A1 Private Sector Ownership
A sole trader is a business that is owned and controlled by one person. They make all decisions and keep all of the profits but are responsible for all investment and have unlimited liability.
A partnership is a business that is owned by two or more people. The partners sign a partnership agreement to outline expectations and how profit will be shared. Ordinary partnerships have unlimited liability but limited liability partnerships can be formed.
A cooperative is an organisation that is owned and managed by its members. A workers cooperative is a business where every member of staff has a share in the company and can therefore vote on major decisions and earn a portion of profit.
A private limited company is an organisation that has a legal separation from its owners. The owners therefore have limited liability. private limited companies can raise finance for the sale of shares. However there are restrictions on how shares can be sold, e.g. they cannot be sold on the stock market and if a shareholder wants to sell a share, they must offer them for sale to other shareholders in the first instance.
A public limited company is an organisation that is owned by its shareholders who purchase shares on the stock market. Profit is distributed based on the percentage of shares owned. They are required to publish their financial accounts so potential shareholders can assess their true financial position. There are no restrictions on who can purchase shares.
Limited and Unlimited Liability
What is the impact on the owners of a business if they get into financial difficulty and cannot pay their suppliers or loans? It depends on whether their business is set up as limited or unlimited liability.
Sole traders and ordinary partnerships typically have unlimited liability. This means that if the business cannot pay their obligations, the owners are personally liable. This may mean they have to use their personal assets to pay debts. This may mean, using their personal savings, remortgaging their house, selling their car or asking relatives for a loan.
Limited companies have limited liability. This means that if the business cannot pay its debts, the owners’ personal assets are not affected. The owners and the business are seen as two separate entities in the eyes of the law. Therefore owners may lose the amount they invested in the business for example by buying shares, but they will not lose any more that that.