Private sector businesses.

Advantages:

• Problems can be shared and discussed (“A burden shared is a burden halved”).
• New skills and ideas can be introduced.
• It is easier to raise capital as all the partners contribute.
• There are obvious benefits to be gained by combining the knowledge and expertise of all partners.
• The partners can specialize in their own particular are of expertise (for example, in a legal practice, one partner may specialize in family law, another in litigation and another in business law and so on).
• Unlimited liability means a lot less paper work because they don’t have to pay corporation tax.

Disadvantages:

• The partners may not always agree or contribute equally, an obvious loss of control over a sole trader.
• The profits must be shared. 
• All partners must be consulted before major decisions can be made.
• The partners must 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 means the withdrawal of this share of the capital as the money must be paid into his/her estate. For this reason, it is usual to take out a life assurance policy on each partner’s life.

Private Limited Companies

Many private limited companies start out as sole traders or partnerships. They are mostly small-scale operations, often with just family members running the business. They form a limited company to:

1. Improve their financial security, as the owners (now called share holders) are no longer personally liable for their debts. Instead their liability is limited to the amount of their own investment. The abbreviation ‘Ltd’ has to be part of the name of the business. If the business fails, the owners do not go bankrupt. Instead the company goes into liquidation. So anyone who lends money or sells goods on credit should check that the business they are dealing with is financially sound.
2. Provide a better image to their customers, who are likely to assume the business is well established and more secure (whether it is or not!).

A private limited company issues share to its owners. Each share represents a share of the company and each share equals one vote. Therefore a shareholder with more than half of the shares can out vote the other shareholders. For this reason, the proportions held are often carefully thought out.

Advantages:

• The business can still stay small – many private limited companies have only three or four shareholders (the minimum is one director and one shareholder – there is no upper limit to the number of shareholders).
• The owners or shareholders usually work in the business everyday and have a vested interest in its success.
• The shareholders are often directors also – and responsible for the running of the business.
• It is relatively easy to start up a private company. In some cases the owners may only invest £100 or £200 each to start with.
• Shares can only be transferred with the agreement of all 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, particularly if it has a good financial track record in business.
• Because of limited liability the owners can never lose more than they have invested no matter how much is owed.

Disadvantages:

• It is not possible to sell shares to the general public to raise additional capital.
• Limited companies have to comply with more regulations than sole traders or partnerships, for instance they have to register with the Registrar of Companies and have their accounts audited (checked) by an accountant. They also have to comply with requirements of various Companies Acts.
• A limited company is not allowed to trade under the name of an existing company if this is likely to cause any confusion to suppliers or customers.
• If the company ceases trading it must be officially ‘wound up’ and if the company can not pay its debts it will go onto liquidation, which can be a time consuming and difficult process.

Public Limited Companies

These are the largest type of privately owned enterprise in the UK. Many started as private limited companies and were then floated on the Stock Exchange. Floated is the term used when a public limited company is launched. Any person can buy shares in a public limited company – identified by the letters ‘plc’ after its name. The shareholders in these companies are different to directors – who are usually free to choose whether or not to own shares. Many directors are just salaried employees, paid to run the company.

A company must have more than £50,000 before it can ‘go public’ and must have a satisfactory financial track record. Also, there needs to be enough people interested in buying shares for it to have a successful flotation.

Advantages:

• The major benefit is the vastly increased capital as many thousands of people or organizations may buy shares in the company. This makes expansion much easier.
• Some public companies can be quite small – there only needs to be a minimum of two shareholders and two directors.
• Very large public companies can often operate more cheaply than small companies as they operate 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 in value, which will increase the overall value of the company.

Disadvantages:

• A public company must be registered as such with the Registrar of Companies and has many external regulations to comply with. Any problems a 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 managed may raise objections or vote against a proposal made by the directors.
• Specific account must be prepared each year and these must be audited. Moreover, the accounts must be published so a ‘problem year’ cannot be hidden.
• Shareholders will expect to receive a dividend for their investment. They will also want their shares to increase in value. If the company has a poor year or if the stock market performs poorly and the shares fall in value, the shareholders will be tempted to sell, further depressing (lowering) the price. This makes the company vulnerable to a take-over bid as it is then relatively ‘cheap’ to buy.
• The shareholders may have little interest in the long term prospects of the company and simply be interested in quick returns on their investment. In these cases their interests are different to those of the directors, who may be looking at the long term security of the company.
• The original owner(s) may lose most of their control over the company, even if they retain a substantial number of shares. Sir Richard Branson bought his company back from public ownership because of this!

By Laurence Osborne