Work At Home Careers
Even if you only want to run a small business on your own, you should know something about how businesses generally are organised.
There are three most common forms of business organisation:
- Sole trader
- Partnership
- Company with limited liability
Each of these types of organisation has its advantages and its disadvantages. It is impossible to say which is best, because none is best in all circumstances.
Sole Trader
This is the oldest, simplest and most common form of business organisation. It is also the most straightforward to set up. Basically, the owner or proprietor of the business is the business. Whether you trade under your own name or use a business name such as Garden Designs, you are solely responsible for everything the business does. Being a sole trader does not mean you cannot employ anyone - it simply means that you are the only owner of the business (often called the proprietor). This form of organisation is common in small service businesses of all kinds.
Operating as a sole trader is simple and cheap. It also has the great advantage that all the profits belong to you personally, so if your business does well you can make a lot of money. There are other benefits as well. A sole trader makes all the decisions himself, so this type of business can be very flexible, adapting quickly to changing circumstances. If, for instance, your customers start asking for new products or services, you can make the changes needed to provide them quickly and easily There is no-one to argue with you if you wish to alter the way the business is run. Without doubt, operating as a sole trader can provide great personal satisfaction.
Being a sole trader does have its drawbacks, however. Just as all the profits of the business belong to you, so you personally are responsible for all its debts. If the business cannot pay its creditors, you, the business owner, can be made bankrupt - that is, you may be forced to sell your personal possessions, your house, your car, and so on to pay off the business's debts.
As a sole trader, you are liable not only for what you do, but for what your employees (if you have any) do as well. For instance, if they fail to install or repair an electrical appliance correctly and it causes an injury, you personally may be sued. It is therefore essential that you insure against such mishaps. The business is also heavily dependent on your good health, and you should insure against the possibility of this failing.
Most sole traders operate businesses which do not require substantial amounts of capital (money invested in the business). They largely provide their own money at the beginning. However, when the time comes to expand, the owner may have to borrow in order to increase the assets of the business, and this is where other people may enter the picture.
It is at this stage that one of the other forms of business organisation may be considered, because they make more money available. However, they do involve a reduction in personal control and direction of the enterprise.
Partnership
In this form of business there are two or more owners. They divide the profits between them, and also share liability for any debts which arise. Partnerships are common in all fields where personal service is involved. Many professional practices such as accountancy, law and medicine are organised in this way.
A great advantage with a partnership is that there is usually more money available to be invested in the business. The worries and responsibilities are shared among more people and, of course, there are more people to contribute to the business's success. Everything does not depend on one person. If one partner is ill, or just wishes to take a holiday, the whole business will not come grinding to a halt.
A big disadvantage of a partnership is that if it fails you can be called upon to pay all the debts of the partnership. This includes the debts of your partners if they cannot pay their share - even if the debts were incurred without your knowledge.
In addition, there tend to be stricter legal requirements governing partnerships, and this means more rules concerning how you organise and run the business. Responsibility for decision-making will be shared between you and your partners, thus also reducing your freedom of action, and perhaps leading to disagreements.
Furthermore, partners will often put different amounts of money into the business. In some cases, one partner may have supplied most of the money, while the other has brought the expertise. This may cause disagreement over how profits should be shared. It would not be reasonable for profits to be shared simply in proportion to money invested; the partner who put up less money would naturally expect some reward for his expertise, though deciding what this should be might be difficult. It is essential that such issues should be settled at the start in a formal partnership agreement. If you are thinking of starting a business as a partnership, you should certainly seek legal advice.
Company
A company - properly called a joint stock company - is where a group of individuals put their money together to make a 'joint stock' of capital. The people who put up the money are called shareholders. They all own a share of the company, and expect to receive a share of its profits.
The shareholders are also called 'members' because they are part of the company, but the company is a legal entity quite separate from the members who own it. In law, a company is regarded as an individual in its own right. It can make a profit or a loss; it can be held responsible for the actions of its employees; it can be sued; and, if the worst comes to the worst, it can go bankrupt (though in the case of companies this is called 'going into liquidation').
The amount of the company each shareholder owns is directly proportional to the money he puts in. The shares of large companies are bought and sold on the stock exchange. Such companies are called public companies, and anybody can buy their shares through a stockbroker or bank. The shares of many smaller companies, however, are owned entirely by the people who work in them.
