Business (9225) | Business ownership

Welcome to Business Ownership! Your Guide to Starting Up

Hello future business leaders! This chapter is all about one of the most important decisions any entrepreneur makes: How should my business be owned?

Choosing the right ownership structure dictates how much risk you face, how much control you have, and how easy it is to raise money. Don't worry if this seems tricky at first—we will break down the different types using simple analogies so you can understand exactly why lawyers or accountants choose one structure over another!

What We Will Cover:

• The critical difference between Unlimited and Limited Liability.
• Sole Traders (going solo!).
• Partnerships (teaming up).
• Private Limited Companies (LTDs).

---

SECTION 1: The Most Important Concept – Liability

Before we look at specific business types, you must understand the concept of liability. This single idea separates the risky ownership structures from the safer ones.

What is Liability?

Liability simply means being legally responsible for the debts or obligations of the business. If the business owes money, who has to pay it back?

1. Unlimited Liability (The Risky One!)

If a business has Unlimited Liability, there is no legal difference between the owner and the business.

• The Risk: If the business fails and owes money, the owners are personally responsible for paying all debts.
• What is at Stake? The owners might have to sell their personal assets (like their car, their house, or their savings) to cover the business debts.

Analogy: Imagine the business is a small ship, and your personal savings account is right next to it. If the business ship sinks (goes into debt), it pulls your savings account down with it!

2. Limited Liability (The Safe One!)

If a business has Limited Liability, the business is legally separate from its owners.

• The Safety: If the business fails, the owners (shareholders) only lose the money they originally invested in the business.
• What is Safe? Their personal assets (house, car, savings) are protected and cannot be used to pay off the business debts.

Analogy: In this case, the business ship has a strong legal shield around it. If it sinks, your personal wealth is safe outside the shield.

---

SECTION 2: The Sole Trader

The Sole Trader is the most common and simplest form of business ownership. It literally means "one trader" or "solo" owner.

Definition and Features

• Definition: A business owned and controlled by one person.
• Legal Status: The owner is the business (they are not separate legal entities).
• Liability Status: Unlimited Liability.
• Profits: The owner keeps all the profits after tax.

Example: A local plumber, a freelance photographer, or a small market stall vendor who runs the entire operation alone.

Advantages (Pros) of Being a Sole Trader

1. Easy to Set Up: Very little legal paperwork needed to start trading.
2. Control: The owner makes all the decisions quickly without needing to consult anyone else.
3. Keeps All Profits: Every penny of profit (after tax) goes directly to the owner.
4. Privacy: Financial information is private and does not need to be published for the public to see.

Disadvantages (Cons) of Being a Sole Trader

1. Unlimited Liability: This is the biggest drawback. All personal assets are at risk if the business fails.
2. Lack of Capital: It can be difficult to raise large sums of money because banks see them as higher risk, and there is only one source of investment (the owner).
3. Heavy Workload: The owner must manage everything—marketing, finance, production, cleaning—leading to stress and long hours.
4. Lack of Continuity: If the owner dies or becomes seriously ill, the business usually ends.

---

SECTION 3: Partnerships

When a business is too big or too risky for one person, two or more people might decide to form a Partnership.

Definition and Features

• Definition: A business owned and controlled by two or more people (usually up to 20).
• Legal Status: Like sole traders, the partners are usually the business.
• Liability Status: Typically, Unlimited Liability (shared between the partners).
• Profits: Shared according to an agreed ratio (e.g., 50/50 or 60/40).

Example: Many law firms, accounting firms, and doctor's practices are run as partnerships.

The Deed of Partnership (The Rule Book)

It is crucial for partners to draw up a legal document called the Deed of Partnership.

Why? Because if disagreements happen, this document explains:

• How much capital each person invested.
• How profits and losses will be shared.
• How decisions are made.
• What happens if a partner wants to leave.

Common Mistake: If there is no Deed, profits are usually split equally by law, even if one person invested much more money or time! Always use a Deed!

Advantages (Pros) of Partnerships

1. Shared Workload and Stress: Responsibility is divided, leading to better work-life balance.
2. More Capital: Because there are multiple owners, more money can be invested at the start.
3. Wider Expertise: Different partners bring different skills (e.g., one is good at sales, the other at finance).

Disadvantages (Cons) of Partnerships

1. Unlimited Liability: Each partner is still personally responsible for the debts of the business. Even worse, if one partner takes out a bad loan, the others are legally responsible for that debt too!
2. Potential for Conflict: Disagreements over strategy, money, or workload are very common.
3. Slower Decision Making: Partners must consult each other, which slows down the process compared to a sole trader.

---

SECTION 4: Private Limited Companies (LTDs)

This is the type of ownership where the big legal shield comes into play. When a partnership or sole trader gets large enough or wants to limit their risk, they often choose to become a Company.

Definition and Features

• Definition: A business owned by shareholders, where the shares are not available to the general public.
• Legal Status: A Private Limited Company is a separate legal entity. It has its own legal identity, separate from the owners.
• Liability Status: Limited Liability. This is the main reason businesses choose this structure!
• Raising Capital: Money is raised by selling shares privately to friends, family, or existing investors.

Did You Know? The name of the company usually ends with "Ltd" or "Limited" to clearly signal to customers and banks that the owners have Limited Liability.

Ownership and Control in an LTD

1. Owners: The owners are called shareholders. They invest money by buying shares.
2. Control: The shareholders elect a Board of Directors to run the business day-to-day. In smaller LTDs, the owners often serve as the directors themselves.

Step-by-Step: Becoming an LTD

Setting up an LTD is much more complicated than a sole trader. You must:

1. Register the company with the official government body (e.g., Companies House in the UK).
2. Submit extensive legal documents (Memorandum of Association, Articles of Association).
3. Appoint directors and issue shares to the initial shareholders.

Advantages (Pros) of Private Limited Companies

1. Limited Liability: The most significant benefit. Shareholders’ personal wealth is protected.
2. Continuity: Since the company is a separate legal entity, it continues to exist even if a shareholder dies or sells their shares.
3. Easier to Raise Capital: The protection of limited liability makes it easier to convince new investors to buy shares.
4. Status: Having “Limited” in the name often gives the business a more professional image, which can attract customers and suppliers.

Disadvantages (Cons) of Private Limited Companies

1. Expensive and Complex Setup: There is a lot of legal paperwork and administrative cost involved in formation.
2. Financial Reporting: LTDs must publicly file their accounts (financial records). This means competitors and the public can see how much profit they make.
3. Cannot Sell Shares Publicly: Shares can only be sold privately. This limits the amount of capital that can be raised compared to Public Limited Companies (PLCs).