UNincorporated Business - Definition
There is no distinction between the LAW and the INDIVIDUAL OWNER and the BUSINESS ITSELF. The IDENTITY of the BUSINESS and the OWNER is the SAME. Such Businesses tend to be:
Sole Traders or Partnerships
INincorporated Business - Definition
This has a LEGAL IDENTITY that is SEPERATE from the INDIVIDUAL OWNERS. As a result, these organisations can own assets, owe money and enter into contracts in their OWN RIGHT. Such businesses include:
Private Limited Companies (LTD) and Public Limited Companies (PLC)
Unlimited and Limited Liability
Liability is the legal responsibility to pay money owed by your business
Unlimited Liability
A situation in which the OWNERS of a business are LIABLE for ALL the DEBTS that the business may incur.
Limited Liability
A situation in which the LIABILITY of the OWNERS of a business is LIMITED to the FULLY PAID-UP VALUE of the SHARE CAPITAL.
Sole Trader
Definition = A business OWNED by ONE person. The owner may operate on his or her own or may employ other people.
Features:
- Usually have little capital for expansion
- No protection offered against debts (due to unlimited liability)
- Often found in provisional of local services (e.g. you local newsagent, plumber and hairdresser are likely to be sole traders)
- Easy and cheap to set up
- Few legal formalities
- Able to respond quickly to changes in circumstances
- Owner takes ALL PROFIT --> Hence there is good motivation
- Independence
- More privacy than other legal structures, as financial details do not have to be published.
- Unlimited Liability
- Limited collateral to support applications for loans
- Limited capital for investment and expansion
- Difficulties when the owner wishes to go on holiday or is ill.
- They have limited skills, as the owner needs to be a 'jack of all trades'.
Partnership
Definition = A form of business in which TWO OR MORE people OPERATE for the common goal of making a profit.
Features:
- Partnerships usually have unlimited liability (but some partners can have limited liability in some circumstances)
- A partnership agreement sets down the rights and responsibilities of the partners and how profit will be allocated. This is called the Deed of Partnership.
- If there is no agreement, profits are shared equally among all partners.
- Can potentially have more capital than a sole trader.
- Decisions and responsibilities are shared.
- Between them, partners may have a wide range of skills and knowledge.
- Partners are able to raise greater amounts of capital than sole traders.
- The pressure on owners is reduced, as cover is available for holidays and decisions are made jointly.
- Control is shared among the partners
- Arguments are common among partners
- There is still an absolute shortage of capital - even 20 people can only raise so much!
- Partnerships have unlimited liability (unless a limited liability partnership)
Definition = A small to medium-sized business that is usually run by the family or small group of individuals who own it.
Features:
- Can keep its affairs reasonably private.
- Funded by shares that cannot be sold without the agreement of other shareholders - this means shares cannot be sold on the stock exchange.
- The share capital of private companies may be less then £50,000, although many have much higher levels of share capital.
- Generally limited in size
- Must have 'Ltd' after the company name to warn people that its owners (shareholders) have limited liability.
Advantages:
- Has limited liability and a legal identity separate from its owners.
- Has access to more capital than unincorporated businesses.
- More privacy than Public Limited Companies (plc), only required to divulge a limited amount of financial information, meaning it is subject to less pressure from outside investors.
- More flexible than a plc.
- Its shares are less attractive, as they cannot traded on the Stock Exchange and hence could be difficult to sell.
- It is less flexible if expansion needs finance, which is more difficult to raise than for a plc.
- More legal formalities than for an unincorporated business.
The stock exchange is a market where second-hand shares (i.e. shares that have already been issued by PLCs) can be bought and sold.
Public Limited Companies
Definition = A business which has limited liability; a share capital of over £50,000, at least two shareholders, two directors and a qualified company secretary, and usually a wide spread of shareholders. It has 'plc' after the company name.
Features:
- Shares can be traded on the stock exchange
- Meaning it is easier for these businesses to raise finance.
- Limited liability and the business has a separate legal identity
- Easier to raise finance as a result of its Stock Exchange listing
- Greater scope for new investment
- Can gain positive publicity as a result of trading on the Stock Exchange
- Suppliers tend to be more willing to offer credit to public limited companies
- Must publish a great deal of financial information about its performance
- Greater scrutiny of activities
- Significant administration expenses
- Founders of the firm may loose control if their shareholding falls below 51%
- A Stock Exchange listing means pressure from investors who put emphasis on short-term financial results and not the company's long-term performance
For individuals and unincorporated businesses with unlimited liability, the situation when liabilities (e.g. to pay off debt) cannot be paid in full is called BANKRUPTCY.
INSOLVENCY occurs when liabilities of a business are greater than its assets. Meaning the business cannot meet its financial obligations. This may put the business into LIQUIDATION. Liquidation is when assets are turns into cash (e.g by selling the firm or its assets in order to pay creditors).
Insolvency and liquidation are terms applied to incorporated businesses with limited liability.
Example= Woolsworth
Divorce of ownership and control
Entrepreneurs have two functions - Ownership and Control.
- Sole traders have both ownership AND control.
- Plcs have shareholders who vote for a board of directors, who in turn appoint managers to control the business. Here the two functions (ownership and control) are divorced/separated.
Ownership = Providing finance and therefore taking risks.
Control: Managing the organisation and making decisions
Why do Ltd companies become Plc Companies?
- To raise finance for further growth
What are stakeholders?
Any group of individuals with an interest in a business. This includes employees, customers, shareholders and the local community.
What is Corporate governance?
This refers to the systems and mechanisms established by a firm to protect the interests of its owners (shareholders).
Not-for-profit Organisations
- Aim to breakeven financially
- The sector includes: Voluntary and community organisations, charities, social enterprises, pressure groups, cooperatives, mutual societies and trusts
- They are non-government organisations
- They have a governing body responsible for managing their affairs
- Value-driven. They have social, environmental, community, welfare or cultural aims and objectives.
- Established for purposes other than financial gain, with any profits or surpluses being reinvested in the organisation in order to further its objectives.
- Many use volunteer staff in addition to paid employees.
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