Advantages-
There are few legal formalities in setting up a partnership business, which makes starting one simple and quick for anybody. The workload is shared between the partners and if the partners come to an agreement or are friends, they tend to be flexible with one another- which makes the job less stressful. Due to the business having more workers than a sole trader, it has a better chance at generating other sources of finance such as that from loans etc. Another advantage is that, during times of absence such as sick days and holidays, the partners can cover each other very simply.
Disadvantages-
Unlimited liability is a large downfall in partnerships, which means that they are completely liable for the whole business if it owes money to banks etc. - and although banks will be more willing to lend to partnerships than sole traders, they are still not eager to do so. Profit capital is also shared between the partnership, meaning that the more partners involved, the less salary they will earn. Another disadvantage is that any arrangements or decisions based on the business are legally binding to all partners. Finally, a partnership is terminated if one single partner dies which means that a new partnership must be created after that one partners’ death.
Why would a partnership change ownership to a limited company?
There are many advantageous reasons as to why a partnership would change ownership to a limited company. Firstly, they would be able to raise extra capital through selling parts of their company. Secondly, they have the added advantage of limiting their liabilities. Limited liability is an important legal protection for shareholders as they only risk losing the amount of money that they have invested in the business and not their own personal assets.
Once the business has changed ownership, this means that if the business fails, the shareholders only lose the money invested in the business; their own personal assets, such as their home, are not at risk. This makes people more willing to invest their money in the business as the risk is reduced but shares cannot be sold on the Stock Exchange. Another very good advantage is that the death or resignation of any director does not affect the structure of the company. This is a strong advantage because the company continues to trade as before.
Business Examples
Pictured left is a deed of partnership.
A deed of partnership is a legally binding agreement between the partners who are in business together. It describes how the partnership will be run, the rights of the partners and the percentage of profits each member will earn. Although ultimately an agreement between the partners, a solicitor is usually hired to write up the final deed so that any loopholes are covered.
An example of a partnership is Axholme estate agent partnership- Grice and Hunter. Although Grice and Hunter will benefit from having up to twenty partners allowed in this type of ownership to invest capital and share the workload, the business would benefit from investors to expand. For example, they may want to open a third, non- local, office in Doncaster. By selling private shares, they can raise the capital to expand the business and also reduce the risk for shareholders with the benefit of Limited Liability.
Another example of a partnership is the Yorkshire Dental practitioner Partnership- Holloway and Jones. This partnership is becoming very successful and has decided to change ownership to a Private Limited Company to raise enough capital from private investors to move the business to a more high-end business with its premises on Harley Street, London.
Many other local partnerships exist as they tend to be small-scale businesses due to their unlimited liability. More examples of these include Lake and Marr (a local fish and chip shop) and Harvey and Scholl (a local newspaper shop)
Limited Companies
The definition of a Limited Company as a whole is that the ownership of the enterprise is divided into equal parts called shares- the owner of any number of shares is called a shareholder. The shareholders all have Limited Liability which means that the firm is liable for no more than the amount of capital that they have invested in the firm.
There are two types of Limited company- Private Limited Companies (ltd) and Public Limited Companies (Plc.). The one difference between these two are that Ltd.’s only have private shareholders, (the shareholders must apply directly through the business to purchase shares) whereas Plc.’s are floated on the stock exchange and any member of the public may buy shares in it.
Private Limited Companies-
Usually small businesses such as petit independent stores, although shares can be sold directly to investors that have contacted the business and requested shares, the shares in this type of business do not float on the stock market therefore cannot be traded on the stock exchange.
The obvious advantage of a Private Limited Liability Company is the financial security that comes with business. The Company’s shareholders will only be liable for any debt the company has got from capital invested in the business. This can provide a comfortable feeling of security for investors in the Company. Tax advantages for limited Companies are only taxed on their profits- this means that they are not subject to the much higher personal tax rates placed on sole traders or partnerships which can reach 40%.In the case of Private Limited Companies specifically, the Directors are also usually the main shareholders of the Company, thus both the ownership and control of the business remain in their hands. Decisions can be made quickly and easily, with little fuss, allowing for a more successful business management platform. Also, Ltd.’s are subject to restricted raising of capital. This means that they have a restricted amount of shares allowed to sell to raise capital.
Why would a Private Limited Company go Public?
