FORMS OF BUSINESS

SOLE TRADERS
There are millions of businesses trading all over the world. They vary in their size, ownership
and legal structure. A sole trader or sole proprietor is the simplest form of business organization.
It has one owner, but can employ any number of people. Sole traders can be involved in wide
range of business activity. In the primary sector, they may be farmers or fishermen. In the
secondary sector, they may be small building or manufacturing businesses. However, most sole
traders will be found in the tertiary sector. Many of these are retailers running small shops.
Others may offer services such as web design, tutoring, hairdressing, tax driving and garden
maintenance. Setting up as a sole trader is easy, as there is no legal requirements. However, sole
traders do have some legal responsibilities.

 They may have pay taxes and other government charges.

 Once their turnover reaches a certain level, they must register for the value added tax
(VAT). However, in some countries some sole traders choose to register because they
can claim back VAT that they have paid, even through they do not charge VAT.
 They may need a license to trade if they are involved in activities such as selling in a
marketplace or street or supplying a taxi service or public transport.
 They may need planning permission for example a person may have to apply to the
local authority for planning permission to convert a shop into a restaurants.
 They must comply with legislation aimed at business practice for example, they are
legally required to provide safe working conditions for their employees.

All sole traders have unlimited liability. This means that if the business fails, a sole trader can
lose more money than was originally invested. This is because a sole trader can be forced to use
personal wealth to pay off business debts. The advantages and disadvantages of operating as a
sole trader are summarized in Table 1.

PARTNERSHIP
A partnership, in the UK, is defined in the Partnership Act 1890 as the ‘relation which subsists
between persons carrying on business with common view to profit’. Put simply, a partnership has

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more than one owner. The ‘joint’ owners will share responsibility for running the business and
also share the profits. Partnerships are often found in professions, such as accountants, doctors,
estate agents, solicitors and vets. After sole traders, partnerships are the most common type of
business organization. It is usual for partners to specilise. There are no legal requirements to
complete when a partnership id formed. However, partners may draw up a deed of partnership.
This is a legal document that states partners’ right in the event of a disagreement. It covers issues
such as:

 How much capital each partner will contribute.

 How much profits and losses will be shared among the partners.
 The procedure for ending the partnership.
 How much control each partner has.
 Rules for taking on new partners.

If no deed of partnership is drawn up the arrangements between partners will be subject to the
Partnership Act. If there is a dispute regarding the share of profits, the Act states that profits are
shared equally among the partners. The advantages and disadvantages of partnerships are shown
in Table 2:

LIMITED PARTNERSHIPS
The Limited Partnerships Act 1907, in the UK, allows a business to become a limited
partnership, although this is rare. This is where some partners provide capital but take no part in
the management of the business. Such a partnership will have limited liability, the partner can
only lose the original amount of money invested. A partner with limited liability cannot be made
to sell personal possessions to meet any other business debts. This type of partner is called a
sleeping partner. Even with a limited partnership there must always be at least one partner with
unlimited liability. The Act also allows this type of partnership to have more than 20 partners.
The Limited Liability Partnership Act 2000 allows the setting up a limited liability
partnership. All partners in this type of partnership, the business has to agree to comply with a
number of regulations, such as sending annual reports to the Registrar of Companies.

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LIMITED COMPANIES
A limited company has a separate legal identity from its owners. The company can own assets,
form contracts, employ people, sue people and be sued. Certain features are common to limited
companies.

 Capital is raised by selling shares. Each shareholder owns a number of these shares and is
a joint owner of the company. They are entitled to vote on important business decisions,
such as a choice of who should run the company. They also get dividends paid from
profits. Shareholders with more shares will have more control and get more dividends.
 Unlike sole traders or partnerships, the owners (shareholders) have limited liability. If a
limited company has debts, the owners can only lose the money they originally invested.
They cannot be forced to use their own money to pay any debts that have been run up by
the business.
 Limited companies are run by directors who are elected by the shareholders. The board of
directors, headed by a chairperson, is accountable to shareholders. The board runs the
company as the shareholder wish. If the company performs badly, directors can be voted
out at an annual general meeting (AGM).
 Unlike sole traders and partnerships, who pay income tax on profits, limited companies
pay corporation tax.

