Business Ownership

Sole Trader
Sole traders are one-man businesses where the individual is completely responsible for every aspect of the business and is usually responsible for having started the business. A sole trader can have as many people as he or she wants working for him, assuming he can pay their wages. Setting up such a business is very easy and there are few legal formalities that have to be conformed to. The individual will have had to provide the capital for the business either from personal savings or from a loan from a bank. Sole traders usually take the form of small shops of construction companies. They are usually named after the owner of the business, for example "Oxley's Greengrocers". The owner must be a "Jack of All Trades" in that he must deal with all management tasks such as accounting, interviewing and advertising.

Advantages of sole traders are that as the person is working for himself or herself, he or she has a certain incentive to work as he or she is working for their own livelihood and will only get paid if they work hard. Decisions regarding the business can be made instantly as there is nobody that needs to be consulted this makes the business very flexible. All of the profits go straight to the business owner. In some cases a small tax rebate is offered to a sole trader which can help the business's money situation. In addition, depending on the nature of the business, only a small amount of capital is required.

Disadvantages include the fact that the owner is personally liable and may lose his house if the business fails to make money. In a similar way, if the owner of the business falls ill or even dies it is very difficult to maintain the continuity of the business and profits may be easily lost in such a period of inactivity. This is especially true where there has been a considerable amount of investment in machinery. Money can be very tight especially when all of the initial capital has come from lifetime savings and a bankloan. Bankloans can be very hard to achieve because sole traders are high risk businesses. In addition, the owner will always be working alone and will lack new ideas that could be brought on by another person. Growth will always be very slow unless the owner decides to go into partnership with somebody. Competition is always a problem for sole traders. Local 'corner shops' are often undercut by larger supermarkets because the small shops have a limited buying power.

Partnership
Partnerships can consist of between two and twenty members although there are some exceptions. These exceptions include banks, who cannot have more than ten partners and accountants and solicitors who are allowed more than twenty. The partners are equally responsible and equally liable for the business and all decisions that the business makes must be made together. Often a legal contract is drawn up called a Deed of Partnership between both of the partners. This document contains details such as each of the partners' holiday entitlement, their share of the profits and losses and their wages. Although this is not always necessary for a successful business if there is a disagreement between the partners, problems could arise if there is no formal agreement between them. Each partner puts in a agreed amount of capital. Usually this money is equal, but it does not have to be. All of the profits, unless decided otherwise in an agreement are to be shared equally between the partners. It is possible for one partner to invest in the business and receive a share of the profits but take to active part in the business. This partner is called a sleeping partner and there can never be more than one sleeping partner in a business. Usually the business is named after the partners and this is usually a clear indication that the business is a partnership. For example "William and Rogerson". All losses that the business makes are shared out between the partners as stated in the deed of partnership.

Advantages of partnerships are there that there is generally more capital available to the business and this will allow the business to expand. Different ideas can be contributed by each of the partners and the management decisions are shared. Also specialisation is important. With a sole trader, only he can work for his business. With partnerships, each of the partners can work for the good of the business in different ways more suited to them. For example one partner may be a bricklayer, and one may be an electrician in a building partnership. It is much easier for partners to take agreed holidays as the other partner(s) can look after the business whilst he is away.

Disadvantages include unlimited liability. This means that both of the partners are responsible for the running of the business and all of its debts. Disagreements may arise and could lead to the break up of the partnership. In addition, if one of the partners dies, the partnership must be dissolved. A partnership requires an accountant and a solicitor which requires a large amount of money to be paid which cannot be pumped back into the business. Decision making is slower and this makes the business marginally less flexible.

Private Limited Company
Private Limited Companies are similar to partnerships but the main difference is the presence of shareholders. There can be any number of shareholders greater than two and these shareholders are a separate entity from the business although they may take an active part in its running. The number of shares that a shareholder owns determines the amount of profit that he or she may receive. Shares can only be sold to family and friends and they cannot be sold on the stock exchange or advertised in any newspaper. Most of the company's capital comes from the share purchases although money can be borrowed from a bank however not much capital can be raised in this way as the shares can only be sold privately. The name of the company is usually appended by the letters Ltd or limited and this can also serve as a warning to other businesses as it shows that the business has limited liability. The company is completely separate from its owners - this is called a separate legal identity.

Advantages of Private Limited Companies are that there can be an unlimited amount of owners and this means that there will naturally be more money available to the business. Also the owners are more protected by the fact that the business's liability is unlimited so if the business goes into liquidation, they can only lose their shares at the most. Also, because the business has its own legal identity, if a shareholder dies or withdraws, assuming there are two or more shareholders remaining, the business can carry on regardless. The accounts only have to be published in a summarised form although they must be available if the people want to see them.

