Types of Business Entity (Copy)

1.1 Types of Business Entity – Cheat Sheet

Types of Business Entity

1. Sole Trader
   • Definition: A single individual owns and operates the business.
   • Advantages:
     • Full control and decision-making.
     • Simple to set up.
     • Profits taxed as personal income.
     • Lower startup costs.
   • Disadvantages:
     • Unlimited liability.
     • Limited capital and resources.
     • Limited expertise and skills.
     • Business ends if the owner dies.
2. Partnership
   • Definition: Two or more people share ownership and management of the business.
   • Advantages:
     • Shared responsibility and workload.
     • Combined skills and expertise.
     • Easier to raise capital.
     • Profits taxed at personal income level.
   • Disadvantages:
     • Unlimited liability for all partners.
     • Potential for disputes among partners.
     • Shared profits.
     • Limited lifespan if a partner leaves or dies.
3. Limited Company (Ltd & PLC)
   • Definition: A company where ownership is through shares, and liability is limited to the amount invested by shareholders.
   • Advantages:
     • Limited liability for shareholders.
     • Ability to raise capital through shares.
     • Perpetual existence.
     • Easier access to loans.
   • Disadvantages:
     • Complex and expensive to set up and maintain.
     • Subject to higher taxation (corporation tax and personal tax on dividends).
     • Public Limited Companies (PLCs) face public scrutiny and more regulations.
   • Private Limited Company (Ltd):
     • Ownership: Shares held by a small group.
     • Funding: Can raise funds via private shares.
   • Public Limited Company (PLC):
     • Ownership: Shares available to the public on stock exchanges.
     • Funding: Can raise large amounts of capital by issuing shares publicly.

Sources of Finance

1. Loans:
   • Secured: Backed by collateral (lower interest rates).
   • Unsecured: No collateral required (higher interest rates).
2. Bank Overdraft: Short-term borrowing with high-interest rates to cover cash flow gaps.
3. Payment by Instalments: Purchasing goods/services and paying over time, usually with interest.
4. Leasing/Rental: Renting assets instead of purchasing them, offering flexibility.
5. Trade Credit: Delayed payment to suppliers, usually 30-90 days, easing short-term cash flow.

Key Terms

• Unlimited Liability: The owner is personally responsible for business debts.
• Limited Liability: The owner’s liability is limited to their investment in the business.
• Capital Raising: Methods businesses use to secure funds (e.g., loans, shares, etc.).

Decision-Making Context

• Sole Trader: Full control, simple setup, but at risk of unlimited liability and limited resources.
• Partnership: Shared responsibility and expertise, but also shared risks and unlimited liability.
• Limited Company: Limited liability, easier access to capital, but complex setup and higher regulatory burden.