Sole trader

Sole Trader

Type of Business

This type of business is sometimes known as a sole proprietor. These are the most widely used business structure in the common market, there normally found in the economic areas of activity. Which include the manufacturing sector, the retail industry and the service sector. These businesses mainly work alone, but some companies decide to employ people which they can do the work that they don’t want to do.

The features of a sole trader

The features of a sole trader in business is that they have to pay income tax on their net profit, if the net profit is over a specified threshold the owner must pay the VAT that over that specific amount which is currently residing on 17.5% and has been the same since 1991. Although the amount of VAT that has to be paid is going to be decrease shortly to 15% due to the economic downturn. They are also responsible for paying their own class 2 National Insurance Contributions (NIC) which currently stands at £2.40, but if your company profit is over the standard margin of £5,715 you will be expected to pay an additional class of contribution which is class 4 NIC. For tax purposes a complete profit and loss account and also an accompanying balance sheet should be submitted to the HMRC, but a simple income and expenditure statement is sometimes accepted. Also the sole trader should keep a detailed record of all the financial transactions that occur with-in the tax year.

The owner is solely responsible for covering all the cost that the company incurs from buying materials and stock also he/she has to absorb all the losses that the company may come into play throughout the lifetime of the business. The business becomes obsolete if the owner decides to sell the business whether is for a loss or a profit of the initial start up cost, if the owner dies or becomes unable to work due to ill health. And finally if the owner ceases operations the business will be no more.

Sources of finance

One source of finance that a sole trader has is his own personal investment, but if he requires more than what he can comfortably afford, there is several other options which are open to him. One of them options would be going to a financial institution and asking for a business loan. With-in the process it would involve him giving the institution a detailed business plan passing all the relevant credit checks and also making a good impression to the staff member that is assigned to his account. There is also the option of asking family and friends to either loan you the money or invest in your business idea. There are a few draw backs from this kind of funding, one of them being that the family member that has loaned you the money may ask for a return on there initial investment and or part ownership in your business venture without putting in work. A couple of advantages of this kind of funding are that you wont have to pass any credit checks and it will be easier to impress them when it comes down to you pitching them with your idea.

Advantages of Being a Sole Trader

The advantages of being a sole trader are that it takes only a little initial start up capital, to get the business off the ground. Another advantage is that if your idea is not solid enough to take -off then you only have to worry about your own livelihood and not also about the ones of your employees. For a sole trader the process of setting up your business is rather simple, the first step is to register with the HMRC as self employed. There are a few exceptions and some special rules for certain industries, like the construction industry. Another advantage is one where you can keep all the profit for yourself so you see the benefit of all the long hours that you work, and if you need to expand your business and you make enough money in your profit margin you will be able to write off the money you invest back into the company as a tax exemption so you wont have to pay tax on the amount that you invest. All the decision that effect your business wont take as long as all the other types of ownership solely because the decision for the changes that your trying to implement don’t have to be put to other people for their approval, so this speeds up the process considerably. Also the main advantage to being a sole trader is your in charge, which in the long run is good because you won’t have to conform to anyone else’s expectations of how the business should run and what improvements would make the business run smoothly.

Disadvantages of being a sole trader

The disadvantages that are involved with being a sole trader are, some may say very harsh and may put some people off setting up a small business. I am now going to outline a few of the main disadvantages that hinder people when starting up a small business. The first and foremost one is the unlimited liability that is attached to sole trader ownership. It is the worst possible disadvantage because the owner will always have it hanging over his head, if the company starts to make a loss, he/she will have to come up with the extra money to cover it and if it continues they will have to start selling personal possessions to pay the creditors. Also there is the disadvantage of small business start up costs which limits the amount of capital that is available for expansion which in the specific market that the sole trader has set up his business in. For example if he is to expand he will need to be competitive with the facilities that he can offer to future employees, which would include comprehensive training, also they will have to implement a development scheme which could be used to make the service that the company is providing faster and more efficient methods for completing the given task. This will also include a research facility to look at the other ways of doing the specific task and make a choice to see which one fits the purpose. Another disadvantage is that the sole trader can’t enjoy the same economies of scale as much as larger firms; because they can’t afford to buy a massive amounts of stock. This is because they don’t have the spare capital to tie up in stocks of specific parts, and also they won’t be able to buy in bulk because they won’t know if they will need to use that many of the certain product. One more disadvantage is that they can’t share the responsibility of any mistakes that happens through-out the lifetime of the business.

