Legal Status
The first legal status is Sole Trader. A sole proprietorship, also known as the sole trader,
individual entrepreneurship or proprietorship, is a type of enterprise that is owned and run by
one person and in which there is no legal distinction between the owner and the business
entity.
Advantages of Sole Trader:
You have full control over daily and strategic decision making.
There's far less red tape and regulations than a Limited Company.
You have no staff to manage or pay.
Starting your business is quick and easy.
All financial data is kept private.
No annual accounts to prepare as sole traders add income and expenses to their tax
return.
Disadvantages of Sole Trader:
You have full personal liability for any debts.
It may be difficult to bid and accept larger contracts.
There's no staff to delegate to if you have an accident or fall ill.
It's difficult to scale a business on your own.
You can't leverage buying power due to your small size.
You have to buy-in knowledge and expertise if you don't have it yourself.
Another legal status is Partnerships. A partnership is a form of business where two or more
people share ownership, as well as the responsibility for managing the company and the
income or losses the business generates. That income is paid to partners, who then claim it
on their personal tax returns – the business is not taxed separately, as corporations are, on
its profits or losses.
Advantages of Partnerships:
two heads (or more) are better than one
your business is easy to establish and start-up costs are low
more capital is available for the business
you’ll have greater borrowing capacity
high-calibre employees can be made partners
there is opportunity for income splitting, an advantage of particular importance due to
resultant tax savings
partners’ business affairs are private
there is limited external regulation
it’s easy to change your legal structure later if circumstances change
Disadvantages of Partnerships:
the liability of the partners for the debts of the business is unlimited
each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each
partner is liable for their share of the partnership debts as well as being liable for all
the debts
there is a risk of disagreements and friction among partners and management
, each partner is an agent of the partnership and is liable for actions by other partners
if partners join or leave, you will probably have to value all the partnership assets and
this can be costly.
Another legal status is Private Limited Company. A private limited company is a type of
business entity in "private" ownership used in many jurisdictions, in contrast to "public"
ownership, with some differences from country to country. Private limited companies have a
limited number of employees which normally is 50.
Advantages of Private Limited Company:
Member's liability is restricted to the amount of shares they own. They have limited
liability
Additional capital can easily be raised by selling shares
The company can continue to trade even if one of its members dies
Shares can be bought and sold with director's approval
The private company has a separate legal existence from that of its owners. It can
own property and sue and be sued
This type of organisation has a much higher business status than a sole trader
Disadvantages of Private Limited Company:
Audited annual returns and accounts have to be made to the Registrar of
Companies. All these documents are available for public inspection
A private limited company is more expensive and time consuming to set up than a
sole trader or partnership
Professional help will be needed to set up a private limited company
There is separation of ownership and control which means that the owners no longer
make all the decisions
There are limited opportunities for economies of scale
Another legal status is Public Limited Company. A public limited company ('PLC') is a
company that is able to offer its shares to the public. They don't have to offer those shares to
the public, but they can.
Advantages of Public Limited Company:
Better access to capital – i.e. raising share capital from existing and new investors
Liquidity – shareholders are able to buy and sell their shares (if they are quoted on a
stock exchange)
Value of shares – the value of the firm is shown by the market capitalisation (based
on the share price)
The opportunity to make acquisitions more easily – e.g. by offering shares to the
shareholders of the target firm
To give a company a more prestigious profile
The first legal status is Sole Trader. A sole proprietorship, also known as the sole trader,
individual entrepreneurship or proprietorship, is a type of enterprise that is owned and run by
one person and in which there is no legal distinction between the owner and the business
entity.
Advantages of Sole Trader:
You have full control over daily and strategic decision making.
There's far less red tape and regulations than a Limited Company.
You have no staff to manage or pay.
Starting your business is quick and easy.
All financial data is kept private.
No annual accounts to prepare as sole traders add income and expenses to their tax
return.
Disadvantages of Sole Trader:
You have full personal liability for any debts.
It may be difficult to bid and accept larger contracts.
There's no staff to delegate to if you have an accident or fall ill.
It's difficult to scale a business on your own.
You can't leverage buying power due to your small size.
You have to buy-in knowledge and expertise if you don't have it yourself.
Another legal status is Partnerships. A partnership is a form of business where two or more
people share ownership, as well as the responsibility for managing the company and the
income or losses the business generates. That income is paid to partners, who then claim it
on their personal tax returns – the business is not taxed separately, as corporations are, on
its profits or losses.
Advantages of Partnerships:
two heads (or more) are better than one
your business is easy to establish and start-up costs are low
more capital is available for the business
you’ll have greater borrowing capacity
high-calibre employees can be made partners
there is opportunity for income splitting, an advantage of particular importance due to
resultant tax savings
partners’ business affairs are private
there is limited external regulation
it’s easy to change your legal structure later if circumstances change
Disadvantages of Partnerships:
the liability of the partners for the debts of the business is unlimited
each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each
partner is liable for their share of the partnership debts as well as being liable for all
the debts
there is a risk of disagreements and friction among partners and management
, each partner is an agent of the partnership and is liable for actions by other partners
if partners join or leave, you will probably have to value all the partnership assets and
this can be costly.
Another legal status is Private Limited Company. A private limited company is a type of
business entity in "private" ownership used in many jurisdictions, in contrast to "public"
ownership, with some differences from country to country. Private limited companies have a
limited number of employees which normally is 50.
Advantages of Private Limited Company:
Member's liability is restricted to the amount of shares they own. They have limited
liability
Additional capital can easily be raised by selling shares
The company can continue to trade even if one of its members dies
Shares can be bought and sold with director's approval
The private company has a separate legal existence from that of its owners. It can
own property and sue and be sued
This type of organisation has a much higher business status than a sole trader
Disadvantages of Private Limited Company:
Audited annual returns and accounts have to be made to the Registrar of
Companies. All these documents are available for public inspection
A private limited company is more expensive and time consuming to set up than a
sole trader or partnership
Professional help will be needed to set up a private limited company
There is separation of ownership and control which means that the owners no longer
make all the decisions
There are limited opportunities for economies of scale
Another legal status is Public Limited Company. A public limited company ('PLC') is a
company that is able to offer its shares to the public. They don't have to offer those shares to
the public, but they can.
Advantages of Public Limited Company:
Better access to capital – i.e. raising share capital from existing and new investors
Liquidity – shareholders are able to buy and sell their shares (if they are quoted on a
stock exchange)
Value of shares – the value of the firm is shown by the market capitalisation (based
on the share price)
The opportunity to make acquisitions more easily – e.g. by offering shares to the
shareholders of the target firm
To give a company a more prestigious profile
