GCSEBusinessAQARevision NotesBusiness in the Real WorldBusiness OwnershipChoosing an Appropriate Legal Structure

Choosing an Appropriate Legal Structure (AQA GCSE Business)

Revision Note

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Lisa Eades

  • When setting up a business, an entrepreneur must choose the ownership structure that suits the business needs, particular circumstances and level of personal risk they are willing to accept

  • Deciding on the best form of legal ownership requires the owners to consider many different factors

Factors to consider

Type of ownership

  • Is unlimited or limited liability most appropriate?

    • How much of a financial risk is the owner willing to take?

  • Is the business based on an original idea or a franchise?

    • Franchising usually requires a business to be established as private limited company

Desire for control and privacy

  • How much direct control over decisions does the owner(s) want?

    • Do they want to be the sole owner, or would they be willing to share ownership with others?

  • Does the owner(s) want to share the workload?

  • Does the owner mind if the financial accounts are made publicly accessible?

    • Sole traders and partnerships do not have to report their financial outcomes outside of the business

Financial considerations

  • How much start-up finance is required?

    • Do the owners have enough capital of their own to invest?

    • Might the business need to borrow or raise capital from other sources?

  • How might the choice of finance affect the break even point/profits?

  • How is finance to be managed?

Objectives for business growth

  • Does the owner want it to grow?

  • Will growth require further finance?

Examples of Start-up Business Ownership Recommendations

Business Description

Key Considerations

Recommendations

  • Siobhan wants to set up a pet sitting business

  • Siobhan could

    1. Set up as a sole trader

    2. Set up the business with a partner

  • Siobhan does not have much money to invest in the business

  • Siobhan wants to work on her own

  • Operating as a sole trader would allow Siobhan the independence she desires

  • The pet sitting business is unlikely to require much capital to set up, so Siobhan does not need a partner to invest capital

  • Kevin is a qualified dentist, looking to set up a surgery in his local town

  • Kevin could

    1. Set up as a sole trader

    2. Set up the business with a partner

  • Kevin has some savings but not enough to purchase all the equipment required

  • Kevin has a good friend in a similar professional position

  • Kevin should set up a partnership business with his friend

  • Both partners could contribute capital

  • A partnership is seen as less risky than sole traders by lenders so a loan application to purchase equipment could be successful

  • Pauline and Olive want to set up a restaurant

  • They could

    1. Set up the business as a partnership

    2. Establish a private limited company

  • The restaurant building requires modernisation and refitting with a full kitchen and dining space

  • They have enough capital to fund some of this work

  • Neither Pauline nor Olive are prepared to take personal financial risks

  • Pauline and Olive should form a private limited company as equal shareholders

  • They may be able to borrow the required finance to fund the modernisation and refurbishment, as Ltds are seen as less risky than partnerships

  • They will enjoy the protection of limited liability should the business fail

  • Established businesses may consider changing their legal ownership for a range of reasons

    • To raise finance

    • To increase the business profile

    • To attract new owners who can contribute time, ideas and share responsibilities

  • Again, a range of factors need to be considered before changing the legal ownership of a business

Factors to consider

Objectives for business growth

  • Does the existing owner want the business to grow?

  • Will growth require further finance that cannot be obtained through borrowing?

Willingness to dilute control

  • Does the existing owner want to retain the majority of ownership of the business?

  • What reward does the existing owner expect to receive for their risk?

  • Is the owner prepared to work with others to direct the business?

  • Do suitable alternatives to the current legal structure exist?

  • What are the implications for business stakeholders of changing the ownership structure?

Examples of Established Business Ownership Recommendations

Business Description

Key Considerations

Recommendations

  • AMF Ltd is a large, fast-growing commercial cleaning company

  • It is seeking to raise substantial funds to finance further growth

  • AMF Ltd can either

    1. Remain as a private limited company and take out a loan

    2. Become a public limited company

  • AMF Ltd has been a family-owned business since it opened in 1982

  • AMF Ltd has a good credit rating and has used loans to finance growth in the past

  • Remaining as a private limited company would ensure AMF remains as a family business

  • The business may not need to raise large amounts of capital from the sale of shares as it has successfully raised the finance it needed to grow in the past by borrowing

  • The decision depends on how much finance is required, as only a flotation could raise a very substantial level of finance

  • Having achieved success in the UK, Varitool Ltd is looking to open retail outlets across Europe

  • It requires significant amounts of capital to fund research and the purchase of suitable premises

  • Varitool Ltd can either

    1. Remain as a private limited company and take out a loan

    2. Become a public limited company

  • Varitool Ltd is currently owned by its founder and a range of private investors

  • Its owners want to maximise their financial rewards

  • Becoming a public limited company could raise a significant amount of capital through stock market flotation

  • This could fund the ambitious growth plans

  • Existing owners would be able to take a large financial reward from flotation

  • The decision depends on the attitude of current owners toward the potential for loss of control over the business, especially for its original founder

  • Occasionally, business owners want to take back some control over a business and change its ownership in order to do so

    • E.g. In 2004, Tom Singh, the founder of high street fashion retailer New Look, chose to withdraw the business from the London Stock Exchange

      • It was taken back to being a private limited company, with Tom holding the majority of shares alongside other private investors

      • Its owners wanted the freedom to pursue a particular strategy to grow the business without pressure to prioritise profits in the short term

Examiner Tip

Make sure you understand the benefits and drawbacks of each type of legal ownership, as this will help you analyse the options and recommend a suitable ownership for a particular business.

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    Lisa Eades

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