Forms of Business

This section explains the Types and Forms of Business covering, Sole Trader, Partnership, and Private Limited Company, Franchising, Social Enterprise, Lifestyle Businesses, Online Businesses, Lifestyle Businesses, Online Businesses and Growth to PLC and Stock Market Flotation.

Sole Trader, Partnership, and Private Limited Company

There are several forms of business ownership, each with its own advantages and disadvantages. The choice of structure depends on factors such as the level of control an entrepreneur desires, the need for capital, and the degree of personal liability involved. The main forms of business ownership are sole trader, partnership, and private limited company.

Sole Trader

A sole trader is the simplest and most common form of business ownership. In this model, the business is owned and run by a single individual who has full control over decision-making.

Advantages:

• Full control and decision-making power.
• Simple and inexpensive to set up.
• Profits belong solely to the owner.
• Low administrative burden.

Disadvantages:

• Unlimited liability: the owner is personally liable for any debts incurred by the business.
• Limited capacity to raise finance.
• Business continuity depends entirely on the owner (the business may cease to exist if the owner dies or becomes incapacitated).

Partnership

A partnership involves two or more individuals who share the responsibilities, risks, and rewards of running a business. Partnerships are governed by a partnership agreement, which outlines each partner's role, responsibility, and share of profits.

Advantages:

• Shared responsibility and workload.
• Easier to raise capital than a sole trader, as partners can contribute funds.
• Combined expertise and resources.

Disadvantages:

• Unlimited liability (except in the case of a limited partnership).
• Disagreements between partners can lead to conflict.
• Profits are shared among the partners, reducing individual income.

Private Limited Company (Ltd)

A private limited company is a business owned by shareholders, with liability limited to the amount invested in the company. It is a separate legal entity from its owners, meaning it can own property, enter contracts, and sue or be sued in its own name.

Advantages:

• Limited liability: shareholders are only liable for their investment.
• Easier to raise capital by selling shares (though shares cannot be publicly traded).
• Perceived as more credible by customers and suppliers.

Disadvantages:

• More complex and expensive to set up than a sole trader or partnership.
• Annual filing requirements, such as submitting accounts to Companies House.
• Profits are subject to corporation tax.

Franchising, Social Enterprise, Lifestyle Businesses, Online Businesses

These are alternative forms of business that entrepreneurs may choose based on their goals, values, and market opportunities.

Franchising

In a franchise, a business owner (the franchisor) allows other individuals or businesses (franchisees) to use their business model, brand, and intellectual property in exchange for an initial fee and ongoing royalties. Franchises are common in industries such as fast food, retail, and fitness.

Advantages:

• Proven business model with established brand recognition.
• Ongoing support and training from the franchisor.
• Reduced risk compared to starting an independent business.

Disadvantages:

• Initial and ongoing fees can be high.
• Limited flexibility and control, as franchisees must follow the franchisor's rules and guidelines.
• Potential for conflicts between franchisor and franchisee.

Social Enterprise

A social enterprise is a business that is primarily focused on addressing social, environmental, or community issues, rather than solely generating profit. The profits are reinvested into the business or used to support social goals.

Advantages:

• Makes a positive impact on society.
• Can attract customers who prioritise ethical and social values.
• Can receive grants or funding from government or non-profit organisations.

Disadvantages:

• Difficult to balance social objectives with financial goals.
• Can struggle with securing sufficient capital, as investors may be more interested in profit than social impact.
• Sustainability may depend on external funding or donations.

Lifestyle Businesses

A lifestyle business is a business set up with the goal of providing the owner with a comfortable living, rather than focusing on growth or expansion. Entrepreneurs in this category often seek a balanced life, and the business is designed to support their lifestyle preferences, such as flexible working hours or location independence.

Advantages:

• Flexibility and control over work-life balance.
• Lower stress levels compared to scaling a large business.
• Often requires minimal investment and can be started with little capital.

Disadvantages:

• Limited growth potential.
• Often lacks the resources and infrastructure to scale.
• Earnings may be relatively modest compared to high-growth businesses.

Online Businesses

An online business operates primarily over the internet, selling products or services through a website or app. E-commerce, digital services, and subscription models are common in the online business world.

Advantages:

• Global reach with access to customers from around the world.
• Lower operating costs compared to traditional brick-and-mortar businesses.
• Flexibility in terms of location and working hours.

Disadvantages:

• Highly competitive, with many businesses operating in the same online space.
• Need for ongoing digital marketing and optimisation to remain visible.
• Potential technical challenges, such as maintaining a secure and user-friendly website.

Growth to PLC and Stock Market Flotation

As a business grows and expands, it may reach a stage where it is ready to seek additional capital and broaden its ownership base. One way to achieve this is by becoming a Public Limited Company (PLC) and listing its shares on the stock market.

Growth to PLC

A Public Limited Company (PLC) is a business that has offered shares to the public and is listed on a stock exchange. PLCs have more regulatory requirements, as they are subject to greater scrutiny due to their public ownership. To become a PLC, a business must have a minimum share capital and comply with stock exchange listing requirements.

Advantages:

• Access to a large pool of capital from the sale of shares.
• Increased visibility and credibility due to public listing.
• Easier to acquire other businesses through the issuance of shares.

Disadvantages:

• Increased regulatory requirements and reporting obligations.
• Loss of control, as the original owners must share decision-making with external shareholders.
• High costs associated with going public, including fees for legal advice, accountants, and stock market listing.

Stock Market Flotation (Initial Public Offering - IPO)

An Initial Public Offering (IPO) is the process through which a private company becomes a public one by offering its shares to the public for the first time. This is often a crucial step in a company’s growth journey, as it provides access to large amounts of capital, which can be used for expansion, paying off debt, or funding new projects.

Advantages:

• Significant capital can be raised through the sale of shares.
• The company becomes more widely recognised and gains public confidence.
• Shares can be traded on the stock market, providing liquidity for existing shareholders.

Disadvantages:

• The company must disclose detailed financial information to the public, which may expose it to increased scrutiny.
• Potential loss of control for the original owners or founders.
• The process of flotation can be expensive and time-consuming.

Conclusion

The choice of business form depends on a variety of factors, including the entrepreneur's goals, the desired level of control, the need for capital, and the type of business environment. Forms of business ownership such as sole traders, partnerships, and private limited companies offer different levels of responsibility, risk, and potential for growth. Meanwhile, franchising, social enterprises, lifestyle businesses, and online businesses represent alternative ways of organising and operating a business. As a business grows, it may transition to a Public Limited Company (PLC) and seek funding through the stock market flotation process, allowing it to expand and raise capital more effectively. Each business form presents distinct opportunities and challenges, and the decision should align with the long-term vision and strategy of the entrepreneur.