Distinction between the private and public sectors

The economy is divided into the private and public sectors, each with different ownership structures and purposes. The private sector focuses on profit-making activities run by individuals or organisations, while the public sector is government-controlled and aims to provide essential services.

The private sector

• Owned and operated by private individuals or organisations.
• Primary goal is to generate profit.
• Includes various business types such as sole traders, partnerships, limited liability companies, franchises, and multinational corporations.

The public sector

• Controlled by local or national governments.
• Provides essential goods and services for the benefit of citizens.
• Examples include transport networks, communication systems, healthcare, education, and national defence.

Features, advantages, and disadvantages of sole traders

A sole trader is a business owned and run by one person, who may employ others but remains the sole owner. It operates as an unincorporated business, meaning there is no legal separation between the owner and the business.

Features of sole traders

• The owner provides all finance and accepts all risks, including potential losses.
• Legally, the owner and business are the same entity.
• The owner has unlimited liability, meaning personal assets can be used to pay business debts if necessary.
• All profits go to the owner if the business succeeds.

Advantages of sole traders

• Quick and inexpensive to set up without complex procedures.
• Owner has full control and can make decisions independently.
• Decisions can be made rapidly.
• Tax benefits as a small business.
• Financial accounts remain private, not published publicly.
• Flexibility to change business activities easily.
• High motivation from the sense of achievement in running one's own business.

Disadvantages of sole traders

• Owner bears all risks with unlimited liability.
• Limited finance, mainly from the owner's resources.
• Difficult to access external funding due to high risk.
• No one to share ideas, workloads, or responsibilities.
• Limited scope for specialisation and division of labour.
• Added workload and stress, often involving long hours.
• Lack of continuity during illness or holidays.
• Inability to exploit economies of scale, leading to higher prices and reduced competitiveness.

Features, advantages, and disadvantages of partnerships

A partnership is a business owned by two or more people, typically between two and twenty partners, depending on local laws. It is unincorporated, so partners usually share unlimited liability.

Features of partnerships

• At least one partner (often all) has unlimited liability for debts.
• Common in professional services like law firms, medical practices, and family businesses.
• A deed of partnership is often created to outline responsibilities, voting rights, and profit sharing.
• Some partnerships, like those in law or healthcare, can have more than twenty partners.
• Silent (or sleeping) partners may provide capital without active involvement.

Advantages of partnerships

• More owners allow raising greater finance than a sole trader.
• Benefits from shared ideas, expertise, workloads, and responsibilities.
• Enables specialisation and division of labour.
• Financial affairs remain confidential, shared only with tax authorities.
• Better continuity if a partner is ill or on holiday.
• Silent partners can add capital without daily involvement.

Disadvantages of partnerships

• Potential for disagreements or conflicts among partners.
• Profits must be shared among all partners.
• Death or departure of a partner can dissolve the partnership until a new agreement is made.
• Most partners have unlimited liability (except silent partners).
• Limited capital-raising ability compared to limited companies.

Features, advantages, and disadvantages of private and public limited companies

Limited companies are incorporated businesses with limited liability, owned by shareholders. There is a legal separation between owners and the business, protecting shareholders from losing more than their investment.

Features of private limited companies

• Smaller than public limited companies, with shares owned by family, friends, or relatives.
• Shares can only be transferred privately with agreement from all shareholders.
• Cannot sell shares publicly or on a stock exchange.
• Examples include small retail outlets and local service providers.

Advantages of private limited companies

• Control remains with existing shareholders, as shares need approval for transfer.
• Can raise more finance than sole traders or partnerships.
• Greater privacy than public limited companies.
• Continuity if a major shareholder dies.
• Limited liability protects owners' personal assets.

Disadvantages of private limited companies

• Cannot sell shares to the public, limiting finance options.
• Higher setup costs due to legal and auditing fees.
• Risk of takeover by larger firms.
• Some lack of privacy, as accounts must be available on request.

Features of public limited companies

• Shares can be sold to the public or institutions via a stock exchange.
• Initial sale of shares on the stock exchange is an initial public offering (IPO).
• No limit on shareholder numbers; often the largest businesses.
• Must publish full annual financial accounts.
• Examples include major multinational tech companies and car manufacturers.
• Regulated strictly, with shares traded on stock exchanges like the London Stock Exchange.

Advantages of public limited companies

• Easier to raise finance by selling shares.
• Access to loans and investments from banks and others.
• Benefits from size, such as economies of scale and market power.
• Limited liability for owners.
• Continuity even if a key shareholder dies.

Disadvantages of public limited companies

• Financial information is public.
• Most complex and expensive to set up.
• High compliance costs with stock exchange rules.
• Threat of takeover by rivals.
• Risk of diseconomies of scale if the firm becomes too large to manage efficiently.

Key concepts in setting up limited companies

Setting up a limited company involves specific legal steps and documents to establish it as a separate entity from its owners. This provides limited liability and enables share ownership.

Essential documents for incorporation

• Memorandum of Association - Includes the company's name, address, share capital, and outline of operations.
• Articles of Association - Details directors' duties, shareholders' rights, share transfer rules, annual general meeting procedures, profit distribution, and winding-up processes.

Process and key terms

• Submit documents to authorities; receive a Certificate of Incorporation to start trading.
• Shareholders elect a Board of Directors to manage strategy.
• Limited liability - Shareholders' losses are capped at their investment.
• Unlimited liability - Owners personally responsible for all debts, common in unincorporated businesses.
• Stock exchange - Marketplace for buying and selling company shares, e.g., the London Stock Exchange.