Conclusion for sole traders

I am going to conclude now all the information that I have gathered for the ownership type of sole trader. I have weighed up all the pro’s and con’s I can tell you that if you’re looking for a small business with limited room for expansion to become a market leading competitor this is the ownership type for you. On the other hand if you’re going to be looking to expand its probably best if you look at the other types of ownership, because they are filled with opportunities to expand and be competitive in the specific market.

Similarities and difference between a sole trader and a partnership

Being a sole trader has most of the characteristics that being in a partnership has, the most important one is the unlimited liability, even though it’s not exactly the same. The only difference is that being a sole trader the liability is all yours and whatever happens to the company is totally your responsibility. Whereas within a partnership the responsibility is shared equally among all the partners, so it might not have the same affect if the business goes into liquidation. This is because the amount of start up capital will generally be less because there is more people to invest in the business initially.

Another similarity of the two is one where the business isn’t a legal entity; this is because it doesn’t need to register with Companies house and it not possible to sue or to be sued.

One more similarity is that both ownership types have to pay income tax, national insurance contributions and Value added tax (VAT) if the profit is over the prescribed allowance.

One difference is that there is only one person in a sole trader ownership and there can be two-twenty in a partnership.

Another difference is the fact that in a partnership a broader range of knowledge is readily available through the different partners that are involved. Whereas a sole trader has to be a “jack of all trades” as it’s known, so that the business stays afloat and doesn’t end up losing the owner money.

The final difference between these different ownership types is that the profit of a sole trader is his to keep, and within a partnership the profit has to be shared equally between all the current parties involved.

Partnership

Type of business

This type of ownership is usually undertaken when two or more people come together with the same idea, but don’t have the skills or the financial support to carry out the business plan on their own. They also may need extra managerial skills which they don’t have and they will be able to pool all their experience and come up with specific roles for each partner in the strengths that they bring to the business. For example, an accountant could look after all the businesses financial commitments whilst a more managerial orientated person could look after all the firm’s employees.

Features of a partnership

The features of the business are quite similar to the sole trader as it still is not classed as a big firm. Partnerships can have from two-twenty partners which is beneficial for quite a few reasons and unbeneficial on the other hand. The beneficial reasons for being in a partnership are that people can join together and cover every aspect of the business with the best people to do the job, so the business is as strong as possible so it has more chance of surviving in the competitive market. Also you may have an accountant or someone with a financial background, he could manage the businesses finances and draw up all the relevant profit and loss accounts which outline the amount of profit or if the company is making a loss. Also a partnership will need to make a balance sheet which brings together all the business transactions throughout the year to see if they add up with the profit and loss account, both these documents are required to satisfy the HMRC and other tax office branches. The current threshold for a partnership is around £67,000 before you have to register with the HMRC. So when your company breaks this threshold you would pay 17.5% of every pound that you went over by. For example if you earned £77,000 in the year it would be £10,000 over the threshold, and you would have to pay 17.5% of that £10,000 to the VAT man. The partners are all liable for the debts that the company has built up, if the debt isn’t paid and it goes further, the credit company can choose to sue quite a few different combinations of partners. They can sue just one individual or a couple but when one or more partners are sued the rest of the partnership has to take on the debt. Every single partner that has a share in the company can make and agree legal and binding contracts without first notifying any of the other owners, this could be for a range various things including simply taking on another client or changing something to do with suppliers. So with this little feature you will always have to have the upmost trust for your fellow partners. The whole business must be dissolved if one or more of the partners become unable to work due to ill health or when one passes away. A partnership has no legal status compared to limited company, a partnership is simply a vehicle in which two or more self employed people become part of a simple business structure.

