Legal Structure and Sources of Finance

  • Sole Trader: A legal structure in which the business is owned and managed by one person who has unlimited liability.
  • Partnership: A legal structure in which the business is owned and managed by two or more people who share unlimited liability.
  • Limited Company: An organisation which has a separate legal identity from its owners, offering limited liability and is able to sell shares to raise capital.
  • Public Limited Company (plc): A business owned by shareholders, whose shares can be bought and sold on the stock exchange.
  • Private Limited Company (Ltd): A business owned by shareholders, with shares that cannot be sold to the general public.

Sources of Finance

Internal Sources

  • Retained profit: Reinvestment of profits after tax back into the company.
  • Sale of assets: Selling business resources to raise finance.
  • Owner’s capital: Personal money invested into the business by its owner(s).

External Sources – Short Term

  • Trade credit: Purchase of goods today with an agreement to pay at a later date.
  • Overdrafts: Banks allow a business to borrow up to a certain limit as and when required.
  • Short Term Loans: Borrowed funds that must be repaid within a year.

External Sources – Long Term

  • Long Term Loans: Borrowed funds that are repayable over a longer period of time, usually for investments in fixed assets and for starting up new companies.
  • Leasing: A way of acquiring new equipment by making regular payments over an agreed period of time.
  • Venture Capitalists: Professional investors who invest large sums of money into businesses with high growth potential.
  • Grants: Non-repayable funds provided by organisations or governments, usually for specific projects.
  • Share issue (equity financing): Raising funds by selling more shares in a company.
  • Legal structure and liability: The type of liability, either unlimited (sole traders and partnerships) or limited (limited companies), may affect the willingness of investors to provide finance.
  • Ability to Issue Shares: Only limited companies are able to issue shares to raise finance.
  • Access to different types of finance: The legal structure may determine what types of finance are available to a business, for example Grants are often only available to specific types of companies.
  • Report and Regulation: Different legal structures have different reporting and regulatory requirements which may impact on finance considerations.