1.4.1 Different Types of Business Organisation

This section explores the different legal structures under which a business can operate. Each structure has its own advantages and disadvantages in terms of liability, capital raising, and management.

Sole Trader

A sole trader is a business owned and run by one person. The owner is personally liable for all business debts.

Advantages

• Easy to set up and minimal legal formalities.
• Owner keeps all the profits.
• Simple to manage.

Disadvantages

• Unlimited liability – the owner is personally responsible for all business debts.
• Limited capital – raising finance can be difficult.
• Limited expertise – the owner has to do everything.
• Business continuity is affected by the owner's ability to work.

Partnership

A partnership is a business owned and run by two or more people who agree to share the profits or losses of the business. Partners typically share unlimited liability.

Types of Partnerships

• General Partnership: All partners share in the business's profits or losses and have unlimited liability.
• Limited Partnership: One or more partners have limited liability and are only liable up to the amount of their investment.

Advantages

• More capital available than a sole trader.
• Shared expertise and workload.
• Relatively easy to set up.

Disadvantages

• Unlimited liability (in general partnerships).
• Potential for disagreements between partners.
• Shared profits.

Private Limited Company

A private limited company is a company in which ownership is divided into shares. The shares are not offered to the general public. The company has limited liability, meaning the personal assets of the shareholders are protected from business debts.

Advantages

• Limited liability – shareholders are only liable up to the amount of their investment.
• Easier to raise capital than a sole trader or partnership through the sale of shares.
• Business continuity – the company continues to exist even if the shareholders change.
• More professional image.

Disadvantages

• More complex to set up and run than sole traders or partnerships.
• More legal formalities and regulations.
• Profit is taxed at a higher rate than with sole traders or partnerships.

Public Limited Company

A public limited company (PLC) is a company in which ownership is divided into shares that can be bought and sold by the general public on a stock exchange. PLCs have limited liability and can raise large amounts of capital.

Advantages

• Limited liability – shareholders are only liable up to the amount of their investment.
• Large capital can be raised through the sale of shares to the public.
• Business continuity – the company continues to exist even if the shareholders change.
• Prestige and public image.

Disadvantages

• Complex and expensive to set up and run.
• Subject to strict regulations and reporting requirements.
• Loss of control by the original owners.
• Public scrutiny of financial performance.

Business Organisation	Liability	Capital Raising	Ease of Setup
Sole Trader	Unlimited	Difficult	Easy
Partnership	Unlimited (General) / Unlimited (Limited)	Relatively Easy	Easy
Private Limited Company	Limited	Relatively Easy (Share Issues)	Moderate
Public Limited Company	Limited	Easy (Public Stock Exchange)	Complex