1-5-4-forms-of-business

Common forms for start-up businesses

• When an entrepreneur starts a business, they will often start operating as a sole trader

• Over time, they may change the form of business to gain more funding or provide more security for the owners with limited liability

Legal forms of business

• Three of the most common forms of business at start-up are sole traders, partnerships and private limited (Ltd) companies

• Each one of these forms has various advantages and disadvantages associated with its structure

Sole trader

• A business that has a single owner (although they may still hire employees) with unlimited liability

• Advantages include:

  • They are easy and inexpensive to set up

  • The owner has complete control over the business

  • All profits belong to the owner

  • Simple tax arrangements

• Disadvantages include:

  • The sole trader is responsible for any debts the business incurs

  • Limited access to finance and capital

  • Limited skill set of the single business owner

Partnership

• Two or more people join together to form a business

  • Examples of this type of business include lawyers and accountants

• Advantages include:

  • Easy to set up and inexpensive

  • Shared responsibilities and decision-making

  • More skills and knowledge are available

  • Increased access to finance and capital

• Disadvantages include:

  • Partners have unlimited liability

  • Potential for disputes between partners

  • Profits are often shared equally, regardless of contribution

  • Difficult to transfer ownership

Private limited company

• The ownership of the business is broken down into a specified number of shares

  • These shares can be sold by the owner, usually to friends and family or to venture capitalists

  • Decision-making often rests with the person appointed to run the company, often called the managing director or CEO

• Advantages include:

  • Limited liability, meaning the owners are not personally responsible for the company’s debts

  • Access to greater finance and capital

  • Easier to transfer ownership

  • Can have a professional image and reputation

• Disadvantages include:

  • More expensive and time-consuming to set up

  • More complex legal requirements and regulations than sole traders

  • Annual financial reporting and auditing are required

  • Shareholders have little control over the company, as the founder usually imposes their agenda

Other forms of business

• Several other forms of business have also gained prominence in recent years, including franchising, social enterprises and lifestyle and online businesses

• There is a growing trend in setting up lifestyle businesses as people demand flexibility and a better work-life balance

Franchising

• Franchising is a business model in which an individual (franchisee) buys the rights to operate a business model, branding and support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees called royalties

• The franchisee operates the business under the franchisor’s established system and receives training, marketing support and ongoing assistance

  • E.g. Domino’s Pizza, KFC, Burger King

Social enterprises

• A social enterprise is a business that has the primary purpose of creating a social or environmental impact (in addition to generating profits)

• Profits are usually reinvested back into the business, used to create positive social change or address an environmental issue

• E.g. Warby Parker is an eyewear company that donates a pair of glasses to someone in need for every pair of glasses sold

Lifestyle businesses

• Lifestyle businesses are typically small, owner-operated businesses that prioritise a specific lifestyle or personal interest of the owner over profits or growth

• These businesses are often run from home or in a location that allows the owner to maintain a particular lifestyle or work–life balance

  • E.g. yoga instruction, personal training, business coaching

Online businesses

• Online businesses often have low overhead costs and can operate from anywhere with an internet connection

• These businesses are still required to have a legal structure, such as a sole trader or a private limited company

  • E.g. e-commerce stores, online courses and software as a service (SaaS) companies, such as Save My Exams

Becoming a public limited company (PLC)

• When a business is growing rapidly, it may require a significant amount of capital to fund its expansion

• To secure this funding, it may choose to transition from a private limited company (LTD) to a public limited company (PLC), thereby allowing the sale of shares on the stock market

• This is a complex process with many legal requirements and involves undergoing a stock market flotation

Benefits of becoming a public limited company

• The top three initial public offerings as of March 2023 are:

  • The Saudi Arabian oil company Saudi Aramco raised $29.4 billion in its IPO in December 2019

  • The Chinese e-commerce company Alibaba Group raised $25 billion in its IPO in 2014

  • The Japanese telecommunications company SoftBank Corp. raised $23.5 billion in its IPO in 2018