A business has to decide what legal structure it should have, and you need to know the different types including the features, advantages and disadvantages of each type.
Features: one owner
Advantages: easy to set up, you’re the boss and you keep any profit
Disadvantages: long hours, unlimited liability meaning the owner is personally liable for any business debts. Worst case scenario? You could potentially lose your car, house or other personal assets to pay the business debt.
Features: between 2 and 20 people
Advantages: shared workload, more ideas, more money goes into the business from each partner
Disadvantages: have to share profit, possible arguments between partners, still have unlimited liability
Private Limited Company
Features: made up of people who know each other
Advantages: owners decide who can buy shares, can issue more shares to raise more capital, limited liability
Disadvantages: more expensive and time-consuming to set up than a sole trader, accounts are a matter of public record and so competitors could view them
Key point – unlimited liability means that in the eyes of the law, the owner and the business are one and the same, meaning the owner is personally liable for any business debts. Limited liability means that the owner and the business are separate legal entities – the owners of the business only stand to lose the money they have invested in the business, their personal assets (e.g. house, car) are safe.