Forms of Business Ownership (Junior Cert Business Studies): Revision Notes
Forms of Business Ownership
When starting a business, entrepreneurs must choose from several different ownership structures. Each form of ownership has distinct characteristics that affect how the business operates, who owns it, and how profits and losses are handled.
There are five main forms of business ownership to consider:
- Sole trader
- Partnership
- Private limited company
- Public limited company
- Franchise
- Co-operative
Sole trader
A sole trader represents the simplest form of business ownership, where one individual owns and operates the entire business. This person makes all business decisions independently and has complete control over the company's direction.
Sole trader - A business owned and operated by a single individual who has complete control over all business decisions.
The sole trader structure offers maximum flexibility and control. The owner keeps all profits generated by the business but must also bear all risks and losses personally. Starting as a sole trader requires minimal paperwork, making it an attractive option for new entrepreneurs.
However, the owner must provide all the initial funding needed to start the business. This startup money is called capital.
Capital - The money used to start and fund a business.
One significant drawback of sole trader businesses is unlimited liability. This means the owner is personally responsible for all business debts, even if this requires selling personal assets like their home to pay creditors.
Unlimited liability - When a business owner's personal assets can be seized to pay business debts. This puts your home, car, and other personal property at risk if the business fails.
Advantages of sole trader ownership:
- Keep all profits from the business
- Simple and quick to establish
- Complete control over business decisions
- Minimal legal requirements
Disadvantages of sole trader ownership:
- Unlimited liability puts personal assets at risk
- Often requires long working hours
- Limited access to large amounts of capital
- All business responsibilities fall on one person
Example: Irish Sole Traders
Common examples of sole traders in Ireland include independent shop owners, plumbers, electricians, and freelance consultants. For instance, a local electrician who runs their business under their own name, keeps all profits, but is personally liable for any business debts.
Partnership
A partnership involves between two and twenty individuals working together to run a business. These individuals, called partners, share the business's profits, losses, and responsibilities according to their agreement.
Partners typically contribute different resources to the business, such as money, skills, or expertise. It's essential for partners to create a formal partnership agreement, known as a Deed of Partnership, which outlines how profits will be shared, how decisions will be made, and how disputes will be resolved.
Partnership - A business owned jointly by 2-20 people who share profits, losses, and responsibilities.
Advantages of partnership:
- More capital available from multiple partners
- Better decision-making through diverse skills and experience
- Shared workload and responsibilities
- Different partners can specialise in different areas
Disadvantages of partnership:
- Unlimited liability affects all partners personally
- Profits must be shared among all partners
- Potential for conflicts over business decisions
- Partners are liable for each other's business actions
Example: Irish Partnership
O'Brien and Murphy Solicitors represents a typical Irish partnership, where two legal professionals combine their expertise to serve clients. Each partner contributes their skills and shares both profits and unlimited liability.
Private limited company
Private limited companies represent the most common business structure in Ireland. These businesses are owned by shareholders who purchase shares in the company, with ownership limited to between one and 149 shareholders.
Shareholder - A person who owns shares in a company and therefore has a stake in its ownership.
Each shareholder's ownership percentage depends on how many shares they own. When the company makes profits, shareholders receive their portion as dividends. The more shares owned, the larger the dividend payment received.
Limited liability - Shareholders can only lose the money they invested in the company, not their personal assets. This is a major advantage over sole traders and partnerships.
All private limited companies must register with the Companies Registration Office (CRO) in Ireland. Upon successful registration, the CRO issues a Certificate of Incorporation, which legally allows the company to begin trading.
Advantages of private limited company:
- Limited liability protects shareholders' personal assets
- Easier to raise capital by selling shares
- Professional image and credibility
- Lower corporation tax rate (12.5% in Ireland)
Disadvantages of private limited company:
- Profits must be shared among all shareholders through dividends
- More complex legal requirements and paperwork
- Must file annual returns with the CRO
- Loss of complete control as more shareholders join
Example: Irish Private Limited Companies
Many Irish businesses operate as private limited companies, including local construction firms, retail stores, and professional service providers. These companies benefit from limited liability protection while maintaining relatively simple operational structures.
