Business Structures: Sole Trader, Partnership, Limited Company, and Franchising

Business Structures

Sole Traders

A sole trader is any business that is owned and controlled by one person.

Advantages of Sole Trader

• It is easy to set up as no formal legal paperwork is required.
• Generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost.
• As the only owner, the entrepreneur can make decisions without consulting anyone else.

Disadvantages of Sole Trader

• The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts.
• Sole traders often work long hours. They may find it difficult to take holidays or time off if they are ill.
• They face unlimited liability if the business fails.

Partnerships

Partnerships are businesses owned by two or more people.

Dental surgeries are often partnerships.

Doctors, dentists, and solicitors are typical examples of professionals who may go into partnership together and can benefit from shared expertise. One advantage of a partnership is that there is someone to consult on business decisions.

The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another.

Limited Companies

These types of company are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into equal parts called shares.

The shareholders have limited liability, which is the major advantage of this type of business legal structure. Plc shares are traded on the Stock Exchange.

Types of Limited Companies

• A private limited company (ltd) is often a small business such as an independent retailer in a market town. Shares do not trade on the stock exchange.
• A public limited company (plc) is usually a large, well-known business. This could be a manufacturer or a chain of retailers with branches in most city centers. Shares trade on the stock exchange.

Franchising

An entrepreneur can opt to set up a new independent business and try to win customers. An alternative is to buy into an existing business and acquire the right to use an existing business idea. This is called franchising.

A franchise is a joint venture between:

• A franchisee, who buys the right from a franchisor to copy a business format.
• And a franchisor, who sells the right to use a business idea in a particular location.