Limited Liability
Nowadays nearly every joint stock company in the world is formed on the principle of limited liability. Limited liability means that if a company fails and has to close down, the individual shareholders will not be held responsible for the company's debts. Each shareholder only loses the money he spent on buying his shares. Unlike a sole trader or a partner, his personal possessions cannot be sold to pay the company's debts; his liability is limited to the amount he invested (hence the term 'limited liability').
Because of the principle of limited liability, establishing your new business as a company may appear an attractive option. Potential lenders and creditors are very well aware of the principle and its implications as well, however. If you apply for a loan or credit terms, they will naturally want to ensure that their money is returned in the event of your company failing. Particularly if you are setting up a new business, therefore, they may require you to personally guarantee any debts, e.g. by allowing them to place a legal charge on your property In this case, if your company does subsequently fail, the creditor can still pursue you personally for any debts outstanding.
Company Directors
Although a company is regarded in law as a separate person, it cannot carry out any business by itself. People must be appointed to manage and run the business, and these people are called the company directors. The minimum number of directors in a private company is one (though in this case someone else must fulfil the role of company secretary). A public limited company must have at least two directors.
In a small company, such as a family business, the shareholders are often themselves the company directors; they both own the company and run it. With larger companies it is usual for shareholders to appoint directors with the necessary skills to manage the company on their behalf. The shareholders meet just once a year, at an annual general meeting, to express their approval or disapproval of the way the directors are managing the business; to appoint new directors if required; and to accept or reject the directors' recommendations on how the profits are to be distributed.
Again, in a small company all or most of the directors will be closely involved in the running of the business. In a larger company many of the directors may only work part-time for the company, simply attending board meetings at which general policy decisions are taken. They leave the day-to-day running of the company to one director, known as the managing director, or a small number of executive directors. Unless they are also shareholders, directors are not entitled to a share of the profits. However, they are entitled to a fee for the work they do for the company, plus their expenses. The managing director and executive directors, who work full-time for the company, also receive a salary, just like any other employee.
The directors may employ staff to work for them and managers to supervise those staff, but the directors have the overall responsibility and are answerable to the shareholders for the success or failure of the enterprise. The shareholders have the right to demand not only that the directors act in good faith, but also that they exercise skill and care in managing the business.
Which Type of Organisation?
Each type of business organisation has its advantages and disadvantages, and you must choose the type which is most suitable for your needs.
The sole trader approach is likely to be the first choice for many small home-based businesses. Its advantages are:
- It is easy to set up
- The owner has complete personal control
- All profits belong to the owner personally.
The disadvantages of being a sole trader are:
- The liability of the owner is unlimited - he may be made personally bankrupt if the business fails
- The growth of the company is limited by the amount of money the owner either has or can borrow as a personal loan
- If the owner is ill, the business may not be able to carry on; although sometimes a good employee may be able to manage the business for a short while.
Setting up in partnership can overcome some of the above drawbacks. A partnership is more complicated to set up than a sole trader business, but less so than a limited company. The advantages of a partnership are:
- It offers greater scope for financial investment and growth
- It allows the skills of several people to be combined, rather than relying on one person
- If one partner is ill, the others can continue the business; the business may also continue on the death of one partner.
The disadvantages are:
- As with a sole trader, the liability of the partners is unlimited; however, in this case, the partner accepts liability not only for his own decisions but for those of his partner or partners. It is therefore essential that a partnership is only entered into with people whose integrity and ability can be relied upon
- Although there is likely to be more money available for a partnership than for a sole trader, there will generally be much less than for a limited company
- Each partner has less direct control than a sole trader.
A limited liability company is the safest type of enterprise, but it is also the most complex. Its advantages are:
- No individual is liable to the company for any amount in excess of the value of his shares; thus, everyone knows how much he is committing himself to from the start
- If the company fails, individuals will not normally face personal bankruptcy and the loss of their property and possessions
- The amount of money available for investment is much greater than with other forms of business
- More expertise is generally available.
The disadvantages are:
- The business is more complicated to set up and will generally require the professional services of a lawyer and an accountant
- There is a cost involved in registering as a legal company
- The person who sets up the business does not own it - no individual does. He may well be the majority shareholder (that is, the person who owns most of the shares) and have a considerable amount of control, but he cannot have the complete personal control of the sole trader. What he does will be subject to the power of other shareholders, and to the requirements of very strict laws.