The fundamental reason as to why Private Limited Companies go public is to raise capital. This is done by the owners selling their shares on the stock exchange to public investors and injecting their profits back into the business. Also, Public Limited Companies receive quite a lot of publicity which can be very beneficial if respectable. This publicity tends to come from analysts of the stock market and investors generally come to hear of it. Because of the simple one way money that Public Limited Companies receive from public investors, this means that the business can avoid borrowing capital from banks, private lenders etc., which must be paid back- usually with added
Business Examples-
Although various Private Limited Companies struggle to acquire capital from investors- there are many which are very successful and wish to remain private. Examples of these are Virgin, Warburton’s and Littlewoods- all of these make a very large profit and, because they are able to choose who can invest into the business to purchase shares, they have fewer investors to share the profits with. Nevertheless, businesses such as Scunthorpe United FC may wish to change their ownership to Public to become more successful. This would be achieved by floating the business on the stock market, thus gaining capital to buy better players and ultimately ascend from the first division to the premiership. However it is risky as a takeover could occur similar to that of the takeover of Manchester United which floated on the Stock Market until Malcolm Glazer, already the owner of Tampa Bay Buccaneers at the time, bought over 50% of the shares and thusly took over the whole business.
Pictured left is a memorandum of association for Nebulas Limited- a small Private Limited Company based in the Isle of Man. This, as with all Memoranda of Association, states the company’s name, the names of its shareholders and their number of shares, the location of its head office, the type of liability that the shareholders have, the objectives, and the authorized share capital (maximum price of securities that a business can legally give out).
A Memorandum of Association is available for any member of the public to inspect.
Public Limited Companies-
Usually large nationwide or global companies, this type of ownership both trades directly to private investors and also floats shares on the stock market to trade via the stock exchange.
Many of the advantages of a Private Limited Company are shared with that of a public. Financial security is still very secure in this type of ownership, as the Company’s shareholders will only be liable for any debt the company has got from capital invested in the business. Public Limited Companies also profit from the attractive tax benefits involved in Limited companies. Nevertheless, there are some drawbacks. Public limited companies must publish their accounts for anybody to see, this can be both costly and time consuming- also this can be quite off-putting if a potential investor sees that an account is managed poorly or has quite low profit margins. Due to the nature of Public Limited Companies, disputes will sometimes arise between Directors and Shareholders as their ideas of how to run the business may be different. Sale of shares to increase company funds will further dilute the management, as more and more people have a say in how the company is run. Also, if over 50% of the shares are purchased, a takeover occurs and the business is therefore run by that one purchaser- not the business’ previous owner.
Pictured right is a document stating Sab Miller Plc. - a Public Limited Company based in Howarth. All Limited Companies must have and work by this document which is fundamentally a contract between the shareholders and business, and also between the members themselves. Rights and duties of the shareholders and directors are documented in these articles which are available for all to see and inspect. If such clauses as those dealing with allocation, transfer, and penalty of shares are not included then the business may face a hefty prosecution.
Shares-
When a business changes its ownership to a Limited Company, whether Public or Private, the ownership of this Limited Company is divided into equal pieces- the name for these pieces of the company are called shares. The share price (cost of each individual share of ownership) can be from £6.27 (the share price of Yell Group on the 27th of January) and £228.90 (the share price of Imperial Tobacco on the 27th January). The name given to those owning shares in a business is Shareholder. As soon as one becomes a shareholder, they instantly receive the rights to: sell their shares, nominate management dividends if they are being given out, vote on the directors nominated by the board and the right to remaining assets after liquidation. The common interest of these shareholders is the price of the shares that they own so that they could sell them for a profit. It is for this reason why shareholders take interest in the ownership and running of a business in which they own shares in, as, commonly, the more successful the business- the higher the share price.
Why would a Public Limited Company Change to a Franchise?
If the owners of a business are looking to expand the business even further than possible in their current predicament as a Public Limited Company, the best option would probably be for the business to change to a franchise. The owners of a franchise receive both a high purchase cost of the franchise and also a large percentage of all of the franchisee’s earnings. Also, franchises are the best type of business to expand- businesses such as the body shop had previously decided to change to a franchise but later decided that this cosmetic store became too vast for the owner to handle, so therefore changed the business back to a Public Limited Company. This is an indication as to how vast franchises can become.
Business Examples-
Although some Public Limited Companies such as Sainsbury’s, John Lewis and Primark are huge, transnational businesses that benefit from floating shares on the stock market to raise capital- resulting in a very high annual profit, some businesses, such as Nando’s (a casual dining restaurant) chose to make the business a franchise as the shareholders knew that this would expand the business quickly and vastly, thus increase profit by a large amount. And it did. Going from an annual profit of just under seven million pounds profit per year, Nando’s now receives £31,090,834 annual profit.
Franchises
A franchise is very different to all other types of business ownership in that it is not a type of business ownership in its own right. In fact, it is usually a very large business that sells franchises (or small branches that can must be owned either solely, as a partnership, or as a limited company).
Advantages: For the franchisee (the business buying the franchise) franchises are quite advantageous in that it takes away many of the risks that setting up your own business entails, as the business is usually very established and reputable- banks are sometimes more likely to lend money to buy a franchise with a good reputation. Advertising campaigns are supplied by the franchisor therefore the business will be well known. Another advantage to the franchisee is that they will generally receive training and support from the franchisor because obviously the franchisor wants the franchise to be a success. For the franchisor, selling franchises is very beneficial to their business because they will raise capital from people buying it, and it gives the business a very high opportunity to expand and makes it much easier for the business to go global.
