1. Which is the most appropriate legal structure for the business?

2. Unincorporated business
No distinction in law between the individual owner & the business itself
Identity of the business & the owner is the same
Sole traders or partnerships
Unlimited liability
If assets cannot pay liabilities, individual will become bankrupt

3. Unlimited liability
A situation in which the owners of a business are liable for all the debts that the business may incur

4. Incorporated business
The business has a legal identity that is separate from the individual owners
These organisations can own assets, owe money & enter into contracts in their own right
Private Limited Companies (Ltds) & Public Limited Companies (plcs)
Limited liability
Can become insolvent if liabilities are greater than assets (will first go into liquidation)

5. Limited liability
A situation in which the liability of the owners of a business is limited to the fully paid-up value of the share capital

6. Sole trader
A business owned by one person. The person may operate on his/her own or may employ other people
Unincorporated, so unlimited liability
Heavily reliant on own personal commitment to make the business a success
Most commonly found in provision of local services, e.g. newsagents, plumbers, hairdressers

7. Partnerships
A form of business in which two or more people operate for the common goal of making a profit
Usually have unlimited liability, i.e. each partner is liable for the debts of the other partner
Partnership agreement sets out rights & responsibilities of each partner – in the absence of an agreement, profits are shared equally
More capital put into the business & stress/pressures are shared
Ability to raise finance is limited

8. Limited Partnership Possible since Limited Partnership Act of 1907
At least one partner assumes responsibility for managing & running the business & has unlimited liability
Sleeping partner – contributes finance but is not involved in the running of the business. Has limited liability

9. Limited Liability Partnership
Limited Liability Partnership Act of 2000 introduced this new form of business – LLP
Created in response to pressure from large professional partnerships concerned about unlimited liability of partners for very large legal claims
Designed for professional or trading partnerships
Partners actively involved can limit their liability for the partnership’s debts

10. Private Limited Company (Ltd)
Small to medium- sized business that is usually run by the family or the small group of individuals who own it.
Can keep affairs reasonably private
Funded by shares that cannot be sold without the agreement of other shareholders, i.e. cannot be traded on the Stock Exchange
Share capital is typically less than £50k
Ltd after company name warns of limited liability

11. Public limited company (plc)
Incorporated business with limited liability
Shares are traded on the Stock Exchange
Loss of control as becomes responsible to shareholders (shareholders are the owners)
Subjects the business to constant scrutiny by financial press
May cause the business to focus on short-term profits for shareholders & maintaining share prices in order to avoid takeover pressure – detracts from long-term decision making

12. Ordinary share capital
Ordinary shares are known as risk capital or equity capital – no promises!
If business is successful, each shareholders receives a dividend (share of profits)
Shareholder gets to vote at the Annual General Meeting
If you own 10% of company’s shares, receive 10% of profits distributed (some may be retained profit) & have 10% of the votes
No guaranteed dividend level – agreed at the AGM

13. What if the business goes wrong?
Shareholders will only have money invested returned if every debt has been paid in full
In case of liquidation, shareholder is protected by the limited liability – can only lose the paid-up value of their shares and cannot be asked to pay any more money

14. Rights issue
To fund expansion, new shares may be sold to existing shareholders
This reduces the administrative costs that are an element of issuing ordinary share capital

15. Advantages of ordinary share capital
Limited liability encourages shareholders to invest
Not necessary to pay shareholders a dividend if the business cannot afford to (unlike loans where interest MUST be paid)
If share capital is provided by business angels or a venture capitalist, also brings their expertise
Can be easier to borrow from a bank as share capital can pay for assets that be used as collateral
Permanent source of finance – money stays permanently in the business

16. Disadvantages of ordinary share capital
In profitable years, shareholders will expect good dividends & this may be more expensive than interest charged on a loan
Original aims of the business may be lost – new shareholders may not have the same values as original owners
As the business grows, the % shareholding of the original owner(s) is likely to decline
This will lead to a smaller share of the profit & even loss of control of the business

17. Ownership & Control
Sole trader – owner & manager are likely to be the same person
In plcs, shareholders vote for a board of directors who appoint managers to control & manage the business – ownership & control are separated

18. Divorce of ownership & control
Shareholders may find it difficult to access information needed to challenge or judge quality of managers’ decisions
Shareholders may have too narrow a focus on short-term finance & less understanding than management of the needs of other stakeholders

19. Stakeholders
Any group of individuals with an interest in a business. This includeds:-
Employees
Customers
Shareholders
Local community

20. Corporate governance
The systems & mechanisms established by a firm to protect the interests of its owners (shareholders)
Board of directors is elected to represent shareholder interests, determine strategy & ensure that the firm acts legally
Recommendation from government is that plcs should have more non-executive directors – independent assessors

21. Not-for-profit organisations
Known as the ‘third sector’ – neither commercial nor public
Includes voluntary & community organisations, charities, social enterprises, pressure groups,cooperatives, mutual societies & trusts

22. Common characteristics
Non-governmental organisations
Have a governing body responsible for managing their affairs
Value driven – have social, environmental, community, welfare or cultural aims & objectives
Usually established for purposes other than financial gain – profits or surpluses are reinvested into the organisation in order to further its objectives
Many use volunteer staff in addition to paid employees

23. Legal structure – determining factors
Need for finance in order to expand
Size of the business
Level & type of investment required
Need for limited liability
Degree of control desired by the original owners
Nature of the business
Level of risk involved