Business Ownership, Governance, and Legal Forms
Choosing a Legal Form
Businesses can be structured in various ways, each with distinct legal and financial implications. Candidates must understand the main forms: sole proprietorship, partnership, private limited company (Ltd), public limited company (PLC), and limited liability partnership (LLP). Key differences revolve around liability, taxation, ownership transfer, and capital raising.
A sole trader has unlimited liability, meaning personal assets are at risk. A partnership also typically has unlimited liability unless it is an LLP. Limited companies offer limited liability to shareholders, meaning their personal assets are protected, but they must comply with more regulations (e.g., filing accounts). A PLC can offer shares to the public, while an Ltd cannot.
Governance
Corporate governance refers to the system by which companies are directed and controlled. It involves the board of directors, shareholders, and other stakeholders. The UK Corporate Governance Code sets standards for board leadership, effectiveness, accountability, and remuneration. Key concepts include separation of ownership and control (agency problem), board independence, and transparency.
A common trap is confusing the roles of the board of directors (strategic decision-making) and management (day-to-day operations). Another trap is assuming that all limited companies are PLCs; only those listed on a stock exchange can be PLCs.
Worked Example
A startup wants to raise capital from external investors while protecting the founders' personal assets. The best form is a private limited company (Ltd) because it offers limited liability and can issue shares to investors without going public. A partnership would not protect personal assets, and a PLC would require a costly listing process.
Rule of Thumb
If liability protection is needed, choose a limited company. If raising capital from the public is required, a PLC is necessary. For professional services, an LLP combines partnership flexibility with limited liability.