Sources of finance

The sources of finance that are available to partnerships when they are needing extra capital or start up funds are, the amount of spare capital that the individuals that are entering into the partnership. They can find capital in various places they can just use money they have saved over a period of time, or money left over from a previous business venture that they either sold to make way for the new idea or sold for a profit. They could also drum up some capital from acquiring a few different types of loan; the first type of loan that is there for a start up of a partnership is personal bank loan which is normally secured on one of the applicants personal possessions. And the other is a business loan which is secured on the good faith of the business that is getting purchased, and if the applicant has any collateral in the form property, other businesses and personal possessions. Some banks are more unwilling to lend to this type of ownership because the risk base is spread between the amount of owners. People can also apply with some specific government agencies which are there to help people when they are short of funds, some of these agencies that are set up by the government include the likes of The Princes Trust, business link these sources normally have a limit to what they can afford to give to specific people. There are also age restrictions and various other regulations which need to be satisfied before the funds will be released. As a last resort the parties involved in the partnership could go to family and friends to get the funds required together, these come to be quite an advantageous situation when the party doesn’t have the correct amount of creditworthiness or no other collateral that is able to be borrowed against.

Advantages of a partnership

Partnerships can have from two-twenty partners which is beneficial for quite a few reasons and unbeneficial on the other hand. The beneficial reasons for being in a partnership are that they are cheap and easy to set up, with minimal start up costs the more people that enter into the partnership the cheaper it becomes for everyone involved in the venture. All the initial start up cost are shared among the partners, which makes it very beneficial to make a partnership. The type of cost that are involved in becoming a partnership are, brought around by the way of premises to operate the business from and depending on the nature of the business stock holding facilities. Also they may need to invest in equipment and computers. People can join together and cover every aspect of the business with the best people to do the job, so the business is as strong as possible so it has more chance of surviving in the competitive market. Also you may have an accountant or someone with a financial background, he could manage the businesses finances and draw up all the relevant profit and loss accounts which outline the amount of profit or if the company is making a loss. With more than just one person the knowledge base is a lot wider so every eventuality has more chance of being covered by the correct and most experienced person, these increase the prospects of the business. Another advantage of a partnership is shared responsibility which in a partnership means that each partner has more time in which they can devote to their specialised job with-in the company, for instance the owner that is involved with the company’s finances will mainly only have to do them and small amount of other stuff which was stated when the business was set up. Also being in a partnership means that the company doesn’t have to have an external audit of all the financial documentation, the only financial information that is required to be released is anything to do with income tax and VAT. This provides the company with a little bit of privacy saying they don’t have to publish their whole financial report. Another advantage would be that the risk that is involved within the business is split between all partners. This is the same for all losses accumulated through-out the life of the business. Also on the competition side of the advantages is the one where another company which has the same status isn’t allowed to take over the company. Also the more people that you have in partnership gives you a lot more profitable idea’s when things aren’t going to well or they are trying to make some extra profit to expand the business. On a day to day basis the continuity of the business can be kept at a very high standard, due to the fact that if one or two partners are unable to work for any reason the roles could be overtook so that the business isn’t weak in any areas at any one time.

Disadvantages of a partnership

Along with the advantages of starting up a partnership there are also a few disadvantages that are worth looking at. Partnerships have the same kind of liability as sole traders; it’s the worst kind of liability because all of the owners have the chance of losing some or all of their personal possessions depending on the amount of debt that the company has gained over the period of time in question. Along with the advantage of continuity there is also the disadvantage, if anyone of the owners dies, becomes too ill to carry on with his/her duties or is declared bankrupt or if they resign the whole company will go into insolvency. Owners in a partnership can make individual decisions which affect all the owners of the business which is a disadvantage because; if one person makes a decision and the other partners don’t agree they are still legally bound by that contract. Another disadvantage is that the capital base with the whole company is relatively small and in turn this hampers the rate of expansion the company has when the time comes. This is due to the amount of start up capital the company as a whole used because the amount of money that is in the business isn’t enough to get the specific amount of finance required to expand the company to become more competitive in the particular market.

