Forms of business
There are several different forms of business enterprise. The simplest is that of a sole trader. A sole trader is someone who starts up their own business. They are the owner and make all the decisions (although they might employ people to help get some of the work done). Many entrepreneurs and small businesses (such as window cleaners, plumbers and web designers) start off as sole traders.
The advantages of being a sole trader include:
- Decision making is quick enabling the business to be flexible and respond to changes without lots of committees to discuss things with and without lots of forms to fill in.
- The sole trader is likely to have a sense of achievement because it is his or her own business - something they have created.
- The affairs of the business are private; the firm's accounts do not have to be registered anywhere public and profits do not have to be declared to outsiders.
The disadvantages of being a sole trader include:
- It can be very demanding running your own business; the individual involved has to take all the decisions in many different areas and this can be stressful. The person concerned may be strong in one particular field such as marketing but will have to learn how to cope with making decisions in other areas such as finance as well.
- There is no distinction in law between the person who sets up the business and the business itself. This means there is unlimited liability. If there are financial problems with the business the sole trader is personally liable for all money owed. Everything the sole trader owns is potentially at stake if there are difficulties.
- The business ends when the sole trader dies or decides to stop.
An alternative form of business is that of a company. A company has a separate legal existence in law from its owners. The company can own assets in its own right; it can sue and be sued. To create a company in the UK the owners must register the business at Companies House and complete documents including the Articles of Association and the Memorandum of Association. These documents provide information about the business such as details of its owners, the company name, where the head office is based, the purpose of the business and the rules on electing company officials.
The benefits of creating a company include:
- The company has limited liability. The company is liable for all its own debts and therefore investors can only lose the funds they have invested. There is, therefore, a limit to how much they can lose. This is a vital advantage of setting up a company because it means you are more likely to attract investors because they know exactly what the downside is if it goes wrong. If there was unlimited liability you would be wary of investing in any company unless you had very tight control over the business. This is because everything you owned could be at risk. With limited liability you can invest a certain sum and let this be managed by others; obviously you will want to know what they are doing with your money but at least you know the maximum you can lose if it goes wrong and therefore you don't need to have information on absolutely every decision that is being made. With limited liability those with funds can invest them for managers to use without having to be party to every single decision. Those with funds can invest for managers to use to generate profits and returns.
- The business outlives the founders. If the original owners die or want to end their relationship with the business they can sell their shares to others and the company continues. Many companies such as WHSmith, Marks and Spencer, Cadbury have little or nothing to do with the families that originally set them up. (There are exceptions- the Mars family and the Ford family, for example, are still big shareholders of their businesses). When the founders of a company die or sell up the ownership of the company simply moves to others.
One significant disadvantage of being a company is that the accounts of a company have to be checked each year by an outside accountant (called an auditor) and then sent to Companies House, This means they are available to others to investigate and "outsiders" can see what has been earned in a given year.
In the UK there are in fact two types of company: private limited companies (these are called ltds and are in the majority by far) and public limited companies (plcs). Public limited companies can advertise their shares and so have access to far more investors. They will usually be listed on the Stock Exchange and tend to be the high profile companies such as BT, BP, Tesco, Sainsbury's and Marks and Spencer. By being able to advertise shares to the general public plcs may be able to raise millions of pounds of finance. However, because more shareholders are involved plcs are more regulated than private companies. Their accounts have to be more detailed, for example, and there are more regulations concerning what information must be made available. Also, whereas in a private company you can restrict who shares are sold to (e.g. to keep the business under the control of family members), in a public limited company there are no restrictions on the sales of shares. This means that some of the existing owners of a company can decide to sell their shares and the others cannot stop them; this can lead to a company being takeover if the majority of shareholders sell even if it is against the wishes of some of the other owners.
Plcs tend to have many millions of shares and because they are traded on the Stock Market they are being bought and sold every day in huge quantities. At any moment the price of the shares can be seen and so the overall value of the business is known. This can show whether a takeover is likely to desirable or not. You will regularly hear on the news of takeover bids being made for public limited companies; a bidder has decided the share price does not reflect the full potential value of the business and therefore it is worth trying to gain control of the business by gaining a majority of the shares. With a private company the sale of shares is far less frequent and there is no daily market for them; therefore the price is not immediately visible - if you want to buy you will need to negotiate with the owner of the share. A "sudden" takeover is therefore less likely.
There are, of course, other forms of business. For example, partnerships occur when individuals join together to start a business. This means they can share their skills and funds and benefit from each others' knowledge. However, it does mean each partner is very reliant on the others and has to trust them not to make mistakes because they will be liable for each other's actions.
Not for profit organisation also exist. These include some schools, environmental groups and sports clubs. Many of these are charities, which means they are regulated by the Charity Commission and have a special tax status but must invest their funds in agreed causes and not make a profit.
When choosing a business form the individuals concerned must consider factors such as:
- Their willingness to share control
- Their willingness to publish information about the business
- The importance of limited liability
- The scale of investment needed to set up and run the business
The decision on the right form of business may change over time. For example, if the owners of a private company want to expand the business and bring in many more investors they may turn it into a plc and "float" it on the Stock Exchange. In some cases the main owners decide they want complete control and they buy up all the shares and make the company private again. This is what happened when Malcolm Glazer bought Manchester United in 2005 and turned it from a public company to a private company.
To read about Malcolm Glazer winning control of Manchester United you can visit
