Task 2- Types of businesses in the UK

Sole traders

A sole trader is 'a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses', though can have employees. They are self-employed with the business having no legal identity separate to its owner. There are many financial responsibilities as they have to keep records of the business' sales and expenses and send a 'Self Assessment tax return' every year. The sole trader also raises all of their own funds as there are no shareholders.

Advantages:

• Full control of the business 
• Changes can be made quickly and easily
• Can be closer with customers
• Fast and simple to start business
• Low setup costs

Disadvantages

• Personally responsible for any debts or liabilities
• Often perceived as 'less professional'
• Limited finances
• No partners to work with 
• Difficult to keep a work-life balance

Example: Freelancers (e.g. designers, artists, photographers, media consultants)

Limited companies

A limited company is a business which is 'legally separate from its owners (typically shareholders) and managers (formally called directors)'. All of the finances are separate from the business owner's personal finances. 

They can be limited by shares or limited by guarantee. Limited by shares companies are businesses that make a profit, which they can keep after paying tax, and have shareholders involved. Limited by guarantee companies, on the other hand, usually aren't for profit as the money is invested back into the company. There are also guarantors and a 'guaranteed amount', meaning there's an agreed amount of shares the business owners pay to the guarantors. 

Advantages

• Limited liability
• Gives an appearance of credibility and prestige
• Often can provide greater tax efficiency
• Can easily change ownership of the business

Disadvantages

• Additional reporting and filing requirements
• Potentially higher legal, accountancy and other administrative costs
• Information about the company is available to the public

There are numerous different types of limited companies:

• Public limited company (PLC)
• Private company limited by shares (LTD)
• Private company limited by guarantee

A public limited company (PLC) is owned by its shareholder/s and run by its directors, who technically could be any members of the public. It is the only kind of company that can offer its shares to the public to raise funds for commercial use. The ability to raise funds from the public is a driving reason that many choose to create a PLC.

Examples: Burberry, BT, Tesco

A private company limited by shares (LTD) cannot be owned by any members of the public and is instead owned by a non-government organisation (NGO), with the sale of company shares being handled privately. They are one of the most common types of companies as it combines the potential to share in profits with a clear restriction on personal financial liability, meaning shareholders' personal assets wouldn't be at risk if the company faced financial difficulties.

Examples: Iceland, Wilko

A private company limited by guarantee is a structure often used by non-profit organisations without shareholders, such as charities and community projects. Any surplus income is typically re-invested back into the company or is used for promotional purposes, instead of distributing the profits amongst the members. Typically a group of guarantors agree to contribute a sum of money to help start up the company.

Example: PGA European Tour, Oxfam

Contrasting with limited companies are unlimited companies (Unltd) which have no formal restrictions on the sum of money the shareholders have to pay if the company were to go into 'formal liquidation' (closure of a limited company where its assets are sold and distributed). 

Example: C. Hoare & Co, The Equitable Life Assurance Society

Partnerships

Partnerships are businesses owned by two or more people. A contract called a 'deed of partnership' is drawn up, detailing what type of partnership it is, how much capital (wealth) each party contributes and how profits and losses will be shared. A partner doesn't have to be a person; for example, a limited company can be counted as a 'legal person' and act as a partner. 

Both partners will work in pursuit of the business purpose for which the partnership was created, contributing capital, skills and time, often in different areas of the business. 

Advantages

• Fewer legal obligations
• Easy to start
• Shared responsibility between partners
• Collaborative decision-making
• More privacy
• Easy access to profits

Disadvantages

• No independent legal status
• Unlimited liability (partners are personally liable for debts/losses)
• Perceived lack of prestige
• Potential differences and conflict
• Profits must be shared
• Limited access to capital

Example: Pret A Manger, Whatsapp, Carphone Warehouse

There is a type of business known as a limited liability partnership (LLP) but they aren't legally recognised as partnerships in the UK. For a business to be an LLP, some or all of the partners have to have limited liabilities, meaning they are only responsible for their own misconducts.