With having more people involved in the decision making process it starts to become difficult to make decisions quickly, also disputes may occur among the respective owners and in some extreme cases of this companies have disbanded due to people not taking on board other people views. Also all the profits that the company makes has to be shared equally among the owners of the company. And the final disadvantage is one of job satisfaction, if you’re not the only boss it takes away the satisfaction that you receive from doing something well because everybody in the partnership will want to be claiming some of the credit.

Conclusion of partnership

I’m going to conclude this section of the types of ownership by saying that partnerships are good for several reasons, one being that the company as a whole has the most chance of surviving because you can make sure that all the various different areas are covered by the correct and most qualified person. And the worst disadvantage is that every partner in the business can still lose everything by the way of the unlimited liability ruling.

Similarities and differences between a partnership and a PLC

The first and for most on the similarities of the ownership types, is that the continuity of the business is unaffected by one of the owners, there is also a difference between the two types of continuity. In a partnership it’s the owners that effect the continuity and in a PLC it’s the shareholders, but it’s still unaffected by their personal circumstances.

One of the main differences between a partnership and Private limited company is that the partnership has unlimited liability and the PLC has limited liability.

Another of the major differences is that in the terms of a PLC the business its self is a legal entity, whereas a partnership isn’t its solely on the owner.

There is also the difference in business structure between ownerships; this is because in a PLC it’s required to complying with more legislation and tax requirements.

Private Limited Companies

Type of Business

The business structure of this specific type is different to sole trader and partnership because the ownership and control are separated. The only hold back is that they have to be approved for sale by existing shareholders. The ownership is down to the shareholders, these shareholders are then to appoint a suitable director one of his jobs is to do an annual report. Thos is generally presented at the annual general meeting (AGM). This is about the performance of the managers that are running the business.

Features of a Private Limited Company

The access to funding is generally less restricted when it comes to a private limited company because there are lots of different avenues that can be explored to raise extra capital, which is needed either to cover existing debts or expand the business to become more competitive in the specific market. With a PLC the liability changes from unlimited to limited unlike a sole trader and partnership, limited liability means that the shareholders are only liable for the amount of money that they invest for example if they buy 1000 share’s for £2 each they amount of investment that they will be accountable for is £2000. So the investor isn’t to worry about the debts and obligations of the company that they are investing in. The shares for a PLC can’t be sold to the general public so it may be hard for investors to get the money back. The members or shareholders are the main and only owners of the business, this occurs because the shares are sold to raise capital for various things that business needs, for example to pay existing debts or expand the business. When a company becomes a PLC it also becomes a separate legal entity which means that the company name can sue and be sued and the owners personally don’t get sued. It also means that the company name its self can own something for example, if the owner buys some machinery or equipment it is owned by the company not the individual. The continuity of the business is free from the personal circumstances of the shareholders/ members. The shares that the company put up for sale aren’t allowed to be sold on the stock exchange.

Sources of Finances For a Private Limited Company

In this business type the main type of start up and expandable finances come in the way selling shares. There are some restriction placed over the selling of shares with-in a PLC, These restrictions sometimes don’t help with the financial commitments that are required for the business to grow in the desired way. These restrictions include: – the shares not being allowed to be sold on the stock exchange, this is a bad point as the amount of people that are willing and able to buy shares is greatly decreased due to them not being available to the general public. The types of shareholders mainly consist of family members which will have a limited amount of spare money to buy shares. Existing business partners this can be good for the existing partners because they will have a larger share of the company and on the flip side of this, it means the partner must come up the money to buy the shares. The other group of people that shares can be sold to are employees. The shares can only be sold to a different person if the rest of the shareholders agree to the sale, this is good because the shareholders decide who the shares are sold to and if done correctly they can choose the people they feel that can bring the most to the business. The shares that are up for sale must be offered to the existing shareholders first before they go up for general sale, this is so the shares are kept within the company and not many outsiders can muscle their way into the company.

