Though sole traders and private limited companies are in the same sector of the economy, there are many differences between them. One of them is that ltd’s have a separate legal identity to their owner, whereas sole traders do not. This means that, in the event of the death of one of the shareholders, the company can still continue running and, if the company is in debt, the personal possessions of the shareholder cannot be sold to pay for it. own the business. The infrastructure in a Private Limited company’s business is such that ownership is divided into shares, so more than one person can control the business. A sole trader business cannot be divided into shares.
Another difference is present in the way the business is run. In a sole trader, the sole owner of the business has complete control over decision making. However, if any decisions are to be made in a Private Limited Company, decisions can rest upon the agreement of other shareholders.
A Private Limited Company’s end-of-year accounts must be sent to the Companies’ House, where it is available for public inspection. However, a sole trader has more secrecy concerning financial affairs.
- Since a large number of shares are issued (and because many people and institutions invest in the company), it is unlikely the original owner/s of a public limited company will be able to retain total ownership and control. Shareholders own the company, but a Board of Directors, whom they appoint at an Annual General Meeting, controls the business.
This divorce between ownership and control is often the source of many conflicts
Within the business. For example, the aims of the Board of Directors and the shareholders often differ. Measures that generate short-term profits suit the shareholders, whereas the Directors may operate in order to create long-term growth.
- Two benefits of engaging in a joint venture are….
- The costs and risks of a new venture are shared, which is a major consideration when the cost of developing new products is increasing rapidly.
- Different companies might have different strengths and experiences so, when they work together, they combine. This means they collectively have new strengths.
However, they do contain risks, such as…
- Differences and clashes in management styles (as well as aims) can lead to conflict and inefficiency.
- If one of the partners fail, the whole project is put at risk.
- By buying a majority of the shares, the Directors of a Public Limited Company might decide to convert the business back into a Private Limited Company to overcome the separation of control and ownership. The owner of a ltd can take a long-term long-term planning view of the business. As a public limited company, ‘short-termism’ can be damaging to the long-term investment plans of the business. The cost of business consultants and financial advisors is less in a Private Limited Company. There is less risk of takeover and the risk of fluctuation of share prices is less.
- If a company has limited liability, people and institutions are more willing to invest because the company’s chance of closing down is greatly reduced. It also encourages investment because the shareholders’ private assets cannot be put at risk when debt is incurred by the business. It is also easier for limited companies to raise finance because they can issue shares.
