3.1.2 Understanding different business forms
Private sector businesses
Businesses in the private sector fall into two categories, corporate and non-
corporate
Corporate businesses
Have legal identity that is separate from that of their owners
Limited liability, this is important for owners as only what they invested is risked
Two methods in which liability of shareholders can be limited:
By shares
Shareholders liability is limited to the value of the shares that they have purchased,
there can be no further call on shareholder’s wealth
By guarantee
Each member’s liability is restricted to the amount they agree to pay in the event of
the business being wound up
Corporate
1. Ltd
Advantages
Shareholders benefit from limited liability
Companies have access to greater amounts of capital
Ltd are only required to divulge a limited amount of financial info
Companies have a separate legal identity
Disadvantages
Ltd companies cannot sell shares on stock ex
Requiring permission to sell shares limits potential for flexibility and growth
Ltd companies have to conform to a number of expensive administrative
formalities
2. plc
Advantages
plc can gain position publicity as a result of trading on stock ex
stock ex quotation offers access to large amounts of capital
stock ex rules are strict and this encourages investors to part with their money
(trust)
suppliers will be more willing to offer credit to plc’s
Disadvantages
stock exchange listing means emphasis is placed on short-term financial results, not
long-term performance
plc are required to publish a great deal of financial info
trading as a plc can result in administrative expenses
Non-corporate businesses
1. Sole traders
Advantages
Simple and cheap to establish with few legal formalities
The owner receives all the profits
Able to respond quickly to changes in the market
Confidentiality is maintained as financial details do not have to be published
Private sector businesses
Businesses in the private sector fall into two categories, corporate and non-
corporate
Corporate businesses
Have legal identity that is separate from that of their owners
Limited liability, this is important for owners as only what they invested is risked
Two methods in which liability of shareholders can be limited:
By shares
Shareholders liability is limited to the value of the shares that they have purchased,
there can be no further call on shareholder’s wealth
By guarantee
Each member’s liability is restricted to the amount they agree to pay in the event of
the business being wound up
Corporate
1. Ltd
Advantages
Shareholders benefit from limited liability
Companies have access to greater amounts of capital
Ltd are only required to divulge a limited amount of financial info
Companies have a separate legal identity
Disadvantages
Ltd companies cannot sell shares on stock ex
Requiring permission to sell shares limits potential for flexibility and growth
Ltd companies have to conform to a number of expensive administrative
formalities
2. plc
Advantages
plc can gain position publicity as a result of trading on stock ex
stock ex quotation offers access to large amounts of capital
stock ex rules are strict and this encourages investors to part with their money
(trust)
suppliers will be more willing to offer credit to plc’s
Disadvantages
stock exchange listing means emphasis is placed on short-term financial results, not
long-term performance
plc are required to publish a great deal of financial info
trading as a plc can result in administrative expenses
Non-corporate businesses
1. Sole traders
Advantages
Simple and cheap to establish with few legal formalities
The owner receives all the profits
Able to respond quickly to changes in the market
Confidentiality is maintained as financial details do not have to be published
