Types of business organisation (AS Level) flashcards

Topic 2: Types of business organisation

Sole trader and partnership: liability and reporting

Sole trader: unlimited liability; minimal external reporting. Partnership: unlimited liability for ordinary partners; reports mainly to the partners.

Private limited company (Ltd) vs public limited company (plc)

Ltd: shares cannot be offered to the public; limited liability; statutory filing obligations. Plc: shares freely bought and sold by the public; limited liability; the most extensive disclosure and audit requirements.

What does limited liability cap?

The owner's maximum possible loss, at the amount invested. "Limited" does not refer to the size of the company.

Why does incorporation produce limited liability?

It creates a separate legal entity: the company, not the shareholder, owns its assets and owes its debts. A sole trader or ordinary partner and the business are legally the same.

Which sources of finance are open to which ownership types?

Owner's capital: sole traders. Partners' capital: partnerships. Bank overdraft, loan, mortgage: all four. Ordinary shares and debentures: realistically only limited companies, usually plc.

One risk of a bank loan and one risk of issuing shares

Bank loan: fixed interest and repayments whatever the profit; may need security. Shares: dilute existing holdings unless all invest proportionally; create dividend expectations.

Why does a plc face the heaviest reporting burden?

Reporting protects people with a financial stake but no control over day-to-day running. A plc may have thousands of outside shareholders; a sole trader has none.