Study guide: Business Ownership Structures

📋 Course Outline

1. Liability and Legal Identity
2. Sole Traders and Partnerships
3. Private and Public Companies
4. Joint Ventures
5. Social Enterprises and Co-operatives
6. Franchising
7. Changing Business Structure
8. Public Sector Organisations

📖 1. Liability and Legal Identity

🔑 Key Concepts & Definitions

• Unlimited liability: The owner is personally responsible for business debts and may lose personal possessions to repay them.
• Limited liability: An owner's financial loss is limited to the amount invested in the company, protecting personal possessions from company debts.

★ Must-know

📌 A sole trader or partnership has no separate legal identity from its owner or owners, whereas incorporation creates a separate company responsible for its own debts and liabilities.

Further detail

• Incorporation registers a business as a company, creating a separate legal entity between the company and its shareholders.

💡 Memory Hook

Unlimited liability puts personal possessions at risk; limited liability protects them.

📖 2. Sole Traders and Partnerships

🔑 Key Concepts & Definitions

• Sole trader: A business with one owner who retains control of decisions and keeps all the profits.
• Partnership: A business with more than one owner who can contribute different skills, experience and start-up capital.

★ Must-know

• Sole traders face unlimited liability, may have difficulty obtaining finance, and can find expansion difficult because lenders may consider small businesses higher risk.

Further detail

• Sole traders are easy and generally inexpensive to set up, do not have to publish financial accounts, and have no shareholders to whom they are accountable.

• A partnership's Deed of Partnership sets out partners' roles and responsibilities, their division of profits, and their liabilities for business debts.

📌 Partnerships allow owners to share workload and decision-making, but partners share profits and may face disagreements that lead to one or more partners leaving.

💡 Memory Hook

A sole trader keeps control and profits; partners share skills, workload and profits.

📖 3. Private and Public Companies

🔑 Key Concepts & Definitions

• Private limited company: An incorporated company whose shares are not publicly available on the stock exchange and whose share transfers must be agreed by existing shareholders.
• Public limited company: An incorporated company that can offer its shares to the public to raise capital.

★ Must-know

• A PLC can raise substantial investment through a public share sale, and flotation can increase its public profile and help raise its share price and valuation.

Further detail

• Both LTDs and PLCs raise capital through share sales, pay Corporation Tax on profits, and give shareholders voting rights; shareholder liability is limited to their investment.

• An LTD can raise share capital while keeping share ownership and decision-making among a select group of shareholders.

• LTDs must publish basic financial information annually, which involves costs and exposes them to greater public scrutiny.

• PLC flotation is expensive, and PLCs face extensive regulation, greater shareholder influence, takeover risk, possible loss of customer connection, and profits shared through dividends.

💡 Memory Hook

An LTD restricts share transfers; a PLC can sell shares to the public.

📖 4. Joint Ventures

🔑 Key Concepts & Definitions

• Joint venture: An agreement in which two or more businesses work together on a specific project or business activity while remaining separate companies.

★ Must-know

📌 Joint ventures can provide access to new markets, combine firms' strengths, share costs and risks, and enable faster growth, but they can also bring conflicts, cultural clashes, shared profits, and legal costs and complexity.

Further detail

• Joint-venture partners share resources such as money, skills, technology and risks.

• Jaguar-LandRover entered a joint venture with China's Chery to gain access to the Chinese car market.

📖 5. Social Enterprises and Co-operatives

🔑 Key Concepts & Definitions

• Social enterprise: A business that trades to address social problems, improve communities or the environment, and reinvests any profit in achieving its social aims.
• Co-operative: An organisation owned and controlled by its members, such as workers, consumers or producers.

📝 Essential Points

• The Big Issue, Divine Chocolate and the Eden Project are examples of social enterprises.

📌 Co-operatives use democratic governance in which each member has one vote, regardless of position.

• Co-operatives prioritise meeting member needs over maximising profit, and surplus profits may be reinvested or distributed to members.

📌 Worker co-operatives involve workers in ownership and decisions and can motivate members through shared benefits, but equal wages may deter highly skilled recruits and successful co-operatives may sell to companies.

💡 Memory Hook

Social enterprises reinvest profit in social aims; co-operatives prioritise member needs.

📖 6. Franchising

🔑 Key Concepts & Definitions

• Franchise: The right to trade under an existing business's brand and use its business model, purchased from the franchisor by the franchisee in return for a fee or royalty.

★ Must-know

• Franchisees gain a ready-made business opportunity, established brand and suppliers, tried-and-tested products, training, and potentially more favourable loans because the business has a lower risk of failure.

Further detail

• The franchisor controls:

  • the business name
  • suppliers
  • pricing
  • advertising
  • store appearance
  • products

• Franchisors can expand rapidly through franchising, with franchisees bearing much of the risk and paying annual royalties that are normally a percentage of turnover.

📌 Franchisors risk losing day-to-day control, brand damage, high support costs and diseconomies of scale, while franchisees face initial and royalty costs, limited initiative and potentially expensive compulsory suppliers.

💡 Memory Hook

The franchisor supplies the brand and controls the model; the franchisee invests and operates locally.

📖 7. Changing Business Structure

★ Must-know

• Changing from a sole trader to a partnership can provide new skills, finance, experience and shared workload and decisions, but it reduces sole control, shares profits, may slow decisions and can bring arguments or departing partners.

• Changing from a sole trader to an LTD provides limited liability, more potential capital, easier access to investors and improved continuity, but entails shared profits, consultation, slower decisions, less independence, published financial information and extra costs.

• Becoming a PLC can raise significant public investment, improve finance access and brand recognition, and support reinvestment and economies of scale, but involves flotation costs, separation of ownership and control, takeover risk, public scrutiny and possible diseconomies of scale.

Further detail

• Businesses may change their legal structure as they grow, develop or change their owners' aims.

• A PLC can delist from the stock exchange and buy back shares to regain control over decisions; Richard Branson and Virgin are given as an example.

• External events can undermine confidence in stock markets, causing a company's share valuation to fall and making it more vulnerable to takeover.

📖 8. Public Sector Organisations

📝 Essential Points

📌 Public-sector organisations may provide key services that would otherwise be unavailable and are not primarily focused on profit, but they may have weaker efficiency incentives, less competition and use tax revenue that could be spent elsewhere.

💡 Memory Hook

Public-sector provision serves needs beyond profit, but may face weaker efficiency incentives.

📊 Synthesis Tables

Ownership Structures Compared