Disadvantages: As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor. Another disadvantage is that the franchise agreement usually includes restrictions on how you can run the business which makes the running much less flexible. Also, if the franchise goes out of business, your franchise will be closed down with no consent required. If another franchisee has a bad reputation, this reputation may spread to your own through no fault of your own.
Pictured above is a copy of the agreement held between the franchisors of McDonald’s and their franchisees. Stated in this agreement are the many costs that must be paid to the franchisor from franchisee. Not only does the franchisee have to pay for the franchise fee, but must also pay its franchisor for all costs and products that they will sell to customers and on top of the franchise and product costs, a percentage of all profits must be given to the franchisor. As you can see in this franchise agreement, the average of the total costs before the costs of the franchise is almost six times that of the price of the franchise.
Why would a franchise change to a Private Limited Company?
The franchisor of a business may choose to change from a franchise to a ltd company because the franchisor may think that he/she is losing a lot of profit capital paying franchisees for running the franchises of his/hers business. Another reason may be that the franchisees of his/her business are not running the company to the best standard possible- therefore giving the business a bad reputation, losing customers and consequently lose profits through no fault of the franchisor. Another less common reason as to why some franchises choose to change the type of ownership back to a limited company is that the business may become unmanageably vast for the franchisor to maintain.
Business Examples
Although some franchises such as McDonald’s, Nando’s and Hilton are all running phenomenally profitably, some businesses such as The Body Shop have chosen to revoke their numerous franchises across the globe as the many franchises made it more difficult for the previous owner, Dame Anita Roddick, to maintain and feel satisfied with how the business was run when the ownership was a franchise. Because Roddick had also dreamt of personal, intimate customer experiences- she ultimately decided that a franchise was not the right path for her business to take.
Co-operatives
A cooperative is a business owned and ran by either the employees of the business or its customers. They finance and run the business for their mutual benefit. The purpose of a cooperative is to provide benefits to the members, such as increasing individual income or enhancing a member's way of living by providing important, needed services. There are two types of cooperative trading organisations- these are:
Retail cooperative is the best known cooperative in the UK, including retail
stores, the cooperative bank, insurance and funeral services. Members of the
retail cooperative are able to join with a minimum investment of just one
pound; they are able to vote on Society policy. This is a democratic vote-
everyone as the exact same voting rights, regardless of the amount of shares
they own. The Co-op is proud of its unique approach.
-Worker Co-operatives
A worker cooperative is a cooperative owned and managed by its worker-owners,
and often arise when a business is threatened with closure. They are formed
when a group of people, often but not necessarily known to each other, come
together to form a business owned and controlled by themselves. They do not
necessarily need to already have all the skills, experience or finance for the
success of the enterprise.
The advantages of a Co-operative are as follows- they are inclusive and have open membership, aid young businessmen and women due to their principle of ‘education, training and information.’ Also, they tend to have a greater generation of ideas due to the existence of multiple owners. Finally, the combined actions of the businesspeople can open up national and international markets, as seen with many examples in the Fair-trade market.
Although this type of ownership is, as a whole, very advantageous- there are some disadvantages. Because the majority of workers are at the same status, conflict may emerge with regards to business decisions etc. Yet again, because the majority of workers have a say in how the business is run, this will cause a longer decision making time which may cause the business to be behind in terms of new ideas in comparison to competitors. Also, participation of members is crucial for the success of the business which can be quite difficult to achieve. The final disadvantage of a Co-operative is that extensive record keeping is necessary for the business to succeed which is time consuming and requires staff to manage.
Why would a co-operative change ownership to a Limited Company?
Co-operatives are commonly very charitable organisations with ethical values and are commonly willing to lose some profit if in the aid of ethical values. If the business however decided that profit could not be lost in the aid of anything, the business may choose to change ownership to a Limited Company. Also, if the majority of workers in the Co-operative are tired of conflict and slow decision making due to all being of similar status, the workers may opt for more of a hierarchy within the business which would be much simpler in a Limited Company due to the overall structure of this type of ownership. Also, to join a retail Co-operative, an investment of only one pound is necessary- yet in Limited companies, share prices have been known to be very high- thus resulting in much higher profits.
Business Examples
Many Co-operative businesses such as ‘Co-operative’, John Lewis and CRS are currently very successful Co-operative businesses and wish to remain in its current type of ownership. However- John Lewis, if all John Lewis’ ethical values were lost, John Lewis may choose to change to a Limited Company. Also, John Lewis may choose to shorten its decision making process to stay ahead of fashion trends against its competitors. This would be done by making the business more hierarchical which is much more compatible with Limited Companies.
