Are all businesses the same? Are some small and some big? What are the types of business
entities?
I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at what are the types of business entities.
There are numerous types of business, which range from a small business that could be
on your local high street or a large global business which has hundreds or even thousands
of stores just in one country.
First of all, there are four main types of business entity. They are sole traders, partnerships,
private limited companies (LTD) and public limited companies (PLC).
If you have not already guessed, a sole trader is the most common type of business. A sole
trader is a business that is owned and controlled by one individual.
Sole traders do not have a separate legal existence from their owners. And as a result,
the owners are personally liable for all the business debts and in some cases may have
to pay the debts out of their own pocket, known as unlimited liability.
Sole traders can range from a hairdresser to a builder or even a sweet shop.
A partnership is the next step up from a sole trader. It is where two or more people own
a business.
A partnership is quite similar to a sole trader whereby the owners are equally and personally
liable for the debts of a business.
Partnerships share the responsibilities of the owners as well as profits and losses,
it also allows more capital to be contributed by the owners than a sole trader. However,
there is a high chance of dissatisfaction and disputes happening between the owners.
Partnerships can include dentist practices, small solicitors agency or even an accountants
firm.
Let’s now move on to the next type, the limited companies. A limited company is briefly
an organisation which has separate legal identity to that of its owners or shareholders.
Limited companies have limited liabilities meaning that if the business failed the maximum
amount a shareholder could lose is their investments (i.e. shares) and their personal possession
(i.e. assets) will not be used to pay off the company's debts.
The next type is a private limited company (LTD). These businesses are usually family
owned and the directors are often majority shareholders.
They cannot offer shares to the public making it more harder to raise money and it is more
difficult to takeover as an external party or investor. Also the financial information
must be filed with the Registrar of Companies.
Private limited companies include a chain of fish and chip shops, a group of local building
contractors or a group of grocery shops.
Now, the final type is a public limited company. This is where a business is registered under
the Companies Act and where two or more people are required to form the company assuming
it has a lawful purpose.
It can offer shares to the public on the stock exchange, which can mean the company has better
access to capital and liquidity through selling shares.
Although this is good financially, the company will be under greater public scrutiny on their
actions and performance and the financial markets will control the value of the company
through trading the shares.
Examples of a public limited companies include a majority that are household names and exist
on mainly every high street and shopping centre. And in the United Kingdom you would be able
to exchange shares of them on the FTSE or NYSE in the US.
So that was the identification of different types of business entities. If you enjoyed
it, press the like button.
If you have a question you want answered leave it in the comments below and we’ll try our
best to answer it.
And if you’re not already subscribed make sure you click the red subscribe button to
keep updated with The Accounting Student.
Thanks for watching we’ll see you next time.