Social enterprises

Social enterprises are businesses, often independent, that have a social mission, such as giving back to the community, the environment or encouraging positive social change. They reinvest their profits back into the business or donate them to charitable causes, putting the interests of people and the planet before shareholder gain. Unlike charities, they need to make a surplus or earnings to keep up as they don't rely completely on donations. They exist in nearly every sector from consumer goods to healthcare to creative agencies. They also create jobs and and opportunities for the more marginalised groups of people, providing them with training and employment opportunities. 

Advantages

• Have a positive impact on society
• Option to get financial help from the government or private investors
• Draw more attention from the people and the media
• Benefit the economy by creating new jobs

Disadvantages

• Competition with enterprises that have the same social mission
• Strict rules and regulations
• Must constantly monitor the market to appeal to customers and address new social matters

Examples: The Big Issue, the Eden Project, TranSanta, TOMS

Charities

A charity is a business with 'charitable' aims such as preventing poverty or advancing the arts, culture, heritage or science. They cannot make any profit as all of the money they raise must go towards achieving their aim, meaning they can't have owners or shareholders benefiting from it. They must be established exclusively for public benefit, which means their work must have a positive effect that outweighs any negative side effects or consequences, and it must benefit members of the public in some way (specific target audience depends on their aim). 

Advantages

• Don't have to pay income/corporation tax, capital gains tax or stamp duty
• Pay 20% maximum of normal business rates on the buildings they use
• Special VAT treatment 
• Easier to raise funds compared to other non-charitable bodies

Disadvantages

• Strict rules that apply to trade
• Trustees receive no financial benefits (e.g. salaries, services)
• Rely on volunteers working for them
• Have to be conscious of charitable and personal interests conflicting
• Limits to the extent of political and campaigning events a charity can take on

Examples: Theatre Support Fund, The Actors' Benevolent Fund

Unincorporated associations

An unincorporated association is an organisation set up by two or more people for non-profit reasons with an agreed upon purpose (e.g. voluntary groups, societies, clubs). They don't need to be registered and don't cost anything to set up, though individual members are personally responsible for any debts or contractual obligations. They are governed by their own rules with no legal obligation to have a written governing document or constitution.

Advantages

• Little/no set up costs
• Cheap and easy to run
• No formal registration requirements
• No detailed procedures to follow in meetings
• Less intimidating structure for those who've never run a business before

Disadvantages

• No separate legal personality
• Management committee are likely to be personally liable for debts
• May be seen as 'less professional' by potential funders
• Little/no financial gain

Examples: drama clubs, art clubs, volunteer groups

Websites used:

https://www.informdirect.co.uk/business-management/what-is-a-sole-trader/

https://www.gov.uk/set-up-sole-trader

https://www.informdirect.co.uk/business-management/sole-trader-advantages-for-business/

https://www.informdirect.co.uk/business-management/disadvantages-of-a-sole-trader-business/

https://sjdaccountancy.com/resources/becoming-contractor/sole-trader/#:~:text=Some%20popular%20sole%20trader%20examples,delivery%20drivers%2C%20tutors%20and%20nannies)

https://www.informdirect.co.uk/company-formation/what-is-a-limited-company/

https://www.gov.uk/limited-company-formation

https://www.informdirect.co.uk/company-formation/public-limited-company-what-is-it/

https://www.companyaddress.co.uk/post/38

https://www.informdirect.co.uk/business-management/company-limited-by-guarantee-what-is-it/

https://theartsdevelopmentcompany.org.uk/resources/what-is-the-best-business-model-for-my-social-enterprise/

https://www.informdirect.co.uk/business-management/general-partnership-uk-what-is-it/

https://www.socialenterprise.org.uk/what-is-it-all-about/

https://www.socialenterprisemark.org.uk/what-is-social-enterprise/

https://honestproscons.com/social-enterprise-advantages-and-disadvantages/

https://howcharitieswork.com/about-charities/what-is-a-charity/

https://hlca.co.uk/resources/advantages-and-disadvantages-of-being-a-charity/

https://www.gov.uk/unincorporated-associations

https://www.netlawman.co.uk/ia/unincorporated-associations

https://scvo.scot/support/setting-up-a-charity/decide-on-structure/voluntary-or-unincorporated-association

https://www.bbc.co.uk/bitesize/guides/zdc6mfr/revision/1