Different Ownership
structures
OCR National Business Studies
Level 2 /VGCSE Business Studies
Objectives
To understand the different ownership
structure of businesses
 To understand the advantages and
disadvantages of different structures
 To understand the liability of each
ownership
 To be able to give examples of businesses
with different ownership
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Different sectors
PRIVATE
Owned by private people
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Sole traders
Partnerships
Companies
etc.. (Ltd and Plc)
Franchises
Co-operations
PUBLIC
Owned by the
Government /state
NHS, Hospitals
Schools
The army , the police
Sole Traders
Owned by one person.
 Small size businesses.
 Unlimited liability- this means that the
owner is liable for all his debts which
means that their personal assets can be
affected.
 The owner keeps all the profit.
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Sole traders- benefits
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Easy to setup up as there are no formal procedures to
follow; especially if using their own name
Ideally suited for offering a person service to
customers.
Decisions can be put into effect quickly as there is noone else to consult
The sole trader is his or own boss and does not take
orders form anyone else
Bad (unpaid) debt can be avoided as the owners
usually know the customers and most transactions as
made by cash and not credit.
There is minimum paperwork unless the business is
registered for VAT
Sole traders - disadvantages
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Long working hours
Illness and sickness cause problems – when the
business is closed the owner makes no money.
Highly dependent up in skills and ability of one
person.
Difficult to raise capital to start up or expand the
business.
The owner has unlimited liability for any debts.
This means that if the business is un successful
the owner may have to sell personal processions
to pay for any debts. If some of the debts remain
unpaid the owner may be declared bankrupt.
Some facts about sole traders:
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In the eyes o the law the sole trader and the
owner are one – you would sue the owner if
anything happened; e.g the hairdresser wrecked
your hair. When the owner dies the business
cease to exist
Banks often reluctant to lend money – usually the
owner has to pay their own money or borrow form
family and friends
The sole trader can keep all the profit once the
expenses are paid; the accounts are keep private.
Opportunities to grow are limited as difficult to
raise extra capital.
SMALL SCALE operations and does depend on
how ambitious the owner is.
Examples of sole traders
Examples include – plumbers,
hairdressers, beauticians , market traders,
Chinese restaurants’, catering outlets etc..
 They o not need lager amount of money to
set up
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Partnerships
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Where 2- 20 people set up a business together.
They jointly one the business- the risk and responsibilities are
shared by all the partners.
Usually setup with people with different skills to offer a wider
range of service.
Sleeping partner are partners which have invested capital not
the business but do not have to involve themselves in the day
to day running of the business; they receive smaller share than
the active partners,.
Sensible to draw up a deed of partnership – sets out the details
for each partner ; their salary, their share of profits and
procedures t follow if there is a dispute; The deed of partnership
act states that all partners are equally liable for nay debt unless
it is stated differently in the deed.
Partnerships – benefits
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Problems can be shared and discussed.
New skills and ideas can be introduced.
It is usually easier to raise capital as all the
partners contribute.
There are obvious benefits t be gained form
combining the skills and knowledge and the
expertise of all the partners.
The partners can specialise in their own
particular area of expertise (e.g in legal practice,
one may specialise in family law, another in
litigation, s third in business law, and so on.
Partnerships – drawbacks
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The partners may not always agree or contribute
equally.
The profits must be shared.
All the partners must be consulted before s major
decision can be made.
The partners have unlimited liability for any debts, and
are therefore personally liable.
The actions of one partner are binding on all the other
partners
The death of a partner mean that the withdrawal of his
share of capital must be paid to his/her estate. It is
therefore usual to take a life assurance policy on each
partners life.
Partnerships - facts
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In the eyes of the law all the partners are equally responsible
for any debt
Partners share the profits equally, unless different agreements
have been made specify in the Deed of Partnerships.
They all liable to pay income tax on the profits.
All the partners have unlimited liability for all the debt and the
accounts are still kept private
In a limited partnership – rare in the UK ; then the sleeping
partner will have limited its debt only to the capital invested into
the business but the there partners will have to have unlimited
liability.
Financing the business is easier and raising money for the
business as there are more than one owners in the business.
Examples include: accountants, solicitors, doctors, dentists,
veterinary surgeons estate agents etc..
How are companies Formed
There are two types of companies
 LTD – Private Limited Companies
 PLC – Public Limited companies
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How are companies formed
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Memorandum of association – the structure of the
new company its purpose and aims and objectives
Article of association – there rule book of how it
should operate- what the business can and cannot do.
This mean the company is issued with a certificate of
incorporation – a birth certificate for the company.
Corporation tax is paid on net profits!
Easier to borrow money.
All the profit belongs to the shareholders but some is
ploughed back to be re invested into the business.
Companies
Has a separate legal identity – which means
that the company has separate legal entity
and is known as a corporate body – the
company has been incorporated. ‘inc’ id the
abbreviation for this. The company owns the
property, employs and pays its staff (including
the directors), take legal action and is
responsible for its debts. In the eyes of the law
it is a separate individual.
