Types of Business Ownership Explained | Sole Traders, Partnerships, LTD, PLC and Franchise

Summary

This video script explores various business ownership structures, including sole traders, partnerships, private and public limited companies, and franchises. It outlines their operational dynamics, financial implications, and legal responsibilities, highlighting benefits and drawbacks. Examples like McDonald's illustrate the franchise model, while companies like Mars Inc. and Dyson exemplify private limited companies. The script serves as an informative guide for entrepreneurs considering different business structures.

Takeaways

• 📚 The type of business ownership is a critical decision that affects the legal structure, financial liability, tax obligations, and management decisions of a business.
• 👤 Sole traders are self-employed individuals who own and control their business, with no legal distinction between personal and business assets, resulting in personal liability for business debts.
• 🔑 Benefits of being a sole trader include ease of setup, full decision-making freedom, low startup costs, and retention of all profits, but drawbacks include unlimited liability and potential for long working hours.
• 🤝 Partnerships involve two or more people sharing ownership and liabilities, with a partnership agreement outlining the business's legalities, including profit sharing and decision-making.
• 💼 Advantages of partnerships include shared expertise, teamwork, and greater borrowing power, but they can suffer from disagreements and unequal workloads among partners.
• 🏢 Private limited companies are incorporated businesses owned by shareholders, offering limited liability and tax efficiency, but with more administrative and legal requirements.
• 💼 Directors of private limited companies are not personally liable for business debts, but profit distribution can be more complex and administrative costs are higher.
• 🌐 Public limited companies (PLCs) are similar to private limited companies but can offer shares to the public, providing greater prestige and capital generation opportunities.
• 🎉 Franchising offers entrepreneurs a proven business model and brand, with the franchisee benefiting from the franchisor's training, materials, and advertising support.
• 💰 Franchisees must pay initial fees and ongoing royalties to the franchisor, and may face restrictions on business operations and innovations due to the franchisor's model.
• 📈 The choice of business ownership can significantly influence the financial and operational aspects of a business, with each type offering unique advantages and challenges.

Q & A

What is the significance of choosing the right type of business ownership?

Choosing the right type of business ownership is crucial as it influences various aspects of the business, including the owner's financial liability, tax obligations, and the decision-making process throughout the business's existence.

What is a sole trader and what percentage of the UK's private sector business population did they make up in 2019?

A sole trader is a self-employed individual who owns and controls a business. They made up approximately 59% of the total private sector business population in the UK in 2019, with 3.5 million registered sole traders.

What are the legal implications of being a sole trader?

As a sole trader, there is no separate business entity, meaning the business owner's personal and professional assets and liabilities are not distinguished. This makes the sole trader personally liable for the business's debts.

What are some benefits of registering as a sole trader?

Benefits of registering as a sole trader include ease of setup, complete freedom in decision-making, low startup costs, and the ability to keep 100% of the business's profits.

What are the potential drawbacks of being a sole trader?

Drawbacks of being a sole trader include unlimited liability, potential loneliness and pressure due to sole responsibility, long working hours, and the need to take on additional roles such as administration, bookkeeping, and marketing.

What is a partnership and how does it differ from a sole trader in terms of ownership?

A partnership is a business owned by two or more people, legally distinct from a sole trader. Partners share unlimited liability and the business's profits and assets, but they also share the workload and decision-making.

What is a private limited company and what does the term 'limited' signify?

A private limited company is an incorporated business owned by shareholders, typically the directors. The term 'limited' signifies that the business's debts are separate from the shareholders' personal assets, protecting them from personal liability.

What are some advantages of operating as a private limited company?

Advantages of operating as a private limited company include limited liability for shareholders, tax efficiency, and the ability to raise capital through the sale of shares to investors.

What is the difference between a private limited company and a public limited company (PLC)?

While both are owned by shareholders and have limited liability, a public limited company can offer shares to the public via the stock exchange, allowing for greater access to capital. However, this also comes with increased legal requirements and potential loss of control by the original owners.

What is franchising and how does it differ from starting an independent business?

Franchising is an alternative to starting an independent business where an entrepreneur acquires a proven business model and uses the franchisor's brand and products. This differs from an independent business as it provides the franchisee with established systems, training, and brand recognition.

What are some key advantages and disadvantages of running a franchise?

Advantages of running a franchise include a proven business system, training, economies of scale, and shared advertising. Disadvantages include the need to pay an initial fee and ongoing royalties, restrictions on business operations, and potential lack of freedom to make improvements to the business model.

