Business Structures: Sole Proprietorship, Partnership, and Companies
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Business Structures Explained
Sole Proprietorship
The simplest form of business organization is the sole proprietorship. This structure requires one person to provide the capital, control the business, keep all the profits, and accept unlimited liability. There are no special legal requirements, except that the business name must be registered if it differs from the owner's name.
It is easy to start this type of business, but it can be difficult to compete with large firms and challenging to raise money for expansion. When people open small shops, they are usually sole proprietors and may employ others.
Partnership
To form a partnership, at least two people are necessary. They contribute capital to the business and share profits in agreed proportions. Like sole proprietors, partnerships have unlimited liability, and there are no special legal requirements. Professional people, such as doctors, often form partnerships.
Private Limited Companies
A private limited company has at least two members, but usually not more than fifty, who provide the capital. It is controlled by a board of directors elected by the shareholders, with one vote per share. Profits are distributed to shareholders in proportion to their shareholdings.
A private limited company has limited liability (indicated by the letters 'Ltd'). There are several legal requirements, such as a Memorandum of Association and other documents submitted to the Registrar of Companies. Many medium-sized companies in manufacturing and retailing are of this type.
Public Limited Company
A public limited company must include the letters 'PLC' after its name.
A PLC has at least two members but no maximum. Like a private limited company, a PLC has limited liability, must have a Memorandum of Association, publish its accounts, and is subject to many legal requirements as set out in the Companies Act. The shareholders are the owners of the company and elect the Board of Directors who control it.
Shareholders cannot sell their shares back to the company but can sell them to others who wish to buy shares on the Stock Exchange. The price of a share depends on the company's profits. The portion of profit not reinvested in the company is paid out to shareholders as a dividend. It is possible for someone buying 51% of the shares to gain control of the PLC.