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Choosing The Right Legal Structure For The Business

Choosing The Right Legal Structure For The Business. AS Business Studies. Aims & Objectives. Aim: Understand the different legal structures of businesses. Objectives: Define sole trader, partnerships, LTDs and PLCs Explain the different types of liability Analyse each legal structure.

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Choosing The Right Legal Structure For The Business

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  1. Choosing The Right Legal Structure For The Business AS Business Studies

  2. Aims & Objectives Aim: • Understand the different legal structures of businesses. Objectives: • Define sole trader, partnerships, LTDs and PLCs • Explain the different types of liability • Analyse each legal structure

  3. Spot The Difference

  4. Legal Structures • Setting up a new business is simple, cheap and straight forward. • Key is to choose a legal structure to minimise the risk of investment which is also appropriate for the business. • Key issue is whether the entrepreneur is personally liable for the debts of the business.

  5. Incorporated Vs Unincorporated Incorporated Unincorporated Sole traders & partnerships No legal entity. Owner is liable for debts personally. The business is the owner! • LTDs & PLCs • Creation of a Legal entity • Business is liable for debts not the owner personally. • The business is separate to the owner.

  6. Sole Trader • The most common type of business. • Individual owning the business on their own. • Can employ people, but they are not owners! • The sole trader owns all of the business assets personally and is personally responsible for the business debts. • A sole trader has unlimited liability.

  7. Unlimited Liability • Where the owners are personally liable for all debts incurred by a business. • All sole traders and most partnerships have unlimited liability.

  8. Advantages & Disadvantages of ‘Sole Trader’ Status – White Boards Advantages Disadvantages Unlimited liability. Harder to raise finance, often secured against personal assets. The business is the owner, if the owner is ill, the business suffers. Owner may not have expertise to make all decisions. • Quick and easy to set up. • Inexpensive to set up. • Owner has full decision making power. • Any profit made is the owners. • Hours of work tailored to owners needs. • Easy to shut down.

  9. Partnership • The partners between them own all the business assets and owe all of the business debts. • Partners have unlimited liability.

  10. Partnership • Business owned by more than one person. • The legal partnership agreement describes how the partnership is run: • How profits are shared • What the partners invest • What happens if a partner leaves or dies

  11. Advantages & Disadvantages of ‘Partnership’ Status – White Boards Advantages Disadvantages Unlimited liability. Poor decision making by one partner damages the interests of the other. Hard to raise external finance. Complicated to sell or shut down. • Simplest way for two people to run a business. • More expertise than just one owner. • Partners can provide specialist skills. • Greater potential finance – partners each provide investment.

  12. Private Limited Companies • The company is a legal entity in itself. • Can own things, sue, and be sued. • Owned by shareholders and run by directors. • Shareholders own a share of the company, but they do not own the assets of the company.

  13. Limited Liability • A feature of private limited companies (LTD) and public limited companies (PLC). • The owner can only lose what they have invested in the business.

  14. Private Limited Companies (LTD) • The company owns the assets and pays the debts. • If it cannot pay its debts it becomes insolvent (closes). • Shareholders are not personally liable for debt (limited liability). • Private means the shares are not traded on stock exchange publicly.

  15. Advantages or Disadvantages? of ‘Limited’ Status - Movement • Limited liability • Can pay less tax • Greater admin costs • Banks may see the business as risky • Public disclosure of company information • Business continues to exist even when shareholders change • Easier to raise finance through the sale of shares

  16. Advantages & Disadvantages of ‘Limited’ Status – White Boards Advantages Disadvantages Greater admin costs Banks may see the business as risky Public disclosure of company information • Limited liability • Can pay less tax • Business continues to exist even when shareholders change • Easier to raise finance through the sale of shares

  17. Public Limited Companies (PLCs) • Large businesses • Shares sold on the stock exchange and traded • Selling shares method of raising finance. • Facebook sold $1bn shares recently!

  18. Beat The Teacher • Highlight Errors You Find In The Article before the teacher!

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