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There are at least six different types of business you could choose to start:
1. Sole trader – the oldest form of trading there is, it’s also the simplest and the most common type of business you’ll find. The clue is in the name – meaning that you are solely responsible for everything the business does and you’re often known as the proprietor. This is the usual form for small shops and businesses that provide services such as beauticians, hairdressers, photographers, gardeners and so on.
When you start out in business, most often you use your own money to fund the venture. However, as you start to grow, you may need to find funding elsewhere. When this happens you may want or need to enter into another kind of business model:
2. Partnership – these are made up of two or more people and any profits, debts and decisions related to the business are a shared responsibility. These are common for practices that offer services such as accountants, dentists, doctors, solicitors and so on.
3. Company – the correct name for this is a joint stock company and it’s made up of a number of people who put their money together to form a ‘joint stock’ of capital. These people are more commonly known as shareholders and, as the name suggests, they each own a share of the business and each expect a share of the profits too.
Each shareholder puts money into the company and receives a portion of the company – shares – equivalent to what they put in.
Despite each shareholder owning a piece of the company, in law it is seen as a legal entity – the same as an individual – that is entirely separate from the shareholders or members, as they are sometimes known. It can be sued, make a profit or loss, be held responsible for its employees’ actions and go into liquidation – the term used for companies that go bankrupt.
Private Limited Companies
Most small businesses are private limited companies with the shares only available privately, for example, to family members. The shares are not available to buy publically so they cannot be traded on the stock market.
Public Limited Companies
Being a Public Limited Company (PLC) is much more complex and is usually reserved for larger companies. To be called a PLC a company must have, amongst other things, more than one director and a trading certificate from Companies House. PLCs can sell their shares on the stock market so anyone can buy them. Whilst it is easier to raise money using this method it also means that the company accounts are in the public domain. The company must also be audited and make certain information available to Companies House. Plus, PLCs can be bought out by other shareholders.
A franchise involves you using another company’s successful business model to create your own shop, restaurant etc. Essentially, you buy the franchise and trade off the good name of the company you’ve bought into. For example Subway – you’d find a suitable location, Subway would provide you with their livery, food products and use of trademark. You make money because customers are already familiar with Subway; so you have an instant customer base. Franchises are for a fixed period of time – from five to 35 years – and cover a certain location known as a ‘territory’. You’ll have to pay fees to the franchisor:
There are specific and complex laws relating to franchise contracts so entering into one is something that needs to be thought about very carefully.
5. Workers Co-operatives
This is a truly egalitarian form of business that is formed to meet the mutual needs of the workers. Each person – from the managing director to the shop floor assistant – is equally important. All decisions are taken democratically and any profits are shared equally or ploughed back into the business. Co-operatives follow seven guiding principles:
This should give you a pretty good idea of the ethical and moral stance of a co-operative.
6. Limited Liability Partnerships (LLPs)
LLPs are a relatively new form of business as they’ve only been around since 2001. They are intended to benefit professional partnerships such as lawyers, accountants and the like, who are restricted from forming limited companies due to restrictions from their professional bodies. LLPs operate in much the same way as limited partnerships and allow the members to limit their personal liability if something goes wrong with the business.
So, as you can see, businesses can be simple or complex but, once you know what all the terminology means, you should find it quite easy to decide which kind of business structure will best suit your needs.
Business Training can help you Start Your Own Business. To find out more request a prospectus for our Start Your Own Business course.