Choosing The Right Legal Structure For The Business

AS Business Studies

Aims & Objectives

Aim:• Understand the different legal structures of

businesses.Objectives:• Define sole trader, partnerships, LTDs and PLCs• Explain the different types of liability• Analyse each legal structure

Spot The Difference

Legal Structures

• Setting up a new business is simple, cheap and straight forward.

• Key is to choose a legal structure to minimise the risk of investment which is also appropriate for the business.

• Key issue is whether the entrepreneur is personally liable for the debts of the business.

Incorporated Vs Unincorporated

Incorporated• LTDs & PLCs• Creation of a Legal entity• Business is liable for debts

not the owner personally.• The business is separate to

the owner.

Unincorporated• Sole traders & partnerships• No legal entity.• Owner is liable for debts

personally.• The business is the owner!

Sole Trader• The most common type of business.• Individual owning the business on

their own.• Can employ people, but they are not

owners!• The sole trader owns all of the

business assets personally and is personally responsible for the business debts.

• A sole trader has unlimited liability.

Unlimited Liability

• Where the owners are personally liable for all debts incurred by a business.

• All sole traders and most partnerships have unlimited liability.

Advantages & Disadvantages of ‘Sole Trader’ Status – White Boards

Advantages• Quick and easy to set up.• Inexpensive to set up.• Owner has full decision

making power.• Any profit made is the

owners.• Hours of work tailored to

owners needs.• Easy to shut down.

Disadvantages• Unlimited liability.• Harder to raise finance,

often secured against personal assets.

• The business is the owner, if the owner is ill, the business suffers.

• Owner may not have expertise to make all decisions.

Partnership

• The partners between them own all the business assets and owe all of the business debts.

• Partners have unlimited liability.

Partnership

• Business owned by more than one person.• The legal partnership agreement describes

how the partnership is run:– How profits are shared– What the partners invest– What happens if a partner leaves or dies

Advantages & Disadvantages of ‘Partnership’ Status – White Boards

Advantages• Simplest way for two people

to run a business.• More expertise than just

one owner.• Partners can provide

specialist skills.• Greater potential finance –

partners each provide investment.

Disadvantages• Unlimited liability.• Poor decision making by

one partner damages the interests of the other.

• Hard to raise external finance.

• Complicated to sell or shut down.

Private Limited Companies

• The company is a legal entity in itself.

• Can own things, sue, and be sued.

• Owned by shareholders and run by directors.

• Shareholders own a share of the company, but they do not own the assets of the company.

Limited Liability

• A feature of private limited companies (LTD) and public limited companies (PLC).

• The owner can only lose what they have invested in the business.

Private Limited Companies (LTD)

• The company owns the assets and pays the debts.

• If it cannot pay its debts it becomes insolvent (closes).

• Shareholders are not personally liable for debt (limited liability).

• Private means the shares are not traded on stock exchange publicly.

Advantages or Disadvantages? of ‘Limited’ Status - Movement

• Limited liability• Can pay less tax• Greater admin costs• Banks may see the business as risky• Public disclosure of company information• Business continues to exist even when

shareholders change• Easier to raise finance through the sale of shares

Advantages & Disadvantages of ‘Limited’ Status – White Boards

Advantages• Limited liability• Can pay less tax• Business continues to exist

even when shareholders change

• Easier to raise finance through the sale of shares

Disadvantages• Greater admin costs• Banks may see the business

as risky• Public disclosure of

company information

Public Limited Companies (PLCs)

• Large businesses • Shares sold on the stock exchange and traded• Selling shares method of raising finance.• Facebook sold $1bn shares recently!

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