Outlines

00:00

🏪 Business Ownership Structures

This paragraph introduces the concept of business ownership, highlighting its importance in the setup and operation of a business. It outlines the various forms a business can take, such as sole trader, partnership, and private limited company, and touches on the implications each has on financial liability, tax obligations, and decision-making. The paragraph emphasizes the prevalence of sole traders in the UK, their unlimited liability, and the benefits and challenges they face, including ease of setup, complete decision-making freedom, low startup costs, and the retention of all profits, contrasted with the risks of personal liability and long working hours.

05:02

🤝 Partnerships and Private Limited Companies

The second paragraph delves into partnerships, comparing them to sole traders but noting the shared ownership among two or more individuals. It explains the role of a partnership agreement and distinguishes between different types of partnerships, including limited and limited liability partnerships. The paragraph also discusses the advantages of shared expertise and teamwork in partnerships, as well as the challenges of potential disagreements and unequal workloads. Moving on to private limited companies, the text describes them as having a separate legal entity with shareholders who are not personally liable for company debts. It contrasts the tax efficiency and administrative complexity of private limited companies with other business forms and mentions notable examples like Mars Inc and Dyson.

10:04

🌐 Public Limited Companies and Franchising

The final paragraph explores public limited companies (PLCs), which, like private limited companies, offer limited liability and can be publicly traded. It notes the prestige and rarity of PLCs, their increased legal and administrative demands, and the potential for generating capital through public share offerings. The paragraph also touches on the risks of losing control and the possibility of a hostile takeover. It concludes with a discussion of franchising as an alternative to starting a business from scratch, providing a proven business model and brand recognition. The paragraph outlines the roles of franchisees and franchisors, the benefits of training and economies of scale, and the challenges of restrictions on business operations and potential costs associated with franchise fees and royalties.

Keywords

💡Business Ownership

Business ownership refers to the legal structure a business operates under, which is crucial for setting up and running a business. It affects financial liability, tax obligations, and decision-making processes. In the video, various types of business ownership are discussed, including sole traders, partnerships, private limited companies, public limited companies, and franchises, each with distinct characteristics and implications for the business.

💡Sole Trader

A sole trader is an individual who owns and controls a business, often self-employed or a sole proprietor. This form of business ownership was prevalent in the UK with 3.5 million registered sole traders in 2019. As per the script, a sole trader has unlimited liability, meaning they are personally responsible for the business's debts. The concept is central to the video, illustrating the simplest form of business ownership with its benefits of ease of setup and complete decision-making freedom, and drawbacks such as personal financial risk.

💡Partnership

A partnership is a business owned by two or more people, who share liabilities and profits. The script mentions that partnerships can be beneficial due to shared expertise and teamwork, but they also come with the risk of disagreements and unequal workloads among partners. The video distinguishes between basic partnerships and other types like limited partnerships and limited liability partnerships, which will be detailed in a separate video.

💡Private Limited Company

A private limited company, often abbreviated as Ltd., is a business owned by shareholders who may also be the directors of the company. The video explains that the 'limited' in its name signifies that the company is a separate legal entity, protecting shareholders from personal liability for the company's debts. The script uses Mars Inc and Dyson as examples of private limited companies, emphasizing their choice to remain private to preserve family values and control.

💡Public Limited Company

A public limited company, or PLC, is similar to a private limited company but can offer shares to the general public and is typically seen as more prestigious. The video points out that PLCs have more stringent legal requirements and can raise capital by selling shares on the stock exchange. It also warns of the potential loss of control and ownership for the original owners if the company goes public, as illustrated by the examples of Starbucks and Snap Inc.

💡Franchise

A franchise is a business model where an entrepreneur acquires the rights to use a proven business system and brand from a franchisor. The video uses McDonald's as a prominent example of a franchise, highlighting the benefits of acquiring a recognized brand and business model, which minimizes startup challenges. The script also discusses the roles of the franchisee and franchisor, and the advantages and disadvantages of franchising.

💡Unlimited Liability

Unlimited liability is a concept where the business owner is personally responsible for the business's debts. This term is central to the discussion of sole traders and basic partnerships in the video, where it is mentioned that the owners may have to pay for business losses out of their own pocket, highlighting the financial risk involved in these business structures.

💡Tax Efficiency

Tax efficiency refers to the ability of a business structure to minimize tax liabilities legally. The video mentions that private limited companies are more tax efficient than sole traders or partnerships, which is an advantage of choosing this business structure. However, it also notes that getting paid as a shareholder can be more complicated due to the need for salary or dividend payments.

💡Shareholders

Shareholders are individuals who own shares in a company, granting them ownership and voting rights. The video explains that in a private limited company, the ownership is divided into shares, making the directors and possibly other investors the shareholders. Shareholders are a key aspect of the corporate structure discussed in the video, affecting decision-making and profit distribution.

💡Flotation

Flotation is the process by which a private company goes public by offering its shares on the stock exchange. The video uses this term to describe the transition of a business from private to public, allowing it to raise capital through share sales. This process can lead to significant growth and investment, as demonstrated by the example of Snap Inc.'s successful flotation.

