Types of legal structure are usually categorized as two separate businesses
Unincorporated
- Sole trader
- Partnerships
Incorporated
- private limited company
- public limited company
Unincorporated businesses have unlimited liability as their legal identity is not separate between the owner and the actual business. However Incorporated businesses have limited liability as their legal identity and their owners are seen as separate identities.
Pros of a sole trader
- easy and cheap to set up
- few legal formalities
- able to respond quickly to a change in circumstances
- the owner takes all the profits and therefore there is good motivation
- they have greater Independence than any other legal structures
- they enjoy more privacy as their financial details do not have to be published
Cons of a sole trader
- sole traders have unlimited liability
- they have limited collateral to support applications for loans
- they have limited capital for expansion and investment
- they have limited skills
Pros of a partnership
- wider range of skills and knowledge
- chance to raise greater amount of capital
- pressure on owners are reduced as there is more flexibility for work cover, eg when somebody is sick
Cons of a partnership
- control is shared among partners
- arguments may arise
- shortage of capital
- unlimited liability
Pros of a private limited company (LTD)
- more privacy compared to PLC
- Limited liability, its identity is seen as a legal identity separate from its owners
- more access to capital than unincorporated
Cons of Private limited company (LTD)
- Its shares are less appealing as they cannot be traded on the stock exchange so therefore it is more difficult to sell
- it is less flexible if expansion needs finance which is more difficult to raise than a PLC
- more legal formalities than for an unincorporated business
Pros of a public limited company (PLC)
- Limited Liability, its legal identity is separate from the shareholders
- easier to raise finance as a result of its stock exchange listing
- it has a greater scope for investment
- it can gain positive publicity as a result of trading on the stock exchange
- suppliers tend to be more willing to offer credit to public limited companies
Cons of public limited company(PLC)
- it has to publish a great deal of financial information about its performance
- there is greater scrutiny of activities
- significant administrative expenses
- the founders of the firm may lose control if they lose their share of 50%
- a stock exchange listing may mean that pressure from investors means that they will focus on short term goals as opposed to long term goals.
Analysis
- assessing benefits and drawbacks of all forms of legal structures
- explaining why a business would want limited liability
- comparing different types of legal structures to one another
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