Describe In Detail And Compare Different Types Of Businesses, Highlighting The Similarities And Differences Between Them.

Shelley Bligh-Wall Page of 02/05/2007

Describe In Detail And Compare Different Types Of Businesses, Highlighting The Similarities And Differences Between Them.

Sole Traders and Partnerships

Sole traders are sometimes known as sole proprietors. A sole trader is a type of business owned by one person. A partnership is a type of business owned by a minimum of two people and a maximum of twenty people. Examples of sole traders and partnerships are a small newspaper stand and doctors / lawyers. Both these businesses are unincorporated businesses which means they both have unlimited liability, which means the owner of the business is liable for debts of the business. Personal possessions such as cars and houses may have to be sold to raise money to pay off the debts of the business.

Unincorporated businesses also have tax on profits, which means that income tax is paid on the profits, which the business may make. Their financial information can only be viewed by the owners of the business and lastly, they can go bankrupt which is the term used to describe when unincorporated businesses “go bust” (when the debts or liabilities are greater than assets). The disadvantages of being a sole trader rather than a partnership are:

Unlimited liability – which I have explained in the above section.
Lack of continuity - Is the term used to describe when the business stops running (ceases to exist) when the owner dies.
Long hours – many sole traders work long hours to keep the business running.
Difficulty in raising capital – Sole traders find it difficult to get money from individuals and banks to run their business because of unlimited liability.
Limited specialisation – It is often not possible for the owner of the business to be skilled in all areas. As a result, ...

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Unlimited liability – which I have explained in the above section.
Lack of continuity - Is the term used to describe when the business stops running (ceases to exist) when the owner dies.
Long hours – many sole traders work long hours to keep the business running.
Difficulty in raising capital – Sole traders find it difficult to get money from individuals and banks to run their business because of unlimited liability.
Limited specialisation – It is often not possible for the owner of the business to be skilled in all areas. As a result, specialist workers may have to be employed which costs a lot of money.
Limited economies of sale – Sole trader businesses are small, there is limited opportunity for the business to gain financial advantages from a large-scale production (where total costs are reduced as more is made).

Public Limited Companies (Plc) and Private Limited Companies (Ltd)

A public limited company is a large sized business owned by shareholders, who can buy and sell shares on the stock market. The business must use the words public limited company or Plc somewhere in the name of the business. An example of a Plc is WoolWorths. Advantages of public limited companies are:

Limited Liability.
Easy to raise finance through the sale of share.
Easy to borrow money from banks.
Largest and most powerful type of business.
Gain economies of scale (where the costs of production decrease as more is made).

Disadvantages of public limited companies are:

Costs a lot of money to set up (cost of incorporation).
They have to make their financial information available to the general public and other businesses.
Shareholders receive a share of the profits in the form of a dividend.
Because shares can be bought and sold freely on the stock exchange it is possible for other companies to buy up a large quantity of shares and the business over.

A private limited company is a medium/ large sized business, which is also owned by shareholders. It is normally identified by the word limited or Ltd somewhere in the name of the business. An example of an Ltd is McDonalds. These are the advantages of private limited companies:

Shares – These can be issued or bought by friends or family only as a way of raising money for the business to use.
Legal Identity – The business is seen as separate from its owners.
Continuity – If a shareholder dies, the business will continue to run.
Directors – They are usually two directors who control the company day to day, but do not own it.
Finance – Limited companies find it easy to raise finance money) because of limited liability.
Limited liability – If the business goes bankrupt shareholders only lose money invested. They do not have to sell personal possessions.

These are the disadvantages of private limited companies:

Availability of financial information – Ltd companies have o show their financial information to members of the public and other businesses if they want to see it.
Availability/ sale of shares and lack of capital – Ltd companies cannot sell their shares tot eh general public on the stock exchange, which limits the amount of shares that can be sold and the capital raised from the sale of shares.
Dividends – Shareholders receive a share of the profits in the form of a dividend,which is proportionate to the money invested.

Public limited companies and private limited companies are both incorporated businesses, which means that unlike the sole traders and partnerships they have limited liability.

Incorporated businesses have to pay tax on profits, which means that corporation tax is paid on any profit, which the business makes. Although both types of businesses pay tax on profits, it is not the same because income tax (which unincorporated businesses have to pay) is paid monthly whereas corporation tax (which incorporated businesses have to pay) is paid annually.

Incorporated businesses also have a separate legal entity from its owners and as well as this, finance can be raised through the sale/ issue of shares. Both of which unincorporated businesses do not have/ cannot do.

The financial information of incorporated businesses is available to shareholders and the public if they want to see it, which is the opposite from the unincorporated businesses.

Lastly, incorporated businesses have insolvency which is the term used to describe when incorporated businesses “go bust” (liabilities or debts are great than assets).

Shares, Dividends and the Stock market

Shares can be issued or bought by friends or family in unincorporated businesses but in incorporated businesses they can also be bought on the stock market as a way of raising money for the business to use. Shareholders receive a share of profits in the form of a dividend, which is proportionate to the money that they invested.

A dividend is an amount of money given the a shareholder to say “thank you” for investing and buying shares. On the stock market, people buy shares in the hope that they will make money but people can also lose a lot of money.