Business Ownership

BTEC Business

Investing in a Business

• Sole traders must raise all the finance to set up and run the business themselves

• Partners can all contribute to the financing of a firm

• Private limited companies can sell shares to family, friends and associates

• Public limited companies can raise finance by selling shares on the stock market

Limited Liability – What does it mean?

It all comes down to the responsibility for the debts of the business:

• A sole trader or partnership can be held responsible for all the debts of the firm

• The owners of limited companies can only be held responsible up to the value of their investment in the business

Other Sources of Finance

• Loans• Overdrafts• Profits that are fed back into the

business• Shares• Grants and donations

Ownership and Control• Owners often want to keep control of their

businesses• This leads many small firms to stay as sole

traders, even though this limits their funds• Taking on new partners or shareholders

cuts the amount of control that owners have

• If you hold the majority of shares (over 50%) you can keep some control, but not all

Legal Responsibility

• Sole traders have no legal formalities to go through, apart from registering for VAT if their turnover reaches a certain amount

• Partnerships also have no legal formalities but may choose to sign a Deed of Partnership

• Companies have to go through a series of legal formalities

Forming a Limited Company

• Limited companies must produce two documents

• Memorandum of Association and Articles of Association

• If these are acceptable, the Registrar of Companies awards a Certificate of Incorporation

• The company can then trade

Other Legal Requirements

• A limited company must also send a copy of its annual accounts to the Registrar

• It must also hold an Annual General Meeting and invite its shareholders to attend

• Becoming a Public Limited Company involves far more time and cost

• It must have a minimum of £50,000 share capital

Where the Profits go

• Limited companies use part of their profits to pay a dividend to shareholders

• They can choose not to pay a dividend but always have to pay interest on any borrowing the company has made

• Profits can be ‘retained’ and ploughed back into the company

Profits and Losses

• Any profits made (once tax has been paid) can be kept by the owners of the business

• This makes Sole Trader (and partnership) businesses very attractive

• But remember … whatever funds have been put into the business will be lost if it goes bust!

Business Ownership

The Private Sector

Business Ownership

• Sole Trader:– Owned, financed and controlled by

one individual but can employ other staff

• Common in local building firms, small shops, restaurants, butchers, etc.

Business OwnershipSole Traders: Advantages

• Easy to set up• Personal incentive –

• keep all the profits • make key decisions• high degree of control

• Flexibility• Ability to offer personal service

Business OwnershipSole Traders: Disadvantages

• Unlimited Liability• Limited access to capital• Potential for long hours• Pressure of being solely responsible• Lack of continuity – business ceases once

owner dies

Business Ownership

Partnerships:

• Owned, financed and controlled by upwards of 2 partners

• Terms of Partnership agreed through contract• Bound by the terms of the Partnership Act

1890• Common in professions – lawyers,

accountants, architects, surveyors, estate agents, vets, etc.

Business OwnershipPartnerships: Advantages

• Greater access to capital• Shared responsibility• Greater opportunity for specialisation• Easy to set up

Business OwnershipPartnerships: Disadvantages

• Unlimited Liability (However since 2001, Partnerships can apply to be Limited Partnerships)

• All partners liable for the debts of the others • Partnership dissolved on death of one partner• Potential for conflict• Decisions of one partner binding on the rest• Limited access to capital

Business Ownership

Limited Companies:– Private Limited Company (Ltd) Owned

by between 2 and 50 shareholders– Public Limited Company (PLC) Owned by

minimum of 2 but no maximum number of shareholders

– Has a separate legal identity – the company can sue and be sued

– More complex to set up– Minimum share capital of £50,000

Business OwnershipLimited Companies:Must Register with Registrar of Companies at Companies House

• Memorandum of AssociationDetails of the nature, purpose and structure of the company

• Articles of AssociationDetails of the internal rules of the company

• Certificate of Incorporation – allows the company to trade • Shareholders have limited liability – can only lose what they agreed to put into the company – no personal liability• PLCs – shares traded on Stock Exchange• LTDs – shares only bought and sold with agreement of existing shareholders

Business OwnershipLimited Companies – Issues

• Divorce between ownership and control• Potential for diseconomies of scale –

communication, decision making, etc.• Must publish accounts• PLCs – shareholders may be large institutions –

pension funds, insurance companies, etc.• PLCs - Share value subject to volatility – affects

company value• PLCs – can be large, complex, possess market

power

Business OwnershipCo-operatives:Ownership, finance and control in hands of ‘members’

•Exists for the benefit of ‘members’•Consumer co-ops – members buy goods in bulk,

sell to members, divide profits between members•Worker co-operatives – workers buy the

business and run it – decisions and profits shared by members

•Producer co-operatives – producers organise distribution and sale of products themselves

Business OwnershipFranchises:Method of business ownership backed by established ‘brand’ name

•Owner gets to run a business with less ‘risk’•Owner buys the right to use the established company’s name,

format products, logos, display units, methods, etc.•Speedy way for business to expand•Become very popular•Owner – (Franchisee) responsible for debts, pays a royalty to

owners of the brand, keeps any remaining profit•Franchisee – pays a fee for the purchase of the franchise•Common franchises – Body Shop, McDonalds, Costa Coffee,

Subway