the type of business ownership refers to the legal structure that the business chooses
to operate with, it is a crucial element of setting up a business and one which
entrepreneurs must think very carefully about.. They can choose to run their
business in a number of ways including as a sole trader in a partnership or
even as a private limited company amongst other options. However each of
these will influence the business throughout its existence such as the
owners financial liability if the business runs into financial difficulty
how the business pays tax and the way management decisions are made about the
business. This video will introduce the common options a business owner has
alongside some benefits and drawbacks of each with support in examples
. Firstly we're going to start with sole traders, a sole trader is often referred
to a self-employed or sole proprietor and describes any business that is owned
and controlled by one person. In 2019 this type of business ownership made up
approximately 59% of the total private sector business population in the UK
with a staggering 3.5 million registered sole traders. A business owner can still
register as a sole trader even if they have employees and are often individuals
who provide a specialist service such as plumbers hairdressers or
photographers. Legally there is no separate business entity meaning there
is no distinction between the business owner's personal and professional assets
and liabilities. Therefore a sole trader is personally liable for the business's
debts and may have to pay for the losses made by the business out of their own
pocket. There's a number of benefits to registering as a sole trader, firstly it's
very easy to set up and provides the owner with complete freedom to make
decisions as they see fit. Also the typical sole trader business will have
low startup costs however most important to some, the sole trader keeps a hundred
percent of the business's profits. Whilst this all sounds great there are a number
of drawbacks to consider when starting a business as sole trader, as discussed
earlier unlimited liability heightens the risk for the business owners also a
sole trader is follow responsible for the business and may at times feel
lonely and very pressured, whilst the typical sole trader will work extremely
long hours and also take on additional roles of running a business to reduce
costs such as: admin. bookkeeping and marketing just to name a few.
Moving on to partnerships, these are businesses that are similar in nature to
a sole trader but legally owned by two or more people, typical examples of
partnerships are skilled people and professionals who decide to set up a
business together such as trades people, dentists and solicitors. A partnership
agreement is a key legal document which is agreed and signed by all partners of
the business and it covers all the key legalities of the business such as how
management decisions are made and how profits are going to be
shared. There are also two other versions of business partnerships, these are
limited partnerships and limited liability partnerships, however these
will be covered in greater detail in a separate video if you wanted to find out
more. Importantly the basic partnership agreement still means the business
owners have unlimited liability just like a sole trader, yet all liabilities
and debt will be shared out equally between the businesses partners depending
on their share in the business as is all the profits and assets. A key advantage
of a partnership is the shared expertise it provides the owners alongside the
benefit of teamwork which can reduce working hours. Whilst a typical
partnership would have low startup costs it also has a benefit of greater
borrowing power as there are more people involved to share the debt and more people
to raise investment capital into the business during its lifetime. However the
main disadvantage of a partnership comes from the disagreements that can happen
over key business decisions and if one partner feels they are working harder
than the other this can really cause some tension in the business whilst the
action of one partner could also have a negative impact on all of the partners
involved in the business and one final disadvantage of a partnership is that
profits have to be shared out between all partners. Moving on to private
limited companies in comparison to sole traders and partnerships, a private
limited company is owned by shareholders who were typically the directors of the
business and shares cannot be offered to the general public, you may also see a
private limited company with the abbreviation Ltd. after their name and a
private limited company is an incorporated business which means that
the business is actually classed as a company and has its own separate legal
entity in the eyes of the law therefore the ownership of a limited
company is divided up into equal parts called shares and the owners are now
classed as shareholders, this is a completely different structure to sole
traders and partnerships that we just looked at, unlike a sole trader or
partnership the owners of a limited company are not necessarily involved in
the running of the business unless they have been elected to the board of
directors common examples of private limited companies are local retailers
such as high street shops or restaurants that do not have a national
presence. Mars Inc is also a famous example of a private limited company
although they offer huge worldwide presence they've chosen not to go public
to ensure they retain the family values of the business and feel these would be
lost if they operate it as a public limited company, this is also the same
scenario at Dyson. Importantly the term limited in private limited company means
that all the debt of the business is separate from the individual
shareholders therefore they are not personally liable and won't lose their
personal assets should the business suffer from financial hardship. Another
key advantage of being a private limited company is it is much more tax efficient
than a sole trader or partnership business model, however once the owners
hold shares in the company the assets and any profits that are generated also
belong to the company therefore getting paid can be more complicated for a
shareholder than it is for a business owner who operates as a sole trader or
in a partnership, this is because the director of a private limited company
has to legally transfer money to you in the form of a salary or dividend payment.
