Business Ownership for Start-ups (OCR GCSE Business)
Revision Note
Start-Up Ownership: Factors to Consider
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 a range of factors
Diagram: Factors to consider for ownership of start-up businesses
Suitable liability
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?
Sole Trader or Partnership?
Case Study
Siobhan's Pet Sitting Service
Siobhan wants to set up a pet sitting business
She does not have much money to invest in the business
She wants to work on her own
Siobhan could
Set up as a sole trader
Set up the business with a partner
Recommendation
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 funds
Case Study
Dan the Dentist
Dan is a qualified dentist, looking to set up a surgery in his local town
Dan has some savings but not enough to purchase all the equipment required
He has a good friend in a similar professional position
Dan could:
Set up as a sole trader
Set up the business with a partner
Recommendation
Dan should set up a partnership business with his friend
Both partners could contribute capital and share responsibility for decision-making
A partnership is seen as less risky than sole traders by lenders, so a loan application to purchase equipment could be successful
Partnership or Private Limited Company?
Case Study
She Cooks Restaurant
Pauline and Olive want to set up a restaurant
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
They could:
Set up the business as a partnership
Establish a private limited company
Recommendation
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 Ltd's are seen as less risky than partnerships
They will enjoy the protection of limited liability should the business fail
Sole Trader or Private Limited Company?
Case Study
Tom Plumb
Having worked for a large building company for several years, Tomasz now wants to run his own plumbing business
Tomasz is ambitious, and intends to employ several other plumbers
He owns a family home and has personal savings that he is reluctant to risk
Tomasz could:
Set up as a sole trader
Establish a private limited company
Recommendation
Tomasz should establish a private limited company to benefit from limited liability protection
He may be able to attract more shareholders to fund his growth plans
If Tomasz needs to raise finance, lenders may be more willing to approve loans to a private limited company
Examiner Tip
In the examples above, the personal circumstances and attitudes of business owners were central to the ownership recommendation. Remember, the ability to take risks and the attitude of business owners towards them are key considerations when selecting the most appropriate form of ownership.
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