STARTING A 

BUSINESS

An entrepreneur combines and organizes resources in a firm for the purpose of carrying out
productive business

In a modern mixed economy a firm may take a number of legal forms according to how it’s
owned/controlled/financed/the owners‘ liability to repay debts

Before starting a new business or expanding it an entrepreneur needs to consider what type of
organization they want

MAIN TYPES OF PRIVATE SECTOR BUSINESS ORGANIZATION:

UNINCORPORATED BUSINESS – doesn’t have a separate legal identity from the owners who have
unlimited liability

 SOLE TRADER

 PARTNERSHIP

INCORPORATED BUSINESS – a limited company with its own legal identity, separate from the
identity of the owners (shareholders) who have limited liability

 PRIVATE LIMITED COMPANY

 PUBLIC LIMITED COMPANY

4 KEY QUESTIONS TO DECIDE TYPE OF BUSINESS ORGANIZATION

Q1 Do I have enough money?

Without enough money you need to find investors and start a PARTNERSHIP / LIMITED COMPANY
and share the ownership of business

CAPITAL – money used to finance business

 FIXED CAPITAL – money used on equipment, premises, machinery

 WORKING CAPITAL – money used to pay running costs, electricity bills, material purchases

Q2 Can I manage my business alone?

Running business often means trying to do everything yourself, working long hours, going without
holidays, you need to organize production, negotiate with suppliers, ensure that premises comply
with food hygiene laws, make payments, keep accounts, develop marketing strategy, recruit and
manage staff
Q3 Do I want to share ownership of my business and any profits?

If not, you must start business alone and be a SOLE TRADER

If you don’t have enough money, skills, time or energy to start and manage business you need to find
other investors to help you (means you can’t make all the business decisions and you need to share
any profits)

Q4 Am I prepared to risk everything I own?

You could end up having to repay all business debts if business fails (liability for debts would be
unlimited), you may have to use up all your savings or sell your possessions to to pay off the debts

UNLIMITED LIABILITY – you can be taken to court and be declared bankrupt if bills are unpaid
because you don’t have SEPARATE LEGAL IDENTITY from your business (You and your business are
considered to be legally the same under law)

LIMITED LIABILITY – in a limited partnership/limited company (the businesses are considered

legally separate from owner and business)

SOLE TRADER

- personal services (hairdressing, plumbing, building/vehicle repairs)

- sole traders finance business from personal savings or borrowing from friends/family and bank loan
(usually unwilling to lend because risky enterprises)

- option to operate business from home thanks to internet

- in case of failure liable for all debts

ADVANTAGES of sole trader DISADVANTAGES of sole trader

Easy to set up Owner has full responsibility, working long hours
without holidays
Set up with little capital Business may lose revenues and profits if owner
is off sick
Owner is their own boss Owner has unlimited liability
Owner receives all profits Sole traders lack often capital
Personal contact with customers Sole traders often lack skills
Separate financial accounts not required
Owner is able to keep financial details private

PARTNERSHIPS

- Partnership is a legal agreement between 2 or more people (2-20) to own, finance, run a business
and share any profits, mostly small local businesses (doctors, accountants, veterinary surgeons)

- Most partners are GENERAL PARTNERS sharing unlimited liability

- It’s possible to have LIMITED PARTNERS with limited liability (LIMITED LIABILITY PARTNERSHIP - LLP)
- A SILENT/SLEEPING PARTNER provides money to the partnership in return for share of profits

ADVANTAGES of partnerships DISADVANTAGES of partnerships

Partnerships are easy to set up, few legal
reuirements
Partners invest new capital
Partners bring new skills/ideas
Partners share responsibilities
Partners share any profits
Partners share business/financial risks
Discussion between partners can slow down
decision-making
Problems can arise if partner is lazy, inefficient,
dishonest
General partners have unlimited liability
Raising additional capital can be difficult
because of limit on the number of partners

LIMITED COMPANIES

- also known as JOINT-STOCK COMPANIES, because they sell stocks (shares) to raise capital

TWO MAIN TYPES OF JOINT-STOCK COMPANIES:

 PRIVATE LIMITED COMPANY (Ltd) – ‘‘closed‘‘ stock company, it can sell shares privately

 PUBLIC LIMITED COMPANY (plc) – ‘‘open‘‘ stock company, selling shares publicly through a stock
exhcange UKplcLtd

- the people/organizations who invest in these shares become the owners of SHAREHOLDERS,
because a company is owned by the investors who bought its stock (usually no limit on the number
of shareholders company can have)

- some large limited companies have thousands of shareholders, they must hold an ANNUAL
GENERAL MEETING (AGM) which allows the shareholders to be informed about its performance and
important decisions

DIVIDEND – each share purchased in a company receives a share of its profit after any taxes on those
profits have been paid

BOARD OF DIRECTORS – elected by shareholders, with valuable financial and business skills to
manage their company

ADVANTAGES of Ltd DISADVANTAGES of Ltd

Shareholders can elect directors to manage
business
Shareholders receive dividends
Limited companies have a separate legal
identity from owners
Shareholders have limited liability
Sale of shares can raise capital
Popular form for family businesses
Ltd are legally required to keep detailed
financial statements of their profits,...
Large shareholders can outvote others
Directors may run company in their own
interests
Shares can only be sold privately
PUBLIC LIMITED COMPANIES

-largest and most successful organizations

- shares are issued for sale to public on the STOCK MARKET (global market for buying/selling
new/existing shares in plc)

- must obtain a public listing to sell shares on the stock market, needs minimum two shareholders

-Public listings:

1. New York Stock Exchange (NYSE),US

2. London Stock Exchange, UK
3. Tokyo Stock Exchange, Japan
4. Deutsche Borse, Germany

ADVANTAGES of plc DISADVANTAGES of plc

Plc can advertise new issues of shares
Plc can raise significant capital
Shareholders receive dividends
Limited companies have a separate legal
identity from owners
Shareholders have limited liability
Expensive to form a plc, many legal documents
needed
Plc required to publish detailed reports to hold
AGMs
Original owners lose overall control unless they
keep 51% of shares
Directors may run a company in their own
interests

OTHER FORMS OF BUSINESS ORGANIZATION:

JOINT VENTURES

- contractual agreement between 2+ organizations to share expertise, investment, management,

costs, profits, risks

- can be partnerships or limited companies and may be dissolved once their objectives are
achieved

ADVANTAGES of joint ventures DISADVANTAGES of joint ventures

Costs and risks can be shared Businesses may disagree on important decisions
Access to knowledge, technologies, customers Profits are shared
Size advantages, increased market share Partners may have different way of running their
businesses
FRANCHISES

-McDonald’s is one of largest most known franchising companies, 75% of its companies are owned
and operated by independent local business owners who have bought the right – a new owner pays
for a franchise and then pays a monthly service fee and rent

-franchises are popular in sectors like carpet cleaning, travel, fintess centres, car rental, pest control

- a franchise involves an agreement by one company to another company to another business to

premit the distribution of its goods/services using its trademark/brand name

FRANCHISOR – existing, well-known company

FRANCHISEE – sole trader / partnership / limited company

ADVANTAGES of franchises DISADVANTAGES of franchises

To the franchisee To the franchisee
Reduces risk of business failure Fees/ongoing payments can be expensive
Banks are more willing to lend Most business decisions are taken by franchisor
Training/supplies provided by franchisor Regular monitoring of performance by franchisor
To the franchisor To the franchisor
Quick/easy way to expand Franchisees keep most profits they make
Fees/regular payments received from franchisees Franchisee can damage reputation of business
Franchisees required to buy products/supplies
from franchisor
Management costs minimized