 E.g. in Tesco if you break your ankle you sue
Tesco not the shareholders
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Private limited companies
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Start out as maybe small sole trader sand or partnership.
They form a limited company:
Improve the financial security as the owner are called
shareholders and have limited liability which means they are
limited to only the amount invested into the business.
The name Ltd stands for private limited companies
The company goes into ‘liquidation’ if the business fails and
there is no bankruptcy.
Before lending money to the company they need to be sure the
business is financially sound.
Ltd provides a better image to their customers as they assume
it is more secure.
Private Limited Company
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LTD – each shareholder receives shares
in the business
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One share equals one vote
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So shareholders with more than half the
shares can outvote the other
shareholders.
Ltd Benefits to the owner:
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Business can stay small- minimum one director and one
shareholder
The owners are the shareholders and have a vested
interest in the business success and are involve din
running the business.
Relatively easy to setup – owners may only need to invest
100 to 200 pounds
Shares can be transferred with the agreement of all the
shareholders and cannot be sold to the public. This gives
the owners direct control over the business.
Banks are more willing to make loans to a limited company
– especially if it has a good financial track record.
Because of limited liability.
The accounts are sill private between the owners, their
accounts and the Inland Revenue.
Ltd – drawbacks
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It is not possible to sell shares to the general public to raise
additional finance.
Limited companies have to comply with more regulations than
sole traders or partnerships, for instance they have to register
the Registrar of Companies and have their accounts audited by
an accountant. Thy also have to commit to the requirements of
various Companies Acts.
A limited company is not allowed to trade under the name of an
existing company as this will lead to confusion between the
suppliers or customers.
If the company ceases trading it must be officially ‘wound up’
and the if the company cannot pay its debts it will go in to
liquidation which can be time consuming and a difficult process
Plc – Public Limited Companies
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Largest type of privately owned businesses in the UK.
Many started out as privately limited companies and were
floated on the Stock Exchange.
Floated means when the public Limited Company is launched.
Any person can buy shares into the business and is identified
with the letters PLC
The shareholders are different to the directors. The directors
can choose to own shares in the business or not.
A company must have more than £50,000 before it can ‘go
public’ and must have a satisfactory financial record.
Also it needs enough people to be interested in buying the
shares for it to have a successful floatation
Plc – Benefits
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Major benefit is increased capital as many thousands
of people or organisations may buy shares into the
company. This makes expansion very easy.
Some public limited companies can be quite smallthere only needs to be a minimum of two directors and
two shareholders.
Very large companies can often operate cheaply than
small companies on economies of scale. For instance,
they can mass-produce goods for sale and buy in bulk
to save money.
If the company is successful, the shares will increase
the overall value of the company.
Plc - Drawbacks
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A public company must be registered as such with the
Registrar of Companies and many external regulations
to comply with.
Any problems the company encounters may become
news if the press run a story on it.
An annual general meeting (AGM) must be held each
year and all shareholders must be invited.
Shareholders who do not agree with the way the
company is run may raise objections or vote against a
proposal made by specific directors.
Specific accounts must be prepared each year and
these must be audited. Moreover the accounts must
be published so tat a ‘problem year’ cannot be hidden.
Plc – drawbacks 2
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Shareholders invest to receive dividend payments in
return for their investment.
They will want the shares to increase in value and if
they decrease in value shareholders will be tempted to
sell their shares. In this case their interest is different
to those f directors who may be looking at the longer
term security of the company.
The original owner(s) may lose most of the control
of the company, even if they retain substantial number
of the shares. Sir Richard Branson bought his
company back from the public ownership because of
this.
Some facts about Plcs
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Legally a public limited company is owned by
shareholders- so its ownership may change all
the time as shares are bought and sold all the
time.
A PLC has to comply with Companies acts as
well as abide by the rules set out by the stock
exchange.
It can choose a variety of source of finance, form
banks to debentures ( loans on the stock
exchange by selling additional shares) – there is
limit on how many shares it can sell depending
on the value of the company.
Facts about Plc (2)
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A plc may take over another company by buying up
share in a smaller company – just to give it controlling
votes. Or it may merge with another company of similar
size to grow bigger.
The net profit is paid out to the shareholders in the form
of a dividend, although the company will put a proportion
into reserves each year. (preference shareholders
receive a fixed amount each year) The dividend depend
upon how much profit is made and how much is required
for reserve.
Examples of Plc include; Barclays Bank, Marks and
Spencer’s, Sainsbury etc..
Ownership of both business
What are they? Ltd or plc
 What is their liability?
 How did they become companies
 What is the advantages/ disadvantages of
being a LTD to B’ham Airport
 Also list the advantages and
disadvantages of lex being a plc
 Use case study to describe the ownership
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