The different types of business organisations
I am investigating the different types of business organisations that Donald could operate as. The types of business I will be investigating will be a sole trader, partnership, private limited company, and a franchise. There are certain advantages and disadvantages to each of these business organisations, which will be examined carefully and to choose the right option. Sole trader A sole trader is a business owned by one person. This person provides all of the capital invested into it. A sole trader business tends to be small in size and is the most common business ownership in the UK.
The owner has complete control of the business however you are also totally responsible for the business’ success or failure. There are many advantages to starting up a sole trader including there is a small start up cost. However, you must tell the income tax authorities and the Department of Social Security. Also, all profits are kept to yourself. This money could be saved up and used to pay tax, interest charges on loans, and VAT. A small business is also more flexible. If one kind of business activity is not profitable, the owner can quickly switch to something else.
However there are also certain disadvantages including the fact that Donald will have unlimited liability – Donald will be completely responsible for any debts the business has. To repay the debts, Donald may need to sell off his personal things e. g. His house, car etc. Also, the risk of failure is high because there is usually high competition around. He may also find it difficult to raise capital for the business because he is the only person working in the business. The firm growth will be slow because Donald will only be able to do a limited amount of work.
Finally, the business stops with the owner’s death. A cash flow plan will increase your chances of getting a loan from the bank, which will be your main source of outside finance. You will need to find a suitable location to work in. You could start at home but without planning permission from your local council you could get into trouble for making too much noise or having too many visitors. From the results given by the questionnaires, 72% of inhabitants tend to go elsewhere to shop for clothes. If Donald opens up a clothes store he may get more potential customers since people would come to his store.
Also, there is not much competition around for Donald so this will be a beneficial thing for him. In order to achieve success, Donald will need to be dedicated, hard working, adaptable and willing to take risks and to overcome problems. Partnership A partnership is like 2 or more sole traders. By law, a business can have between 2 and 20 partners. Partnerships have an equal say in making decisions and an equal share of the profits- unless they have an agreement called a ‘deed of partnership’ that says otherwise.
Partnerships are not that common in the UK but are found a lot in jobs like accounting, solicitors and doctors. There are certain advantages for this form of business organisation including there will be more owners in the business, which means more ideas, and more people to share the work. Also, there will be more owners in the business, which means that more capital can be invested into the business. This capital can be used to keep the business going and also to improve it as well as paying taxes. A partnership business is usually small so Donald will need less money to set his business up.
All of the business’ financial accounts and documents are kept private so no one outside the business will know of the business affairs. However there are also certain disadvantages one of which is that each partner is legally responsible for what all the other partners do. Also, similarly to sole traders, partnerships have unlimited liability. If there are more owners in a business there will be more disagreements too because there will be several bosses. If the partners disagree about which direction the business should go in and how much time to put in, it might lead to the business closing down.
According to law, there is a limit on the number of partners in a partnership business – only 2-20 partners are allowed. Donald will need a Deed of Partnership if he wants to set up this type of business organisation. A Deed of Partnership is a legal document that states the rules of the business. It should state who the partners are, how much money each partner has invested into the business, how profits should be shared out, how many votes each partner has in any of the meetings, the procedures for partners leaving or joining the business.
However if the partners do not get on well on certain things, then he may be putting his business at stake. Although, the more partners in a business, the more specialists, with unique skills, there are. However, if Donald opened up a sole trader business, he would have a limited amount of skills and won’t feel completely lonely. Private Limited Company (Ltd. ) A Private limited company is owned by at least 2 shareholders. Shares are sold privately to friends and family who invest money into the business.
The people who invest money into this type of business organisation receive a dividend in return. The shareholders in a business vote for the board of directors, who run the business. The advantages to setting up a Private Limited Business include the fact that shareholders have limited liability, which will mean that the shareholders will not have to put their personal possessions at stake when investing capital. The firm tends to be bigger if Donald sets up as a Ltd. compared to if he sets up as a partnership or sole trader.
The business can also employ specialists to make the best out of the product or service the business supplies to the public. Also, death or illness will not affect the business. However, there are also certain disadvantages to setting up a Private Limited Company. Shares cannot be sold or bought over the stock market since they can only be sold to friends and family members. This will mean that the company Donald sets up will gain capital slower. This type of business is also hard to set up and profits need to be shared amongst shareholders by paying dividends.
The profits will be shared according to how many shares each shareholder has so the more money they have put into a business the more they will get. To become a limited company, applicants have to submit a Memorandum of Association, which states the business’ name, address and main purpose. It also describes the liability and amount of capital invested. The internal workings of the company including the number of directors, how they are elected and what their roles are described in The Articles. This also describes how profits will be divided.
When the Memorandum of Association has been submitted the Registrar of Companies issues a Certificate of Incorporation which allows a limited company to begin trading. If Donald decides to set up this type of business then he will have limited liability. Also Donald will have himself and 1 or more companion(s) with him too. This will benefit him because many different skills from each shareholder will be used in the business since each person would be specialising on a particular area – if all the skills are put together, the business will be able to be imaginative with its style and creations.
However, a Ltd. is going to be expensive to set up. Donald will find it hard to seek money to set up this type of business organisation because he has a budget of i?? 10,000. Although, if Donald is able to find enough shareholders, amongst his family and friends, who are willing to invest into his business, Donald will obtain more profits and will be able to add these profits to the money he already has. Public Limited Company (Plc. ) A Public Limited Company is the biggest type of private business in the UK.
A public limited company first has to raise capital, through selling its shares to the public. It has to produce a prospectus, which explains how the business is run, and what it intends to do in the future. Once all this has been done, the Registrar issues a Trading Certificate, which would allow Donald’s new PLC to start trading. The main advantages of becoming a Plc. include the fact that Donald will be able to sell his shares to the public. This will benefit Donald because if the public buy his shares, it will allow him to raise more capital and gain more profits in return.
The firm will also be bigger and so will be easier to negotiate with suppliers. Similarly to Private Limited Companies, the shareholders who invest into a Private Limited Companies have limited liability and Donald is also able to employ specialists. Employing specialists will benefit Donald because it will enable the business to come up with more ideas from different people’s perspective, which Donald can take into account when buying clothing from his suppliers (e. g. A person who has fashionable skills will have a different perspective compared to an ergonomist.
This is because someone with fashionable skills will talk about how the clothes will look on people however the ergonomist will be concerned with the health and safety of the clothing rather than the looks). Similarly to a partnership and an Ltd, a shareholder’s death or illness will not affect the business working as a Plc. Also, shares can be given to workers to motivate them if they are performing particularly well. However, there are also certain disadvantages to consider. If Donald sets up as a Plc, anyone will be able to take over his firm without his permission.
The financial accounts of the business are not kept private; instead they are published on to the stock exchange so the public is able to view them. A Plc. is also expensive – it cost over i?? 50, 000 to set up this type of business organisation. A Public Limited Company has to share the profits it makes amongst the shareholders as dividend. I think that Donald would benefit from a Plc because he will be able to raise more capital for the business since he can sell his shares to the public. However, a big disadvantage is that his firm is vulnerable to be taken over by anyone off the London stock exchange.