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Sole trader
This is a business that is owned, financed and managed by one person. Any profit that the business makes belongs entirely to this person. The sole trader is responsible for everything related to the business, including:
- All of the management decisions
- Raising capital for the business
- Any debts that the business has
- Keeping accounts up to date.
When setting up a sole trader business, the owner will register themselves as being self-employed and all of the business profits belong to the owner. Self-employment means that income tax is paid on all profits made by the business. National Insurance contributions are cheaper with fewer benefits.
When it comes to accounting, a sole trader’s business records are not subject to public inspection. The business owner is required to submit annual tax self-assessments.
The sole trader has unlimited liability which means that, if the business fails, then the owner is personally responsible for all the debts of the business. They may even have to sell their personal possessions or use any money they have saved up in order to cover the debts, if necessary.
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Partnership
This is a business which is owned by two or more people. These people all share the profits and responsibility for managing the business.
When a partnership business is set up, it is a good idea to draw up a deed of partnership. This will be a written record of all of the agreed terms of the partnership (who does what, who owns what, etc) and can be very useful to resolve any disputes that may arise.
In a partnership, all partners share the responsibility of managing the business and providing finance where necessary. Each partner is liable for their own debts as well as any partners’ debts. As with sole traders, this liability is unlimited, meaning that the partners must take whatever action is required in order to cover the debts (such as selling possessions, using personal savings, etc).
The partners will share any profits made by the business. Profits can be shared equally between partners or at varying rates, depending what has been agreed in the deed of partnership when the business was set up. For example, if one partner has invested more money in the business, then they may expect to receive a bigger share of the profits.
As with sole traders, the partners are self-employed and profits are taxed as income and National Insurance is cheaper. Each partner will need to complete an annual tax self-assessment.
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Private limited company (Ltd)
In the UK, a private limited company can limit the number of shareholders it has. It can also restrict what shareholders are able to do with their shares – for example, shareholders are not allowed to sell or transfer shares of the company without first offering them to other existing shareholders, and shares may not be traded publicly (such as on the stock exchange).
Shareholders in a private limited company have limited liability should the business fall into debt or fail. This means that their liability is limited to the value of their investment in the company, and does not extend to their personal assets.
Unlike sole traders and partnerships, Corporation Tax is paid on any profits made by private limited companies. With limited companies, some financial information is available to shareholders and the general public.
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Public limited company (PLC)
In the UK, a public limited company makes its shares available to be traded on the stock exchange. This means that anyone can buy or sell shares in these companies. Public limited companies can be subject to lots of regulations, but their management has limited liability when it comes to the business performance.
As with private limited companies, Corporation Tax is paid on any profits made by public limited companies and some financial information is available to shareholders and the general public.
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Franchise
A franchise is created when an existing, successful business (known as the franchiser) gives another person (known as the franchisee) the right to use its company name, business ideas, branding, products, marketing, business processes, etc in exchange for a fee.
Did you know?
Lots of really well-known companies use a franchise model to help them to grow and expand. Examples include McDonald’s, Subway, Hilton Hotels and Costa!
Franchising can offer a less risky way to start a business as it comes with a recognised business name, tried and tested products, guidelines for marketing, training, etc. However, it can cost the franchisee more money to buy into an existing business (as opposed to starting up on their own) and part of the profit that is made will need to be paid back to the franchiser.
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Social enterprise
Social enterprises are businesses that have social and/or environmental objectives. They do not strive to maximise profit for shareholders and owners. Instead, the profit is used to help the business achieve its social objectives. Businesses that re-invest profit in this way are often known as not for profit or non-profit organisations – basically, the business exists for other reasons, not just to make money and profit for its owners.
Some other examples of social enterprises include:
Co-operatives
These organisations are owned and run by its employees and/or customers, who share any profits that are made.
Charities
A charity is a type of non-profit organisation. The money raised by a charitable organisation is used to help with the work the charity does.
