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Introduction
• Ownership • Control • Way finance is raised • Distribution of profits
Main types of business in private sector differ in terms of:Main types of business in private sector differ in terms of:
Sole Trader
• Owned / run by one person.• Rarely employ large no. of people.• Owner complete responsibility.• Main source of finance – personal
savings, bank loans.• Simplest / most common structure.• Common in tertiary sector eg local
butcher.
Sole Trader
• Trading Licence for certain goods eg alcohol.
• Must pay relevant taxes
Legal Requirements on Formation
Sole Trader
• Easy to set up. • Small amount of capital. • Personal control, independence,
freedom.• No formal set of accounts.
Relative Advantages
Sole Trader
• Keep profits (after tax).• Speedy decisions. • Direct contact with customers –
feedback.• Closer working relationship -
management / employees.
Relative Advantages
Sole Trader
• Owner responsible for debts.
• Unlimited liability – personal assets at risk.
• Difficult to raise capital – growth limited.
• Long hours, difficult to cover holidays / illness.
Relative Disadvantages
Sole Trader
Relative Disadvantages
• Business worries not shared.
• Division of labour / specialisation difficult.
• Owner - non specialist – expertise thinly spread.
• Lack of continuity.
Partnership
• Two or more owners.• Ordinary – all partners unlimited
liability.• Some partnerships can have a
partner who has limited liability – but at least one partner must have unlimited liability.
• Professions – dentistry, solicitors, accountants.
Partnership
• Minimum 2, maximum 20. (Exceptions to above can exist dependent on countries etc.)
• Share in capital, profits / losses – “Deed of Partnership”.
• Disputes usually settled by majority.
Legal Requirements on Formation
• Easily formed.
• More finance available – expansion easier.
• Management / risks shared.
• Financial affairs private.
• Greater continuity.
Relative Advantages
Partnership
• Unlimited liability.
• Slower decision making.
• Possible conflict. • Profits shared.
• Membership limited
Relative Disadvantages
Partnership
Limited Companies
• Separate legal identity to owners.
• Incorporated businesses / registered companies.
• Private (Ltd’s) & Public (PLC’s).
• Shareholders elect directors to run the business. Directors appoint: Chairman, MD, Company Secretary.
Limited Companies
• One or more owner / shareholder.
• Directors – family or friends
• Generally smaller – common in UK.
Private Limited Companies
Limited Companies
Private Limited Companies
• Transfer of shares – restricted.
• Owner of family firm can enjoy greater capital, continuity and limited liability without giving up too much control.
Limited Companies
Public Limited Companies
• Two or more owners / shareholders.
• Can sell shares to general public.
• Larger than Ltd’s - greater capital - ease of share transfer.
• Opportunities for specialisation / economies of scale.
• Status. • Ltd. – protected from take-overs
(share transfer restricted).
Relative Advantages
Limited Companies
• Expensive to set up / run (particularly PLC).
• Less flexible – restricted to M of A and A of A.
• Accounts audited – costly.
Relative Disadvantages
Limited Companies
• Personal guarantee may still be required for loans.
• Ltd – shares not offered for public sale.
• PLC – lack of privacy.
Relative Disadvantages
Limited Companies
• PLC – threat of take-over.
• PLC – divorce of ownership / control.
• PLC – shareholder interest – short-term profits.
• PLC – many procedures – slower to react to change.
Relative Disadvantages
Limited Companies
Limited Companies Legal Requirements
PRIVATE PUBLIC
Must register as a limited company(at Companies House, Cardiff for UK firms):
Must submit
MEMORANDUM OF ASSOCIATIONAuthorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders.
ARTICLES OF ASSOCIATIONInternal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s)
Must register as a limited company(at Companies House, Cardiff for UK firms):
Must submit
MEMORANDUM OF ASSOCIATIONAuthorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders.
ARTICLES OF ASSOCIATIONInternal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s)
Issued a CERTIFICATE OF INCOPORATION
Can START TRADING Must produce a PROSPECTUS(history, prospects, invitation to buy shares)
Must issue SHARES to the value of at least £50,000
Must then receive a TRADING CERTIFICATEfrom Registrar of Companies before it can start trading
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