Forming a limited company: To form a limited company, it is necessary to follow a legal

procedure. This involves sending some important documents to the Registrar of companies: these
are the memorandum of association and the articles of association. These are shown in Figure 1
and 2 below.

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If the documents in Figure 1 and 2 are acceptable, the company gets a certificate of
incorporation. This allows it to trade as a limited company. The shareholders have a legal right to
attend the AGM and must be told of the date and venue in writing.
A limited company can be set up online and a number of websites offer such services. Such
websites provide templates for the memorandum of association and the articles of association,
which makes the whole process easier.

PRIVATE LIMITED COMPANIES

Most private limited companies are small or medium sized businesses, through some are large
businesses, similar in size to public limited companies. Private limited companies share the
following features.

 Their business name ends in Limited or Ltd.

 Shares can only be transferred privately, from one individual to another. All shareholders
must agree on the transfer and they cannot be advertised for sale.
 They are often family businesses owned by family members or close friends.
 The directors of private limited companies tend to be shareholders and involved in
running business.
The advantages and disadvantages of private limited companies are outlined in Table 3

FRANSCHISING
Starting up your own business carries a lot of risk. Most new start-ups have ceased to exist after
5 years of trading. One way of possibly reducing this risk is to buy a franchise. The franchisor is
a company that owns the franchise. It has a track record of running a successful business
operation. It allows another business, the franchisee, to use its business ideas and methods in
return for variety if fees. There are a number of successful global franchises.
The franchisor provides a variety of services to its franchisees.

 It gives the franchisee a licence to make a product that is already tried and tested in the
marketplace. This could be a physical product but is far more likely to be a service.
 The franchisor provides a recognized brand name which customers should recognize
and trust. This helps generate sales from the moment the franchise starts trading.

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  The franchisor will provide a start-up package. This will include help and advice about
setting up the business. The franchisor might provide the equipment to start the
business. It might help find a bank which will lend money. It will provide training for
the few new franchisee.
 Many franchises provide materials to use to make the product.
 It is likely to provide marketing support.
 There should be ongoing training. This will be linked to issues such as maintaining
standards, sales and new products.
 There is likely to be a range of business services available at competitive prices.
 Many franchises operate exclusive area contract. This is where one franchisee is
guaranteed that no franchise deal will be signed with another franchisee to operate in a
particular geographical area. This prevent competition between franchisees and so helps
sales.
 Over time, the brand should be developed by the franchisor.

In return for these services, the franchisee has to pay a variety of fees.

 There will be an initial start-up fee. Part of this will cover the costs of the franchisor in
giving advice or perhaps providing equipment. Part of it will be a payment to use the
franchise name.
 Most franchisors charge a percentage of sales for ongoing management services and the
ongoing right to use the brand name.
 Franchisors will also make profit on the supplies they sell directly to their franchisors.
 There may also be one-off fees charged for management services as training.
There are advantage and disadvantages of franchising. Table 4 shows some general
advantages and disadvantages for the franchisee. Although one of the advantages is that
the franchisor provides national advertising, some of it can be quite poor. Also, like any
other business enterprise they can be successful or they can fail. Some of the advantages
and disadvantages to franchisors of franchising are summarized in Table 5.

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SOCIAL ENTERPRISES
Some businesses operate as a social enterprise. These organization trade with the aim of
improving human and environmental well-being, rather than making profit for external owners.
They are sometimes referred to as not-for-profit organizations. Generally, social enterprises:

 Have a clear social and or environmental mission.

 Generate most of their income through trade or donations.
 Reinvest most of their profits.
 Are not connected to the government.
 Are majority controlled in the interests of the social mission.
 Are accountable and transparent.

Social enterprises may take a variety of forms.