Disadvantages include the fact that all decisions must be voted on by the shareholders which can slow down decision making processes. The business must hold an AGM. The number of votes that each shareholder receives is in proportion to the number of shares that he or she owns. This problem can be avoided by one member having more than half of the shares so that his or her vote will always carry the majority. However, this can cause friction between the shareholders if they know that they do not have a 'voice' in the running of the business. This type of business is unable to sell shares to the public so the amount of capital to be received in this way is limited.
For a business to become a Private Limited Company it must go through a series of steps which allow it to be registered. The founders of the company have to file the following documents with the Registrar of Companies.

The Memorandum of Association
This contains details such as the company's name and address, the purpose of the company and the amount of money that the business starts off with. It must also contain an agreement that makes the owners buy the specified number of shares.

Articles of Association
This document deals with the day-to-day running of the business. They include the procedure for calling meetings, rules about the directors and rules about shares. This also contains rules regarding the division of profits.
After these two documents have been submitted, a private limited company needs to submit a statuary declaration which confirms to the Registrar that the business complies with the requirements of the Companies Acts. Next, assuming that everything is in order, the Registrar will issue a Certificate of Incorporation which is the birth certificate of the business. Without this, the company cannot begin to start trading as a Limited Company.

Public Limited Company
PLC's are similar to LTD's but their main difference is that the shares can be sold to the general public through newspapers and on the Stock Exchange. Once a person owns a share, he becomes a shareholder and has certain rights in the running of the business. In addition, shareholders receive the company's annual reports and accounts, they can attend, vote and speak at the company's AGM and they are allowed to elect the Board of Directors and the Chairman of the Board. As the shares do not have to be sold privately, anyone can sell a part or all of their shares to anyone who is willing to buy them.

The advantages of PLC's is that their liability is limited. This means that the most a shareholder can lose is their shares. More capital can be raised as shares can be sold to anyone who is able to buy them. They can take advantage of economies of scale. This means that larger businesses can produce more stock cheaper.

Disadvantages of PLC's mean that they may suffer diseconomies of scale which means that they may lose money because the business may become too large. It may take weeks to make a decision thus slowing down productivity whilst the decision is made. All accounts must be published. There may also be various communication problems between the management and the workforce usually this is due to magnitude of the company. Shares can be sold quickly and easily and this means that they can be bought by rival companies in the form of a take-over bid. Finally, the company's annual accounts must be published.
For a company to become public, it must go through the same stages as to become a Private Limited Company with a few extra sections before it is allowed to trade. Instead of starting to trade as soon as it is given the Certificate of Incorporation, it musty gain a further certificate of trading. This is also issued by the Registrar of Companies once the company has satisfied the Registrar that it has enough capital to trade. This means that the company will have to advertise and sell their shares.

Franchise
A Franchise is the right to sell a good or a service under the name of a larger company in return for paying a fee to that company and a share of the profits and promising to buy all of their stock from that larger company. Large businesses, such as Burger King, sell their burgers to a smaller business which then sells to the general public. The small business then does not have to worry about the production of its product, and neither does it have to worry about some of the risks usually associated with setting up a small business. In addition; companies wishing to trade under a franchise often find it much easier to obtain capital from banks because the company already has a [good] reputation and the bank is better assured that the money will be paid back. The franchiser is responsible for funding research, large scale advertising and the finding of raw materials. The franchisee owns all his/her own equipment and buys the stock from the franchiser.

The advantages of a franchise is that the franchisee is working in essence for themselves so their income is performance related. This means that they will generally work harder in order to earn more money. There is less outlay for the franchisee so it is easier for them to set up in business. The franchiser does not have to worry too much about individual shops. Whether they work well or not, the franchiser will always get the same annual fee regardless of how well the individual outlet is doing. The franchisee does not have to spend any money directly on advertising or market research.

Disadvantages mainly lie in the contract between the franchiser and the franchisee. The franchiser does not wish to be very strict with its rules and wants to allow the franchisee a certain amount of freedom; however, he does not want the main chain to fall into disrepute. Therefore, strict interviews must be carrier out before a certain person is deemed suitable to run a part of the larger business. The smaller businesses can also bring the larger business down if the staff are unfriendly and people decide to boycott the outlet. This can cause ripples throughout the business.

Government Owned
State owned companies or public sector companies are not owned by shareholders but as the name suggests, but the state. However, each privatised industry is not a part of the government, it has a separate identity. The capital of these industries comes from the state, so most of the money is already available should it be needed and does not necessarily need to be raised directly. Industries are nationalised for a number of reasons, these include defence, national monopolies and reasons relating to capital. For example, Rolls Royce was nationalised in the past because it was a necessary step in British Defence.

Advantages include the fact that initial capital does not necessarily have to be raised directly. It can be 'borrowed' from other government projects or taken from taxes and duties.

Disadvantages may include a lack of motivation as the people working for the government will not directly get a pay rise based on how hard they work. Also, the business cannot really be profit based because it is a subsidiary of the government and therefore is prevented from setting out to make money.

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