💡Franchisor and Franchisee

The franchisor is the owner of a trademark and business model who grants rights to a franchisee, while the franchisee is the individual who purchases those rights. The video explains the relationship between these two stakeholders in a franchise business, emphasizing the support and proven system provided by the franchisor to the franchisee, and the fees and royalties paid in return.

Highlights

Business ownership types are crucial for legal structure and impact business operations significantly.

Sole traders are self-employed individuals with complete control and unlimited liability for business debts.

In 2019, 59% of UK's private sector businesses were sole traders, with 3.5 million registered.

Sole traders enjoy ease of setup, decision-making freedom, and retain all profits but face unlimited liability and long working hours.

Partnerships are owned by two or more people and require a partnership agreement for legalities and profit sharing.

Partnerships offer shared expertise and teamwork but can lead to disagreements and unequal workloads.

Private limited companies offer limited liability and are separate legal entities with shareholders.

Mars Inc and Dyson are examples of private limited companies that chose to remain private to retain family values.

Public limited companies (PLCs) can offer shares to the public and are seen as prestigious but have more legal requirements.

Franchising allows entrepreneurs to acquire a proven business model and brand.

McDonald's is a famous franchise model providing a complete business package for entrepreneurs.

Franchises offer support and training but require fees and may restrict business modifications.

Franchisees must pay initial fees and ongoing royalties to franchisors, facing potential restrictions on business operations.

The Founder film illustrates the story of McDonald's franchise expansion and is recommended for business enthusiasts.

Different business ownership types have unique benefits and drawbacks for entrepreneurs to consider.

Transcripts

the type of business ownership refers to the legal structure that the business chooses

to operate with, it is a crucial element of setting up a business and one which

entrepreneurs must think very carefully about.. They can choose to run their

business in a number of ways including as a sole trader in a partnership or

even as a private limited company amongst other options. However each of

these will influence the business throughout its existence such as the

owners financial liability if the business runs into financial difficulty

how the business pays tax and the way management decisions are made about the

business. This video will introduce the common options a business owner has

alongside some benefits and drawbacks of each with support in examples

. Firstly we're going to start with sole traders, a sole trader is often referred

to a self-employed or sole proprietor and describes any business that is owned

and controlled by one person. In 2019 this type of business ownership made up

approximately 59% of the total private sector business population in the UK

with a staggering 3.5 million registered sole traders. A business owner can still

register as a sole trader even if they have employees and are often individuals

who provide a specialist service such as plumbers hairdressers or

photographers. Legally there is no separate business entity meaning there

is no distinction between the business owner's personal and professional assets

and liabilities. Therefore a sole trader is personally liable for the business's

debts and may have to pay for the losses made by the business out of their own

pocket. There's a number of benefits to registering as a sole trader, firstly it's

very easy to set up and provides the owner with complete freedom to make

decisions as they see fit. Also the typical sole trader business will have

low startup costs however most important to some, the sole trader keeps a hundred

percent of the business's profits. Whilst this all sounds great there are a number

of drawbacks to consider when starting a business as sole trader, as discussed

earlier unlimited liability heightens the risk for the business owners also a

sole trader is follow responsible for the business and may at times feel

lonely and very pressured, whilst the typical sole trader will work extremely

long hours and also take on additional roles of running a business to reduce

costs such as: admin. bookkeeping and marketing just to name a few.

Moving on to partnerships, these are businesses that are similar in nature to

a sole trader but legally owned by two or more people, typical examples of

partnerships are skilled people and professionals who decide to set up a

business together such as trades people, dentists and solicitors. A partnership

agreement is a key legal document which is agreed and signed by all partners of

the business and it covers all the key legalities of the business such as how

management decisions are made and how profits are going to be

shared. There are also two other versions of business partnerships, these are

limited partnerships and limited liability partnerships, however these

will be covered in greater detail in a separate video if you wanted to find out

more. Importantly the basic partnership agreement still means the business

owners have unlimited liability just like a sole trader, yet all liabilities

and debt will be shared out equally between the businesses partners depending

on their share in the business as is all the profits and assets. A key advantage

of a partnership is the shared expertise it provides the owners alongside the

benefit of teamwork which can reduce working hours. Whilst a typical

partnership would have low startup costs it also has a benefit of greater

borrowing power as there are more people involved to share the debt and more people

