Forms of Business (Edexcel A Level Business)

• When an entrepreneur starts a business, they will often start operating as a sole trader
• Over time, they may change the form of business to gain more funding or provide more security for the owners about limited liability

 

The different types of business structures available to the owners

• Three of the most common forms of business at start up are sole traders, partnerships and private limited (Ltd) companies
• Each one of these forms has various advantages and disadvantages associated with the structure
   

An Explanation of Sole Traders, Partnerships and Private Ltd Companies

Form	Explanation	Advantage	Disadvantage
Sole Trader	A business that has a single owner (although they may still hire employees)	Easy and inexpensive to set up The owner has complete control over the business All profits belong to the owner Simple tax arrangements	Unlimited liability, meaning the owner is personally responsible for any debts the business incurs Limited access to finance and capital Limited skill sets
Partnership	Two or more people join together to form a business Good examples of this type of business include lawyers and accountants	Easy to set up and inexpensive Shared responsibilities and decision-making More skills and knowledge are available Increased access to finance and capital	Unlimited liability Potential for disputes between partners Profits are often shared equally, regardless of the contribution Difficult to transfer ownership
Private Ltd Company	The ownership of the business is broken down into a specified number of shares These shares can be sold by the owner, usually to friends and family or to venture capitalists Decision-making often rests with the person appointed to run the company, often called the Managing Director or CEO	Limited liability, meaning the owners are not personally responsible for the company's debts Access to greater finance and capital Easier to transfer ownership Can have a professional image and reputation	More expensive and time-consuming to set up More complex legal requirements and regulations than sole traders Annual financial reporting and auditing are required Shareholders have little control over the company as the founder usually imposes their agenda

• Several other forms of business have also gained prominence in recent years, including franchising, social enterprises, lifestyle and online businesses
• There is a growing trend in setting up lifestyle businesses as people demand flexibility and a better work-life balance

1. Franchising

• Franchising is a business model where an individual (franchisee) buys the rights to operate a business model, branding, and support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees
• The franchisee operates the business under the franchisor's established system and receives training, marketing support, and ongoing assistance
  • E.g include Domino's Pizza, KFC, Burger King
    
    

2. Social enterprises

• A social enterprise is a business that has the primary purpose to create social or environmental impact (in addition to generating profits)
• Profits are usually reinvested back into the business or used to create  positive social change or address an environmental issue
• E.g. Warby Parker is an eyewear company that donates a pair of glasses to someone in need for every pair of glasses sold
   

3. Lifestyle businesses

• Lifestyle businesses are typically small, owner-operated businesses that prioritise a specific lifestyle or personal interest of the owner over profits or growth
• These businesses are often run from home or in a location that allows the owner to maintain a particular lifestyle or work-life balance
  • E.g include yoga instruction, personal training, business coaching
     

4. Online businesses

• Online businesses often have low overhead costs and can operate from anywhere with an internet connection
• These businesses are still required to have a legal structure such as a sole trader or private limited company
  • E.g include e-commerce stores, online courses, and software as a service (SaaS) companies e.g. Save My Exams!

• When a business is growing rapidly it may require a significant amount of capital to fund its expansion
• To secure this funding, it may choose to transition from a private limited company (LTD) to a public limited company (PLC)
• This is a complex process with many legal requirements and involves undergoing a stock market flotation
   

The Benefits of becoming a Public Limited Company (PLC)

Access to Capital	Shared risks	Increased liquidity
Significant amounts of capital can be raised very quickly  This is often a more cost effective way to raise capital than borrowing money from banks or other lenders	The risks associated with ownership are spread among a larger group of shareholders This reduces the financial risk to any individual	A company's shares become more liquid (they can be bought and sold more easily) on a public stock exchange This can increase the value of the company's shares and make it easier for shareholders to buy/sell shares
Extended decision-making	Greater public profile
The company will have a board of directors made up of independent directors and representatives from major shareholders This can extend the decision-making process and bring in additional expertise/perspectives that can help the company grow and expand	Becoming a PLC can raise a company's public profile and increase its visibility with customers, suppliers, and potential investors This increased visibility can help the company attract new business and grow its customer base

• The top three initial public offerings as of March 2023 are:
  
  • The Saudi Arabian oil company, Saudi Aramco, raised $29.4 billion in its IPO in December 2019
  • The Chinese e-commerce company, Alibaba Group, raised $25 billion in its IPO in 2014
  • The Japanese telecommunications company, SoftBank Corp., raised $23.5 billion in its IPO in 2018