Choosing a Business Ownership Structure

Understanding Business Ownership Structures

A business ownership structure refers to the legal structure of an organisation. It defines and limits the legal obligations and responsibilities of the business’ parties.
This decision of selection is critical as it can hugely impact the business operations, funding options, tax responsibilities and the overall risk for owners.

Sole Traders

A sole trader or a self-employed person is an individual who runs and owns their entire business.
Being a sole trader is the simplest form of business structure with the least legal formalities, affording total control of the business to the individual.
The sole trader assumes all business risks, meaning if the business fails, the individual’s personal assets may be used to pay off any debts.
All profits of the business belong to the sole trader, but they are also personally responsible for any taxes and debts associated with the business.

Partnerships

A partnership is a type of business structure where two or more people share ownership.
Partners share both the profits and losses of the business in line with their agreed share.
Each partner personally shares responsibility for any debts and liabilities of the business.
Partnerships can be flexible to set-up but can be complex when it comes to handling disagreements or if a partner decides to leave.

Private Limited Companies (Ltd)

Private limited companies (Ltd) are legal entities separate from their owners (shareholders).
Owners are only liable for the business’ debts up to the amount they have invested (limited liability).
Shares in a private limited company cannot be offered to the general public, which means ownership typically stays within a small group.
The separate legal status and continuity of existence make it easier for an Ltd to raise finance.

Public Limited Companies (Plc)

A public limited company (Plc) is a company whose shares are available to the public for purchase on the stock exchange.
There is no minimum shareholding requirement, which means anyone can buy shares, making Plcs more open to investment.
The company exists separately from its owners. Owners are only liable for the company’s debts up to the value of shares they own.
Plcs must have at least two directors and a qualified company secretary.

Franchises

Franchises are businesses where an individual pays the franchise owner a fee to set up using a proven business model and established brand name.
The franchisee maintains some degree of control over the business but must adhere to set business methods and standards.
An advantage of a franchise is that it may help a business establish quickly with a proven model, at the risk of higher start-up costs and ongoing fees.

Choosing the Right Business Ownership Structure

Selecting the correct business ownership structure relies on various considerations, including the nature and size of the business, the level of control to be maintained, the financial considerations and acceptable levels of risk.
Each structure has different implications for profits, independence, credibility, and responsibilities towards staff, so it is crucial to weigh these factors against your business’ goals before making your decision.