Advantages of a Private Limited Company

The advantages that surround a P L C are that the owner benefits from limited liability, this helps the owner to make sure his personal possessions aren’t at risk if the company goes in administration or liquidation. Limited liability is also a good thing for the shareholders as they won’t lose anymore than the initial capital they invested. Within the advantages of a PLC comes the fact that the owner/ owners keep control of the business which is paramount and it means that the owner can choose the shareholders that he thinks will give the business the up most respect and help with the expansion of the business when the time comes. The business is declared as its very own legal entity, which means that it is not solely surviving on the personal circumstances of the shareholders. This is a good advantage because the company could still keep on going if anything happened to the shareholders, but the new shareholders would have to find the finances to take over the shares that will be on offer from the decline of the business. Another advantage is that all the financial information only has to be summarised, and not the entire document. This is to include the trading account document, the profit and loss account, and the end of year balance sheet. This gives the finances more measure of privacy.

Disadvantages of a Private Limited Company

The disadvantages that surround having a private limited company are that shares can’t be sold on the open market, so it makes it hard for investors to get their money back when they are ready to sell their shares and try and make some profit. If someone wants to sell up for a profit they would probably have a hard time finding someone with the spare finances to buy them out. Another disadvantage is the fact that because the general public cant by shares it is really hard to raise enough capital for a major expansion. This is because with the current economic downturn the amount of spare finance that a company has, has plummeted in recent years. There is also a cap on the amount of funds that they can raise from people they know and also family, the last disadvantage of a private limited company is that if a founding member doesn’t have the majority of the shares he may lose control over the company to the person who owns the most shares out of all the shareholders.

Similarities and difference between a Private Limited Company and a Public limited company

One of the similarities is that both businesses have the advantage of separate ownership and control.

Both sets of shareholders benefit from limited liability which makes sure they don’t lose more than the money the initially invest.

The owners of the business for both ownership types are the shareholders. They in turn appoint all the required people for the board.

Access to funding is normally unrestricted which makes expansion possible.

The main difference between the two ownership types is that the private limited company’s shares cannot be sold to the general public. Whereas the public limited company can trade share’s in various places including the stock exchange here and all over the globe.

Another difference is that in the public limited company there must be a full audit carried out, and the results published for the public and everyone to see. They must also pay for an auditor to come in a check over all the accounts to make sure they are all correct. In a private limited company they must do there audit internally and they are required by law only to publish the summarised version of the whole account.

Public limited Company

Type of Business

As with private limited companies the ownership of the public limited company is separated from its owner and becomes it own legal entity.

Ownership is also in the hands of the shareholders who appoint a board of directors

This type of ownership has its shares quoted on the stock exchange; they are available for general sale to the public and anyone who wants to invest in the particular company.

Features of a Public limited company

The funding that is available to Public Limited Companies (PLC) is generally unrestricted; by this it means there are many different sources of finance available for growth and to cover various different expenditures that the company may incur. All the people that buy shares in the company jointly own the business.

One of the main features of this type of ownership is the limited liability for each of the separate shareholders meaning that the shareholder is only liable for the initial investment when they buy the shares in the company. PLC’s have a totally separate legal existence from the owner; this is known as a separate legal entity. This means that the company can sue people, other companies, and can also be sued by the same people and companies. The continuity of the business is unaffected by the personal circumstances of the owners and the shareholders. The shares of the business can be sold to the general public, through the use of the stock exchange.

Sources of Finance for Public Limited Companies

One of the main sources of finance is from the sale of shares; this is due to the fact that shares in the company are made widely available through the sale of them on the stock exchange. The main types of shareholders in this ownership type are; insurance companies, pension funds, the general public and trade unions. This is always a good source of finance because; it’s what is known as an external source. This means it comes from outside the business, not from either the owner or existing share holders. In some cases there is the scope for the owner to inject his own money through the internal method; this would normally be in the way of using profit from the business. Banks are more likely to lend larger sums of money to this type of ownership because; they have more potential assets to cover the amount of the loan. They will also check the company profit and loss accounts and make a prediction for over the foreseeable future and take the outcome into consideration.

Advantages of a Public Limited Company

One of the main advantages of a Private Limited Company is that every single shareholder has limited liability which is good because the investor will only lose the investment that he/she put into the business.

Another of the advantages that are usually coupled with a PLC is, that the continuity of the business is unaffected by the events and personal circumstances of the individual shareholders. Another major advantage to the public limited company is that they can raise large amounts of disposable capital, which they could use for expanding the business, buying much needed equipment, and also for paying off debts that the company has amassed over a period of time.

