Understanding different business forms

Welcome to "Understanding Different Business Forms"!

In this section of the AQA Business 7131 course, we are exploring how businesses are actually structured. When someone says, "I'm starting a business," they have to decide what "legal shape" that business will take.

Think of it like choosing an outfit: some outfits are comfortable but offer little protection (Sole Trader), while others are like a suit of armor that protects you but is more expensive to maintain (Limited Company). By the end of these notes, you’ll understand why businesses choose certain forms and how those choices affect their goals and risks. Don't worry if it seems like a lot of legal talk at first—we will break it down step-by-step!

1. Private vs. Public Sector

Before we look at specific business types, we need to know who owns them in the first place.

Private Sector: These are businesses owned and run by private individuals or groups. Their main goal is usually to make a profit.
Example: Your local hair salon, Amazon, or Virgin Media.

Public Sector: These are organizations owned and funded by the government. Their main goal is to provide essential services to the public.
Example: The NHS, the BBC, or state schools.

Quick Review: The Difference

Private Sector = Owned by "Us" (individuals) for profit.
Public Sector = Owned by "Them" (the government) for service.

2. Sole Traders

A Sole Trader is a person who owns and runs their own business. They are the simplest form of business to set up.

Key Features:

• Owned by one person (though they can employ others).
• The owner has Unlimited Liability.
• The owner keeps all the profits after tax.

Unlimited Liability: This is a vital concept! It means the owner and the business are seen as the same legal entity. If the business goes into debt, the owner is personally responsible.
Analogy: If your business "boat" sinks, your personal "house" sinks with it. Creditors can take your car or home to pay off business debts.

3. Limited Companies (Ltd and PLC)

Unlike sole traders, limited companies have Limited Liability. This means the business has its own legal identity separate from its owners. The owners are called Shareholders.

Limited Liability: If the business fails, the shareholders only lose the money they invested. Their personal belongings (like their house) are safe.
Analogy: There is a "Legal Wall" between the business and the owner's personal life.

Private Limited Companies (Ltd)

Shares in an Ltd are usually sold to friends and family. They cannot be bought by the general public on the stock exchange.

Why choose an Ltd?

• More privacy than a PLC.
• Protection of limited liability.
• Control over who buys into the business.

Public Limited Companies (PLC)

A PLC is much larger. Its shares are traded on the Stock Exchange, meaning anyone with a trading app or a stockbroker can buy a piece of the company.

Why choose a PLC?

• Can raise massive amounts of Ordinary Share Capital by selling shares to the public.
• Higher profile and better "prestige" with suppliers.

Common Mistake Alert!

Many students confuse Public Sector with Public Limited Company (PLC).
- Public Sector = Owned by the Government.
- Public Limited Company = Owned by private shareholders (but "Public" because anyone can buy shares).

4. Non-Profit Organizations and Social Enterprises

Not every business exists just to make the owners rich. Some have a different "Mission."

Non-profit Organizations: These are set up for a specific cause (like charities). Any "profit" they make is called a surplus and is put back into the cause.
Example: Oxfam or Cancer Research UK.

Social Enterprises: These are businesses that trade like normal businesses to make money, but they use their profits to tackle social or environmental problems.
Example: The Big Issue or Divine Chocolate.

5. Key Financial Terms to Remember

When studying business forms, you will see these terms often:

Ordinary Share Capital: The money raised by a company by selling shares. This is "permanent" capital because it doesn't have to be paid back like a loan.

Dividends: A portion of the company's profit paid out to shareholders as a reward for investing. If the business makes no profit, they usually don't pay a dividend.

Market Capitalisation: The total value of all the shares issued by a PLC. You calculate it using this formula:
\( \text{Market Capitalisation} = \text{Current Share Price} \times \text{Total Number of Shares Issued} \)

6. Shareholders: The Role and Why They Invest

Shareholders are the owners of a company. Even if you only own one share in Apple, you are technically a part-owner!

Why do they invest?

• Dividends: To get a share of the annual profits (Income).
• Capital Gain: To buy the share at a low price and sell it later at a higher price (Profit from growth).
• To have a say: Shareholders get to vote on major company decisions.

Memory Aid: Why Invest?

Think of "D.C." (like Washington D.C.):
D - Dividends
C - Capital Gain

7. Influences on Share Price

A PLC's share price doesn't stay the same; it changes every second. Why?

Internal Factors:

• Financial performance (Are profits up?).
• New product launches (e.g., a new iPhone).
• Quality of management.

External Factors:

• The state of the economy (Is there a recession?).
• World events or scandals.
• Competitor actions.

Significance: If a share price falls sharply, it's harder for the company to raise money, and it might become a target for a takeover (another company buying them out because they are "cheap").

8. Effects of Ownership on Mission and Objectives

The form of business heavily influences what the business tries to achieve.

Sole Trader: Objectives are often personal. Example: "I want to earn enough to work four days a week."

PLC: Objectives are often driven by Shareholder Value. Since shareholders want dividends and high share prices, the company focuses on short-term profits and growth.

Social Enterprise: Objectives focus on a Social Mission. They might prioritize fair wages or environmental protection over making the maximum possible profit.

Key Takeaway Summary

Forms: Sole Trader (unlimited liability) vs. Limited Company (Ltd/PLC - limited liability).
Liability: Determines if your personal assets are at risk.
Capital: Companies raise money through shares; PLCs sell to the general public.
Objectives: Change based on who owns the business (Individuals vs. Shareholders vs. Society).