock Exchanges, private companies cannot.

Advantages & Disadvantages of a Plc

Advantages Disadvantages
• Limited liability
• Greater availability of • More complicated & costly to
set up - legal formalities
finance through shares
• Banks more willing to lend • Loss of individual control as
• Specialisation – managers shareholders own the
business
specialise in their own area
of expertise • Greater threat of takeover
• Wide resources available to
them • Less privacy
• Easier to expand and grow

Check your Learning! Can you…..

1. Explain why and how a business
starts

2. Describe:

1. Sole trader
2. Partnership
3. Private limited company
4. Public limited company

3. Analyse and evaluate the main
types of business ownership in
the private sector