Common Business Structures
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Common business structures are the frameworks that guide the operation of many companies. There are six types of common business structures: sole trader, partnership, limited partnership, a private company limited by shares, a public limited company, and co-operative.
A sole trader is a business that is owned and run by one person. He or she carries unlimited financial risk for all work undertaken as well as legal responsibility for any debt incurred throughout this enterprise. A sole trader will pay less tax than if he had two partners with an equal share in the business, but they will not be able to reduce their tax bill on dividends paid out on profits. If you decide to venture on your own little help is available from the government’s Business Link service which gives advice on planning, tax, and finance.
A partnership is a business that comprises two or more people who have agreed to share the profits and responsibilities of a business. Partnerships are relatively informal structures that require little paperwork compared with limited liability companies (see below). In most cases, partners will be personally responsible for all debts incurred by their company as well as taxes due on its activities. As such, you must ensure your partner’s obligations are clearly spelled out from the outset so there is no room for doubt later on about financial responsibility should the relationship sour. If a partnership goes bust, its assets will be sold and the proceeds paid back to creditors in proportion to their share of debt. Any assets left over will be split among partners according to their share of the business.
A limited partnership is like a sole trader but with added protection. Here, one partner takes on unlimited financial liability for all debts incurred by his company while the other(s) are only responsible for any debt up to the amount they have invested in it. The reason behind this structure is that businesses often need more investment than an individual can offer and so turn to friends, family or new investors who might be reluctant to sign up if they were liable for unlimited amounts of money should things go south. So, your partner or investor will not be dragged down with losses during difficult times but he gains recourse against you if you fail to honor agreed debts with him.
A private company limited by shares is a company that has sold off some or all of its assets to shareholders for an agreed price. It carries the usual legal responsibilities that any business does, but it also comprises two types of shareholder: those who have bought an individual share in the business and will expect regular dividends as rewards for their investment; and those who are still involved with day-to-day activities who might not be entitled to any dividends.
A public limited company is one which issues shares on the stock market after first registering with Companies House. These companies are subject to different rules from private ones, mainly around board structure and directors’ duties. Furthermore, this type of business carries unlimited financial liability just like a partnership so if things go wrong the company’s assets will be sold and the proceeds distributed to shareholders.
A co-operative is a collective of people who have banded together for their mutual benefit. This structure is not for profit so any surplus made from its activities goes back into the business or to its members. Co-operatives are based on the Rochdale Principles which state that any profit made by this organization should be used in such a way to improve society and meet social needs. As such, they tend to specialize in areas where all parties involved (the consumer and suppliers) can benefit equally and sustainably from each other’s presence.
Common business structures are the frameworks that guide the operation of many companies. There are six types of common business structures: sole trader, partnership, limited partnership, a private company limited by shares, a public limited company, and co-operative. A sole trader is a business that is owned and run by one person. He or…