Forms of Business (Edexcel A Level Business)

Common Forms for Start Ups

• 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

Sole trader

• A business that has a single owner (although they may still hire employees)

• Advantages include

  • They are easy and inexpensive to set up

  • The owner has complete control over the business

  • All profits belong to the owner

  • Simple tax arrangements

• Disadvantages include

  • The sole trader is responsible for any debts the business incurs

  • Limited access to finance and capital

  • Limited skill set of the single business owner

Partnership

• Two or more people join together to form a business

  • Examples of this type of business include lawyers and accountants

• Advantages include

  • Easy to set up and inexpensive

  • Shared responsibilities and decision-making

  • More skills and knowledge are available

  • Increased access to finance and capital

• Disadvantages include

  • Partners have unlimited liability

  • Potential for disputes between partners

  • Profits are often shared equally, regardless of the contribution

  • Difficult to transfer ownership

Private limited 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

• Advantages include

  • 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

• Disadvantages include

  • 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

Other Forms of Business

• 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

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

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

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 

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!

Becoming a Public Limited Company (PLC)

• 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)

• 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