Types of Business - LTD, PLC and more...

So, you decide to start a business. But what type of business are you going to run and what are your prospects for its growth?

Sole Trader

Sole Traders are usually a One-Man-Band and the owner and business are defined as a single entity. You don't have to pay to form a Sole Trader business but the disadvantage is that a sole trader has unlimited liability in that they are responsible for any losses and are entitled to any profits. Hence when applying for a bank loan, the Bank Manager will take one your assets as a guarantee for the loan. If the business goes under, your house will be sold to pay off the bank loan...Hard Times :(

In addition you may well have a single bank account. e.g. with a plumber all payments are made to Mr T Smith, The Plumber rather than the business. Of course having a separate account is a lot easier though. A sole Trader pays income tax on profits because the profits of the business are treated as your income; provided you don't reinvest the cash. In the unfortunate death of the sole trader, the enterprise will end unless another person takes over.

Partnership

A partnership has the same characteristics as above. Only there are multiple people who run the business and are accountable for the losses / gains.

Private Limited Company (LTD)

You may wish to form a company if your small enterprise and partnership grows big enough. Although you have to apply to Companies House and inform Inland Revenue and Customs etc, you will gain limited liability which means the owners and business are seen as two separate entities. You are required to set up separate bank accounts too. However if the business gets into financial difficulty, you will not have to sell off personal assets  the bank can only take the cash out of the business' assets and so you are protected.

Many firms with an uncertain / inconsistent sales pattern may opt for this classification a partnership as it minimises risk. A Sole Trader such as a Market Retailer selling vegetables buys stock and sells it the same day and so risk of loss is rather small, but for a firm producing chocolate bars such as Mars, one of the largest LTD companies, customers may stop demanding your product and there are substantial bills and loans which could become a problem if demand falls significantly. It is not unheard of for big firms to go bust. Look at what happened in the huge global recession of 2008/09.

Finally a LTD company pays Corporation Tax on its profits to the Governments.If the owners wish to pay themselves a wage out of this then they will have to pay income tax on the cash they withdraw. But it will show up on the financial records as a labour cost and so won't be charged corporation tax and income tax simultaneously.

Public Limited Company (PLC)

Liability is still limited but large corporations may wish to raise capital for investment or cash in on their ownership of the firm by listing on the Stock Exchange. They sell shares in the business for the public, who may be eager investors, regular people or pension fund managers to eagerly buy up in the hope that they will increase in value. Therefore the company gets money to grow and those with a stake in the firm get a windfall. As Mark Zuckerberg was a major shareholder in Facebook, when it became a PLC, he became extremely wealthy. The disadvantage is that you lose control in the business. Most owners try and maintain some power by holding on to 51% of the shares but are still answerable to all of the other shareholders who can vote on a new leader (a CEO) if they feel it will boost company performance.