3 Business structures
Businesses come in different shapes and sizes. Some are very simple indeed providing a single service to a lot of people, such as a window cleaning business or a dog walking service.
A business can be established by an individual as a part-time, enjoyable hobby taking up a couple of hours per week, for example, growing and selling potted plants.
While this is a business of sorts, it involves none of the expected formalities of business method and structure and requires hardly any accounting records other than perhaps a notebook to jot down costs and sales, and perhaps not even that.
As a business grows, however, it gets more complicated, more money is at stake and more stakeholders become involved.
In the beginning a micro-business is likely to be directly linked to the owner’s bank account. As the business grows the owner will want to separate the business from his or her personal finances, and the needs of customers, suppliers and employees will all require it to be treated on a more formal basis. This is where the business becomes something in its own right, with its own bank account and identity.
In the UK, different types of business must comply with different statutory and regulatory requirements. Other countries and legal regimes have their own ways of running business corporations, and their own laws, rules and regulations. If you are studying this course from outside the UK, this would be a good point to research the requirements in your host country.
A limited company (and similar forms of business entity in other parts of the world) is recognised in law as incorporated; in other words with the same ability to enter into legal agreements, to maintain its own identity and finances distinct from its owners, to be sued and be responsible (with very few exceptions) for all it does as if the company was itself a person. The word ‘limited’ is included in a company’s name because it indicates that the financial responsibility of the owners of the company (the ‘shareholders’) is limited to the amount of their money (‘capital’) already paid into the company’s resources and (again, with certain exceptions) that the shareholders cannot be held financially responsible for any losses that are incurred, or unlawful acts that are committed, by the company. This concept of limited liability underpins what has become, by far, the most common and important legal form of business worldwide.
Limited liability means that an individual will not lose all their belongings and money if a business fails, they would only lose the amount of money invested in the company.
In the UK, a limited company is given its legal substance by the depositing of certain documents and information with the Registrar of Companies, the government-appointed official based at Companies House. In the UK, there are three such establishments: in Cardiff (registering companies in England and Wales), in Edinburgh (companies in Scotland) and in Belfast (companies in Northern Ireland).
The required legal documents include:
Memorandum of Association – setting out very limited information on the desire of the first shareholders to form a company and to take at least one share each (The Companies (Registration) Regulations 2008) (UK Government, 2008).
Articles of Association – a much more substantial document, setting out the rules under which the company must be run (its ‘constitution’) including, for example, how directors are appointed and removed, what authority they and the shareholders hold, how often General Meetings (meetings of all shareholders) should be held and how they will be conducted, how decisions will be reached, what is to be done with profits in terms of dividends or re-investment, etc. The government helpfully provides a ‘model’ set of articles that will generally be adequate for most company uses.
Activity 4
There are a number of different types of business structure, some limited companies and some not.
Write down the types you are aware of. We don’t expect you to know all these already, so don’t worry if you don’t feel you know any at this point.
Comment
We will not be dealing with all the business structures.
Here we have listed the most common types of structure, how many did you get?
This first group are types of limited company
Private limited company (‘Ltd’) A private limited company is often relatively small, either family-owned or owned by a small number of business people who will often participate in the management of the business. Its shares cannot be offered to the public but can only be issued, or bought and sold, privately.
Public limited company (‘plc’) A public limited company possesses all the attributes of its private equivalent except that its shares may be offered generally to the public and it can apply to have those shares traded on a recognised stock exchange (such as the London Stock Exchange). It must include ‘public limited company’ (usually abbreviated as ‘plc’) in its name.
A company limited by guarantee does not have a share capital but instead has members who act as guarantors (usually for a very small sum) in the case of the company being unable to pay its debts and being declared insolvent. This form of incorporation is typically used by charities and some larger membership organisations such as trade unions. Well-known examples are the large charity Oxfam, and the trade union representing the interests of performers, Equity.
A chartered company is created by Royal Charter. These are rare, although The Open University itself is an example of a chartered company, as are the respective governing bodies of solicitors and accountants in the UK.
A statutory company is created for public purposes by a specific UK Act of Parliament. The Historic Buildings and Monuments Commission for England (‘English Heritage’) is an example.
This second group lists business structures that are not classed as companies.
A sole trader (or ‘sole proprietor’) is a person undertaking a trade or vocation, not necessarily working alone (he or she might employ other people) but charging for the work or services they provide and solely responsible for their business, which might be of any type. The big difference between this form of business and that run by a limited company is therefore that the owner’s personal assets (including property) may be claimed by creditors if the business’s bills are not paid.
One way to look at a general partnership is to consider it as ‘several sole traders working jointly to make a profit’.
A limited liability partnership (LLP) allows the partnership to have a separate legal personality and thus the separation of the assets of the partnership from those of the partners – the LLP is now the preferred legal form for professional firms of accountants and solicitors.
Unincorporated associations generally have no profit motive and exist in order to provide facilities and services to people with a common interest. They usually raise money by charging joining and membership fees; their affairs would normally be run by a set of rules agreed by the membership and administered by a relatively informal committee appointed by the members. Any assets are held jointly by the members, who would also be personally liable for any debts. Because of this, larger unincorporated associations are rare. They might include some trade unions or mutual societies, but once these reach any significant size it is highly likely that they would seek some form of legally incorporated status involving limited liability for the membership
Whilst not a structure in its own right, it is worth mentioning registered charities. The rules are set by The Charities Commission [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] . The charity may use any of the structures already mentioned plus:
charitable incorporated organisation
charitable company limited by guarantee
trust.
Charity trustees are the people who share ultimate responsibility for governing a charity and directing how it is managed and run. They may be called trustees, the board, the management committee, governors, directors or something else.
Don’t worry if you did not write any of these down in your answer. You probably recognised some of the structures here, and there were probably some you may not have heard about – in the next section we will simplify these structures for you.
2 Starting a business