The accountancy firm Ernst and Young is an example of a Private Limited Company.
Public limited company
Public limited companies differ from private companies because their shares are traded on stock exchanges, allowing members of the general public to buy and sell them freely.
Public limited company - A business whose shares are traded on stock exchanges and can be bought by anyone.
Public limited companies must include "PLC" in their company name and register with the Companies Registration Office. They face stricter regulations than private companies due to their public nature.
These companies can raise substantial amounts of capital by selling shares to the public. However, they cannot control who purchases their shares, potentially leading to ownership by competitors or unwanted investors.
Advantages of public limited company:
- Access to large amounts of capital through share sales
- Enhanced public profile and credibility
- Shares can be easily bought and sold
- Tax advantages compared to personal income tax rates
Disadvantages of public limited company:
- Complex legal requirements and regulations
- No control over share ownership
- Pressure from shareholders for short-term profits
- High costs of stock exchange compliance
Example: Irish Public Limited Companies
Examples of Irish public limited companies include Ryanair PLC, Kerry Group PLC, and AIB PLC. These companies have access to significant capital through public share trading but face strict regulatory requirements.
Franchise
A franchise arrangement allows an individual (the franchisee) to operate a business using an established company's brand name, products, and business model. The original business (the franchisor) grants this permission in exchange for fees and ongoing royalty payments.
Franchise - A licence agreement allowing someone to use an established business's brand and methods in exchange for fees.
Franchisees benefit from using a proven business model with existing brand recognition and customer loyalty. The franchisor typically provides training, marketing support, and ongoing guidance to help ensure success.
However, franchisees must follow strict guidelines and standards set by the franchisor. This limits their creative freedom and business flexibility.
Advantages of franchise ownership:
- Proven business model reduces risk of failure
- National marketing campaigns benefit all locations
- Training and ongoing support provided
- Quick startup compared to creating a new business
Disadvantages of franchise ownership:
- Ongoing royalty payments reduce profitability
- Limited control over business operations
- Must follow franchisor's rules and standards
- Initial franchise fees can be substantial
Example: Irish Franchises
Popular franchise examples in Ireland include Subway, Centra convenience stores, and Supermacs. Each franchisee operates under established brand guidelines while paying ongoing fees to the franchisor.
Co-operative
Co-operatives are businesses owned and operated by their members to meet common needs rather than generate profits for external investors. Each member has equal voting rights regardless of their financial contribution, making decisions democratically.
Co-operative - A business owned by its members and operated for their mutual benefit rather than external profit.
There are three main types of co-operatives:
- Producer co-operatives: Owned by people who create the raw materials or products sold by the organisation. An example is Arrabawn Co-operative, owned by dairy farmers who supply milk.
- Consumer co-operatives: Owned by customers who want to purchase the organisation's goods or services. The Dublin Food Co-op represents this model.
- Worker co-operatives: Owned by employees of the organisation. These are less common but exist in sectors like media and professional services.
Advantages of co-operative ownership:
- Limited liability protects members' personal assets
- Democratic decision-making gives all members equal say
- Focus on member benefits rather than external profit
- Shared resources and risk among members
Disadvantages of co-operative ownership:
- Slow decision-making due to democratic processes
- Limited incentive for members to invest additional capital
- Potential conflicts between different member interests
- Difficulty raising large amounts of capital quickly
Example: Irish Co-operatives
Irish credit unions represent excellent examples of successful consumer co-operatives, providing financial services to their member communities. Each member has an equal vote in decision-making regardless of their account balance.
Key Points to Remember:
- Sole traders have unlimited liability but complete control and keep all profits
- Partnerships share profits and risks among 2-20 partners, also with unlimited liability
- Private limited companies offer limited liability protection and are Ireland's most common business form
- Public limited companies can raise large amounts of capital but face strict regulations
- Franchises provide proven business models but require ongoing fees and limit operational freedom
- Co-operatives focus on member benefits rather than profit maximisation and operate democratically