Business Ownership

Understanding Types of Business Ownership

  • A business is any activity that provides goods or services to consumers for the purpose of generating profit.
  • The term business ownership refers to the type of structure a business is legally established as, which can influence how profits are distributed, how decisions are made, and several other aspects.
  • There are several types of business ownership including: sole traders, partnerships, limited companies and franchises.

Sole Traders

  • A sole trader is a type of business ownership where a single individual owns and runs the business.
  • This individual has unlimited liability, meaning they are personally responsible for any business debts.
  • Sole traders usually have full control of the business and keep all of the profits after tax.

Partnerships

  • A partnership involves two or more individuals jointly running a business for profit.
  • Partners share both the profits and the liability for any business debts.
  • There’s a need for trust and good communication as each partner can be held responsible for the actions of the others.

Limited Companies

  • A limited company is owned by shareholders and run by directors.
  • There are two types – private limited companies (Ltd) and public limited companies (plc).
  • Shareholders have limited liability, their personal assets are protected, they’re only responsible for the initial investment in the business.
  • Such businesses often have access to greater financial resources, but regulation and compliance can be complex and demanding.

Franchises

  • A franchise allows an individual to start their own business using the name, logo and operating methods of an already established company.
  • Franchisees pay fees or a percentage of their profits to the franchisor, but in return receive support, advertising, and often training.
  • This model has the advantage of operating under a recognised brand, but there’s less freedom in decision making than other forms of ownership.

Changes in Business Ownership

  • Over time, businesses may change ownership for various reasons such as growth, investment needs, or for the purpose of risk spreading.
  • For instance, a sole trader might choose to become a partnership or a limited company to increase resources or limit liability.
  • It’s essential to understand the implications of each business type and seek advice before making significant changes to the structure.

Implications of Business Ownership

  • Each type of business ownership has different legal and financial implications.
  • The decisions made, the profits obtained, and the risks assumed vary greatly with each structure.
  • It’s crucial for business owners to be aware of these factors when starting and running a business.