One of the other advantages that are on the side of a Public Limited company, is the possibility of being able to open specialised departments to handle the various different parts of the customer’s needs. For example a help line, product specific departments, and a support centre.

Just like in a private limited company the business is known a separate legal entity which means the business is sued and can sue but the owner is unaffected by the legal action taken against it.

Another benefit surrounding a Private limited company is that more people will be looking to invest in the company because the stocks are organised by the stock broker who works for the London stock exchange.

Large amounts of capital can be arranged in one organisation, this means that one company will be able to get together the funds required to do whatever the company wants to do.

Larger PLC’s have the opportunity to compete in the specific market at a worldwide level and have the chance to be a market leader in their chosen field. They are also able to pass on discounts to consumers through the economies of scale which means that the company can buy large quantities of stock for a cheaper price and pass the savings that they receive to the consumer making them able to compete at a very high level.

Disadvantages of a Public Limited Company

There are quite a few legal formalities when setting up a Private Limited Company.

When setting up a Public Limited company you are usually required to have the use of a solicitor who can do all the relevant paperwork, this is a disadvantage because solicitors charge quite a large sum of money for their services.

Another disadvantage of a Public Limited Company is that the activities of the company are closely monitored and governed by the company law and the running of the business is subject to legal constraints.

A main disadvantage of a Public Limited Company is that the accounts and cash flow charts are made public so that in turn makes for less privacy.

The company has to pay for an external auditor to come in from outside and check the accounts for continuity with the published accounts this is an expense that could be done without because they can be very costly.

The company has another disadvantage whereby it’s accountable to its shareholders and the creditors.

Divorce from ownership can lead to a conflict of interest from the shareholders, because they may be looking for a quick and return on their investment.

Another disadvantage is that if it becomes too large , it may lose efficiency this in turn makes the company become bogged down in red tape.

With the stocks being so readily available on the stack exchange the Public Limited Company is always got to be wary of other companies buying large blocks of shares, and taking over control.

The last disadvantage of a Public Limited Company is that the small time shareholder has not much say in the running of the company because they wouldn’t have as many shares in which to vote for changes.

Conclusion of a Public Limited Company

Public Limited Companies are generally big firms, which have a massive employee base, some examples of Public Limited Companies are:- National Westminster bank Plc, Colgate Plc.

Co-operatives

Type of Business

A cooperative is a form of business organisation which is owned and democratically controlled by the share holders/members. A co-operative is also known as ‘mutual organisation’ or a ‘Co-Op’.

The business is run for the mutual benefit of the shareholders/members; this is the main feature of this ownership type and is why the business was set up in the first place.

The organisation is established so its shareholders/members may purchase goods or use services of the organisation, rather than being established for the purpose of earning profits for investors.

Features of a Cooperative

The key feature of a co-operative organisation is that their main purpose is mutual support for the members or the promotion of a specific purpose or social benefit.

Another feature of this type of ownership is one where, they ensure there is a continuous active membership, this means that the shareholders/ members are able to make changes to the amount of shares they have to the ability to surrender any amount of their shares at the time to suit the shareholder.

The profits of a cooperative company are always returned to the shareholders in the way of extra shares if available, or extra money off the goods and services that the company provide.

Advantages of a Cooperative

Cooperatives have many of the same advantages of the other owner ownership types including such as limited liability of owners and a perpetual existence which means the company doesn’t have set expiration date.

No one investor, or number of investors, can dominate the decision-making process simply because they have made a large investment in the business. This is particularly attractive to members who are smaller than other members of the cooperative, because they have the same amount of voice as all the other shareholders/members.

Cooperatives are structured on a democratic theory of one member, one vote. Another advantage to opening a cooperative, Whereas investor-owned companies are typically exposed to double taxation because dividends to shareholders are distributed out of after-tax company profit, cooperatives are allowed to deduct patronage refunds to members out of before-tax income. Thus, income may only be taxed at the individual member level rather than at both the cooperative and member level. In other words, a cooperative does not pay tax on income that it distributes as shareholder dividends.