Ownership and Control of Private Firms

WJEC BUSINESS STUDIES A LEVEL 2008 Spec. Issue 2 2012 Page 1 RESOURCES. Ownership and Control of Private Firms. Introduction Sole traders are the most popular of business Business managers as a businesses steadily legal forms, owned and often run by a single in- grows in size, are in the main able to cope, dividual they are found on every street corner learn and develop new skills. Change is grad- in the country. A quick examination of a busi- ual, there are few major shocks. Unfortu- ness directory such as yellow pages, will show nately business growth is unlikely to be a that there are thousands in every town or city. steady process, with regular growth of say There are both advantages and disadvantages 5% a year. Instead business growth often oc- to operating as a sole trader, and these are: curs as rapid bursts, followed by a period of steady growth, then followed again by a rapid Advantages. burst in growth.. Easy to set up – it is just a matter of in- The change in legal form of business often forming the Inland Revenue that an individ- mirrors this growth pattern. The move from ual is self employed and registering for sole trader to partnership involves injections class 2 national insurance contributions of further capital, move into new markets or within three months of starting in business. market niches. The switch from partnership Low cost – no legal formalities mean there to private limited company expands the num- is little administrative costs to setting up ber of manager / owners, moves and rear- as a sole trader. Also no formal audited ac- ranges responsibilities, as well reforming the counts are required, though it makes good decision making process. When a business business sense to keep a full set of busi- floats on the stock market – becomes a PLC, ness records. the owners are now distant individual share- Decision making is fast - no need for con- holders, or the perhaps not distant enough, sultations. institutional investors. Hire and fire as you please – the sole trader employs people that they are happy Business growth does not always follow the to work with. pattern of changing legal form described above, but what we are concerned with are Disadvantages. the problems, inefficiencies and contradic- tory pressures that can occur within a busi- Limited capital – Sole traders often rely ness, as a firm grows. So in this case the on their own savings and perhaps secured pattern of sole trader – partnership – private business loans. limited company – public limited company, is Limited range of skills – a sole trader may ideal for examining the problems that can oc- be an expert plumber, bur is he expert at cur with transition in size. marketing, managing staff, and controlling cash flow? Immense pressure – all the decisions and Sole Traders the future success of a business rest with Title Ownership and control Page 2 one person. Advantages of partnerships include: Unlimited liability – the sole trader is li- Wider range of skills able for all the debts of the business, up Greater availability of capital to and including the value of all assets Privacy of business affairs ( no accounts held, and potential future income. need to be published) Decision making is shared Sole Trader to Partnership. But becoming a partner does not solve all the Partnerships involve the joint ownership of a disadvantages of being a sold trader. business. Normally there can be between 2 and 20 partners, but in certain businesses The major disadvantages are: such as accountancy firms, there can be many Capital can still be limited more partners than this. Partnerships are of- Unlimited liability of partners ( sleeping ten found in the professions, such as be- partners who invest, but take no part in day tween lawyers, accountants , doctors etc, but to day running of the business can have lim- can be found in any type of business activity. ited liability) The rules of partnership are laid down in a Partnerships are dissolved on the death of Partnership Agreement, or the Deed of Part- a partner and this can cause complications nership. in re-establishing the partnership. The Deed of Partnership, lays out such rules Although, as we have seen, there are many ad- of operations as: vantages when partners become involved in a The amounts of capital invested business for the first time ( such as increased The share of profits each partner is to capital, greater input into decision making, receive. wider spread of skills), new partner’s can and The voting shares of the partners do cause strains within a business. What is to happen on the death of a partner These strains often result from the loss of Partnerships are Methods of leaving control of the sole trader over many aspects often found in the the partnership of business activity. For example suppliers or manufacturing methods may be changed by new professions, such as Rules for dissolution of the partnership partners, the relationships between managers between lawyers, and employees may now be different. accountants , Should a dispute arise with- doctors etc out a partnership agreement One case study into these pressures examined giving methods of setting the a small boat yard involved in building hand- dispute, then the dispute crafted wooden yachts. The existing owner un- would be settled according to the 1890 Partnership der financial pressure took on a partner, who Act. This is best avoided, particularly were limited liability is involved, as the act states that each partner wished to introduce more modern methods of is equally responsible for any debts. I.e. each partner manufacture such as GRP moulding. The move is ‘jointly and severally’ liable. from traditional methods of manufacture, to modern batch production methods, meant that Title Ownership and control Page 3 the previous owner felt dis-empowered, his follows the completion, and submission of two skills that had built the business were in ef- documents. These are: fect redundant, even his relationships with A Memorandum of Association, which pro- existing customers were not now so impor- vides details of the companies name, state- tant, as new customers brought in the bulk of ment of Limited liability of the shareholders, the business. These problems were only re- company registered office address, and a de- solved by the original owner learning to adapt scription of the business activities of the com- his skills to modern working methods. pany, ( for example the retailing of furniture). And secondly the Articles of Association, The loss of customer contact indicated which provides details of the roles of the Di- above, can be one of the main problems that rectors, the voting rights arises because of business growth. Customer of shareholders, dividend relationships and personal service may be the policy, formal procedures the situation where keys to success of small businesses. of the Annual General owners may take Meeting, methods of calling little interest in the As the business grows, then the original an Extraordinary General ongoing owner/manager may find that his or her time Meeting. management of a is being taken up with administration, staff management and paperwork. Working rela- Setting up a Limited Com- firm, really starts to tionships that have brought the business suc- pany is not complex, compa- occur in limited cess, may be difficult to maintain. Often nies can be bought “off the companies. partnerships, when founded, are based upon shelf”, for around £60, and the sole trader re-establishing the roles that the relevant details in- made the business successful and passing the serted, or they can be registered and incorpo- less customer orientated tasks onto the new rated on-line, with just a simple fee to be paid, partner, or partners. and only 2 shareholders needed. The owners of limited companies are of course From Partnership to shareholders. The minimum number of shareholders is only 2, and it is not unusual to find Setting up a Limited Private Limited limited companies with just £100 of issued Company is not Company (Ltd) share capital, two shareholders, with one hold- complex, companies ing 99 shares the other 1 share. In this situa- can be bought “off Private limited compa- tion the owner is very likely to be the manager. the shelf”, for nies, are incorporated This type of limited company is often bought around £60, and the bodies. They are estab- ‘off the shelf’, at a cost of perhaps £60. relevant details lished through the issue of a Certificate of In- inserted …. Limited companies (both Ltd’s and PLC’s), are corporation. This is is- incorporated. This means they have a legal ex- sued by the Registrar of istence separate from that of the owners of Companies, based at companies house Cardiff. the business. Limited companies can own prop- The issue of a Certificate of Incorporation erty and other assets, can enter into con- Title Ownership and control Page 4 tracts, and sue and be sued. They survive the There are exceptions to this limited liability death of owners, and can borrow and lend status. If shareholder directors are found to money. have traded when they new or should have known that the business was not financially vi- When establishing a limited Company, two able, then they can be held liable for debts documents are required, these are that have accrued after the time they should have or did know. Also if directors acted in a A memorandum of association foolhardy way, creating debts and liabilities, Articles of association then in these circumstances, they can be held liable as above. What is a memorandum of association? This document sets out: Private Limited Companies also have the advan- the company's name, tage of potentially accessing greater where the registered office of the com- amounts of capital through the sale of shares, pany is situated (in England, Wales or Scot- but they are not allowed to advertise shares land); and for sale, only being able to what it will do (its objects).

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