Co-operatives: Most modern co-operatives operate as consumer or retail co-operatives. They are
owned and controlled by their members. Members can purchase shares that entitle them to a vote
at annual general meetings (AGMs). The members elect a board of directors to make overall
business decisions and appoint managers to run day-to-day business. Co-operatives are run in the
interests of their members. Any surplus made by the co-operative is distributed to members as a
dividend according to levels of spending.

Worker co-operatives: These are businesses jointly owned by their employees.

 Contribute to production and be involved in decision making

 Share in the profit
 Provide some capital when buying a share in the business

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Mutual organizations: Most building in the UK are mutual organization. They are owned by
their customs or members, as they are known rather than by shareholders. They offer a wide
range of financial services, such as mortgages and saving products. Profits are returned to
members in he form of better and cheaper products. Friendly societies began in the 18th and 19th
centuries to support the working classes. Today, they offer a wide range of affordable financial
services. These include savings schemes, insurance plans and protection against the loss of
income or death.

Charities: These exist to raise money for various causes and draw attention to needs of
disadvantaged groups in society. Examples: UNICEF , Save the Children, World Vision, MAP
International and Direct Relief. Charities rely on donations for their revenue. They may also
organize fundraising events such as cake sales, sponsored activities and raffles. A number of
charities also run business ventures such as charity shops.

LIFESTYLE BUSINESSES
A person running a lifestyle business aims to make enough money and provide the flexibility
needed to pay for a particular lifestyle. The business should be profitable enough to support the
desired lifestyle without having to sacrifice time for the entrepreneur’s personal life. In some
countries, typical examples might include tradepersons, such as plumbers and electricians,
consultants in a variety of industries, florists, and people who run small retail stores, bed and
breakfasts and small lifestyle farms. Many online businesses such as web design, coaching,
advisory or marketing services also operate as lifestyle businesses. Some features of lifestyle
businesses are:

 The business will often be small and is likely to have just one owner.
 The personal interests of the entrepreneur are likely to influence the nature of the
business, so that time spent working is enjoyable.
 An owner may undertake a variety of different ventures.
 Running the business is likely to be much less stressful than other forms of business.
 The business is likely to be home-based.
 They are likely to have similar advantages and disadvantages to those of sole traders.
 Lifestyle businesses are sometimes considered an alternative to retirement.

Lifestyle businesses are sometimes contrasted with start-up businesses, which are intended to
grow and create increasing amounts of profit. Because growth in revenue and profit is not key
objective to lifestyle businesses, owners of lifestyle businesses usually have to provide all the
funding themselves. Not many external investors will fund businesses that do not aim to
maximize profits. However, there are exceptions,

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ONLINE BUSINESSES
Amazon.com, Alibaba, Confused.com , eBay and Facebook are examples of large and well-
known online businesses. However, there are many thousands of much smaller examples
including retailers, consultants, gaming companies, bloggers, share dealers, teachers, web
designers and information providers. Despite being very different companies, they all use the
Internet to trade and are likely to have the following features in common.

 Customers access the business via the Internet. All online businesses have website which
gives information about their products, their prices and general information about the
company.
 Online businesses collect payment for goods and services electronically. Credit cards,
debit cards and PayPal are the most common methods used.
 There are no formal procedures to follow or legal requirements when starting an online
business. However, traders must have secure websites with adequate protection against
technical breakdowns and fraud.
 Online businesses have low set-up costs. A trader could build their own website for a few
hundred pounds. Alternatively, for a higher set-up costs, a new online trader could
purchase a complete set-up package, including web design, domain name registration and
arranging the hosting of the website by an Internet service provider. Many online
businesses are also run from home, which eliminates the need to find business premises.

For many online businesses, paid for or sponsored advertising is their main source of revenue.
Social media such as Facebook and Instagram are most use. The majority of businesses have
websites that give information about company history, products, services, company aims and
contract details. Also, many retailers such as supermarkets, chain stores and even independent
retailers, have an online sales operation. The Internet has radically changed the way products and
services are sold. Because of the internet small businesses have access to global market. Table 6
shows that global internet use is growing.

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