Appropriate legal structure

Sole Trader

A sole trader describes any business that is owned and controlled by one person - although they may employ workers. Individuals who provide a specialist service like plumbers, hairdressers or photographers are often sole traders.

Sole traders do not have a separate legal existence from the business. In the eyes of the law, the business and the owner are the same. As a result, the owner is personally liable for the firm's debts and may have to pay for losses made by the business out of their own pocket. This is called unlimited liability.

Advantages

  • It is easy to set up as no formal legal paperwork is required.
  • Generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost.
  • As the only owner, the entrepreneur can make decisions without consulting anyone else.

Disadvantages

  • The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts.
  • Sole traders often work long hours. They may find it difficult to take holidays or time off if they are ill.
  • They face unlimited liability if the business fails.

Partnership

A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business.

Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together and can benefit from shared expertise. One advantage of partnership is that there is someone to consult on business decisions.

The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. Like a sole trader, partners have unlimited liability

Private Limited Company (LTD)

A limited company has special status in the eyes of the law. These types of company are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into equal parts called shares. Whoever owns one or more of these is called a shareholder.

Because limited companies have their own legal identity, their owners are not personally liable for the firm's debts. The shareholders have limited liability, which is the major advantage of this type of business legal structure. Unlike a sole trader or a partnership, the owners of a limited company are not necessarily involved in running the business,

Public Limited Company (PLC)

A public limited company (plc) is usually a large, well-known business. This could be a manufacturer or a chain of retailers with branches in most city centres. Shares trade on the stock exchange.

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