to raise investment capital into the business during its lifetime. However the

main disadvantage of a partnership comes from the disagreements that can happen

over key business decisions and if one partner feels they are working harder

than the other this can really cause some tension in the business whilst the

action of one partner could also have a negative impact on all of the partners

involved in the business and one final disadvantage of a partnership is that

profits have to be shared out between all partners. Moving on to private

limited companies in comparison to sole traders and partnerships, a private

limited company is owned by shareholders who were typically the directors of the

business and shares cannot be offered to the general public, you may also see a

private limited company with the abbreviation Ltd. after their name and a

private limited company is an incorporated business which means that

the business is actually classed as a company and has its own separate legal

entity in the eyes of the law therefore the ownership of a limited

company is divided up into equal parts called shares and the owners are now

classed as shareholders, this is a completely different structure to sole

traders and partnerships that we just looked at, unlike a sole trader or

partnership the owners of a limited company are not necessarily involved in

the running of the business unless they have been elected to the board of

directors common examples of private limited companies are local retailers

such as high street shops or restaurants that do not have a national

presence. Mars Inc is also a famous example of a private limited company

although they offer huge worldwide presence they've chosen not to go public

to ensure they retain the family values of the business and feel these would be

lost if they operate it as a public limited company, this is also the same

scenario at Dyson. Importantly the term limited in private limited company means

that all the debt of the business is separate from the individual

shareholders therefore they are not personally liable and won't lose their

personal assets should the business suffer from financial hardship. Another

key advantage of being a private limited company is it is much more tax efficient

than a sole trader or partnership business model, however once the owners

hold shares in the company the assets and any profits that are generated also

belong to the company therefore getting paid can be more complicated for a

shareholder than it is for a business owner who operates as a sole trader or

in a partnership, this is because the director of a private limited company

has to legally transfer money to you in the form of a salary or dividend payment.

Also operating as a private limited company has greater admin costs and

increased legal requirements in comparison to sole traders and

partnerships. In addition to this legally the company has to publicly disclose

key information which not all owners would want to share willingly. Moving on

to public limited companies just like a private limited company a public limited

company is owned by shareholders and run by its directors it has a key advantage

of limited liability and is often referred to as a PLC. Public limited

companies are often seen as a more prestigious business but are often less

common and they only actually make up approximately 5% of all the limited

companies in the UK. However PLC's have more legal requirements and paperwork in

comparison to sole traders partnerships and even private limited companies the

key advantage for a business which operates as a public limited company is

it it has the option to offer shares to the public via the stock exchange which

is a fantastic way of generating additional capital for the business. It

is common for a private limited company to make the decision to go public

through a process of flotation once the business goals public, it has the

opportunity to receive investment through the sale of shares commonly from

investment banks pension funds and wealthy individuals however it's very

important to know that the original owners can lose control and ownership of

the business with the potential for the company to be taken over if a majority

of the shareholders agree to bid. An example of a public limited company is

Starbucks and more recently Snapchat or Snap Inc. which went public in 2017 with

stocks soaring 44 percent on their first day of trading valuing the company at

twenty eight billion dollars although the tech enterprise on paper was making

a loss it propelled its co-founders into the top tier of tech billionaires. The

final type of business ownership we're going to look at is franchising this is

an alternative to setting up a business from scratch, it allows the entrepreneur

to acquire a proven business model and use its brands and products to open up a

new store. An extremely famous franchise model is McDonald's this allows an

entrepreneur to open up a fast-food restaurant with all of McDonald's famous

brand in store layouts, technology and products to provide them with guaranteed

custom. In comparison setting up an independent fast-food restaurant from

scratch. At this point I would recommend you to all watch The Founder which is a

film based on the story of how Ray Kroc turned McDonald's into one of the

world's biggest franchises, it's a great watch for anyone interested in business.

Now there are two key stakeholders in a franchise, the franchisee and the

franchisor, the franchisee is a person who purchases the rights to the

franchise from the franchisor the franchisor is a person or company that

owns a trademarks and business model that receives payments from the

franchisee. Now there are a number of key advantages to running a franchise

firstly the owner gets a proven business system and training from the franchisor

on how to use it which minimises the problems faced by most business startups.

Also the franchisee benefits from economics of scale when purchasing

materials and supplies as well as advertising and negotiations for store

locations, this is in comparison to a sole trader who would have to negotiate

on their own which would typically see them pay more or get less favorable

terms. However as you'd imagine in return for the use of the trademark and ongoing

support from the franchisor, the franchisee has to pay an initial fee

and ongoing royalties to the franchisor, this can be quite costly. Franchises

also have a few more key disadvantages to consider such as the restrictions and

often monitoring of business performance on the franchisee by the franchisor

whilst any alterations or improvement the franchisee wants to make to the

business may get rejected by the franchisor as it doesn't suit the

business' typical or traditional model, this can really frustrate the

entrepreneur who purchase a franchise as they don't have the freedom and

flexibility that the typical business owner would have. Well I hope this has

been a helpful introduction to the different types of business ownership

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further, thank you for listening and all the best.