Also operating as a private limited company has greater admin costs and
increased legal requirements in comparison to sole traders and
partnerships. In addition to this legally the company has to publicly disclose
key information which not all owners would want to share willingly. Moving on
to public limited companies just like a private limited company a public limited
company is owned by shareholders and run by its directors it has a key advantage
of limited liability and is often referred to as a PLC. Public limited
companies are often seen as a more prestigious business but are often less
common and they only actually make up approximately 5% of all the limited
companies in the UK. However PLC's have more legal requirements and paperwork in
comparison to sole traders partnerships and even private limited companies the
key advantage for a business which operates as a public limited company is
it it has the option to offer shares to the public via the stock exchange which
is a fantastic way of generating additional capital for the business. It
is common for a private limited company to make the decision to go public
through a process of flotation once the business goals public, it has the
opportunity to receive investment through the sale of shares commonly from
investment banks pension funds and wealthy individuals however it's very
important to know that the original owners can lose control and ownership of
the business with the potential for the company to be taken over if a majority
of the shareholders agree to bid. An example of a public limited company is
Starbucks and more recently Snapchat or Snap Inc. which went public in 2017 with
stocks soaring 44 percent on their first day of trading valuing the company at
twenty eight billion dollars although the tech enterprise on paper was making
a loss it propelled its co-founders into the top tier of tech billionaires. The
final type of business ownership we're going to look at is franchising this is
an alternative to setting up a business from scratch, it allows the entrepreneur
to acquire a proven business model and use its brands and products to open up a
new store. An extremely famous franchise model is McDonald's this allows an
entrepreneur to open up a fast-food restaurant with all of McDonald's famous
brand in store layouts, technology and products to provide them with guaranteed
custom. In comparison setting up an independent fast-food restaurant from
scratch. At this point I would recommend you to all watch The Founder which is a
film based on the story of how Ray Kroc turned McDonald's into one of the
world's biggest franchises, it's a great watch for anyone interested in business.
Now there are two key stakeholders in a franchise, the franchisee and the
franchisor, the franchisee is a person who purchases the rights to the
franchise from the franchisor the franchisor is a person or company that
owns a trademarks and business model that receives payments from the
franchisee. Now there are a number of key advantages to running a franchise
firstly the owner gets a proven business system and training from the franchisor
on how to use it which minimises the problems faced by most business startups.
Also the franchisee benefits from economics of scale when purchasing
materials and supplies as well as advertising and negotiations for store
locations, this is in comparison to a sole trader who would have to negotiate
on their own which would typically see them pay more or get less favorable
terms. However as you'd imagine in return for the use of the trademark and ongoing
support from the franchisor, the franchisee has to pay an initial fee
and ongoing royalties to the franchisor, this can be quite costly. Franchises
also have a few more key disadvantages to consider such as the restrictions and
often monitoring of business performance on the franchisee by the franchisor
whilst any alterations or improvement the franchisee wants to make to the
business may get rejected by the franchisor as it doesn't suit the
business' typical or traditional model, this can really frustrate the
entrepreneur who purchase a franchise as they don't have the freedom and
flexibility that the typical business owner would have. Well I hope this has
been a helpful introduction to the different types of business ownership
available and if it has remember to give the video a thumbs up and subscribe for
lots more business studies videos. There's also an activity worksheet in
the description of this video if you would like to test your knowledge
further, thank you for listening and all the best.