Three weeks ago we looked at whether you’ve got what it takes to set up your own business. But even if you only want to run a very small business, you need to know how it should be set up so that it works best for you. So this week I’m going to look at the three most common forms of business organisation.
Sole Trader
This is the easiest to set up. Basically, the owner is the business. Whether you trade under your own name or use a business name such as The Corner Shop, you are responsible for everything the business does. This form or organisation is common in many small businesses which provide a service: hairdressers, tailors, photographers, shop keepers, taxi drivers, and so on.
Operating as a sole trader is simple and cheap. It also has the advantage that all the profits belong to you! There are other benefits as well. As a sole trader you make all the decisions yourself, so you can be very flexible, adapting quickly to changing circumstances. This means it can give you great personal satisfaction.
But there are drawbacks. You are personally responsible for all the debts, so if the business can’t pay its debts you can be made bankrupt and may be forced to sell your personal possessions to pay them off. Also, you are liable for what your employees do, so if they fail to install or repair something correctly and it causes injury, you personally may be sued. This means comprehensive insurance cover is essential.
Partnership
Here there are two or more owners. They divide the profits between them and also share liability for any debts. Many professional practices such as accountancy, law and medicine are organised in this way.
On the plus side, in a partnership there is usually more money available to be invested in the business and the worries, responsibilities and decisions are shared among more people. But a big disadvantage is that if the partnership fails you can be asked to pay all the debts – including those of your partners if they cannot pay their share. So, you must trust them completely. Another disadvantage is that the decision-making will be shared between you and your partners, which could lead to disagreements.
Limited Liability Company
This is where a group of individuals put their money together to set up the business. They are called shareholders because they all own a share of the company and expect to receive a share of its profits.
In law a company is regarded as an individual in its own right. It can make a profit or a loss; it can be held responsible for the actions of its employees; it can be sued and, if it fails, it can go into liquidation.
The amount of the company which you own is in proportion to the money you put in. The company can be a public company (where shares are bought and sold on your country’s stock exchange) or a private company (where shares are owned entirely by people who work there).
Nowadays most companies are formed on the principle of Limited Liability. This means that if a company fails the shareholders are not responsible for the company’s debts. You only lose the money you spent on buying your shares – your personal possessions can’t be sold to pay the debts.
The main advantages of a limited liability company are that the amount of money available for investment is usually greater and more expertise is available through the shareholders or the managers they employ. The main drawback is that such a business is more complicated and costly to set up.
This is only a very brief description of the forms a business can take and if you’re looking to set up a business then you must take legal advice so that you comply with the laws in your own country. But if you want to know more about business organisation then you could consider enrolling on our Business English with Spoken English Diploma Course. Plus it has the added advantage of helping you to improve your communication skills (both written and spoken) – and good communication is the key-stone of any successful business!
Author: Diana Nadin
