Deciding on the Business Ownership Model (Cambridge International IGCSE Business)
Unincorporated Businesses and Limited Companies
Spec point — "Differences between unincorporated businesses and limited companies Recommend and justify a suitable form of business organisation to owners/management in a given situation"
Unincorporated businesses and limited companies
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A business may be unincorporated or incorporated. These terms are closely linked to the concepts of limited liability and unlimited liability
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An unincorporated business does not have a separate legal identity from its owner(s)
- If the business is sued the owner is responsible and may need to cover legal costs with their own money
- Unincorporated business types include sole traders and partnerships
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An incorporated business is called a company and has a separate legal identity from its owner(s)
- If the business goes bankrupt its owners (shareholders) cannot be held responsible for debts and only lose the money they initially invested
- Incorporated businesses include private limited companies (Ltd) and public limited companies (PLC)
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Comparing unincorporated and incorporated businesses
| Unincorporated businesses | Incorporated companies |
|---|---|
| - The owner has no legal separation from the business | - A unique legal entity that is separate from business owners(shareholders) |
| - The owner(s) carry full liability (unlimited liability) for the business and it's activities | - Reduced risk and liability of the business to the owners (limited liability) |
| - Can be started with little or no money | - Can be expensive to incorporate |
Recommending a form of Business Ownership
- An entrepreneur must choose the ownership structure that suits the business needs, particular circumstances and the level of personal liability involved
- Deciding on the best form of legal ownership requires the owners to consider many different factors
1. Type of ownership
- Is unlimited or limited liability most appropriate?
- Is the business based on an original idea or a franchise?
2. Desire for control and privacy
- How much direct control over decisions does the owner(s) want?
- Does the owner(s) want to share the workload?
- Does the owner mind if the financial accounts are made publicly available?
3. Financial considerations
- How much start-up finance is required?
- How might the choice of finance affect the break even point/profits?
- How is finance to be managed?
4. The aims and stage of business growth
- Is the business new or established?
- Does the owner want it to grow?
Examples of business ownership recommendations
| Business description | Key considerations | Recommendations |
|---|---|---|
| - Sarah wants to set up a new pizza business. She has 3 different options - Buy a franchise like Dominoes - Start small as a sole trader - Start small but register as a private limited company | - Sarah does not have much money - Banks are often willing to lend to franchisees due to relatively low risk, but this money has to be repaid - With a private limited company, the owner is not liable for outstanding expenses if business failure occurs | - A private limited company may be a better option as it is relatively inexpensive to setup and provides Sarah with legal protection - The Franchise option is attractive but may be best bought into after some time, once Sarah knows she actually likes running a pizza business! - Sarah lacks finance so starting small and growing organically may be the best way forward |
| - AMF is a large, fast-growing private limited company (Ltd) that specialises in commercial cleaning and maintenance services - AMF is seeking to to raise finance to continue their expansion. They can either - Become a Public Limited Company and sell shares - Take out a large bank loan | - If AMF sells shares, they lose some control of the company but do gain access to a large pool of money - This money does not need to be repaid - New shareholders would have high expectations - Bank loans have to be repaid with interest, but AMF would keep control of their business | - Going public would quickly provide access to large sums of money - AMF could investigate the cost and likelihood of getting a bank loan before they make a final decision - Their final decision may depend on how much money they need to raise. If it is significant, going Public would be the best way forward |
Exam Hint When assessing the best form of business to be used in a particular situation (or if a business should change its form), the decision needs to consider any evidence provided about the business owner, the product, the nature and size of the market, the funds required, and the level of profitability. For example, a business which generates sales of £30k a year is unlikely to be ready to become a public limited company, but it may well benefit from transitioning from a sole trader to a private limited company
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