- 15 Marks
BMIS – L1 – QA2 – Business and Organisational Structure
Question
Identify three common types of business entity. Differentiate between the characteristics of each type of entity.
Answer
There are three main types of business entity:
- a sole trader
- a business partnership
- a company (a limited liability company).
Sole trader
The business of a sole trader is owned and managed by one person. Any individual, who sets up in business on his/her own, without creating a company, is a sole trader.
Sole trader businesses are usually small operations, but the owner might employ a number of employees who work for the business to earn a wage or salary, but do not have any share in the ownership of the business.
Partnership
A business partnership is an entity in which two or more individuals (partners) share the ownership of the business. Each partner contributes some funds (‘capital’) to set up the business. Like a sole trader, a partnership may have employees who work for the business, but have no share in the ownership.
Company (limited liability company)
A company is a special form of business entity. Nearly all companies in business are limited liability companies with liability limited by shares.
Unlike a sole trader or a partnership, a company has the status of a ‘legal person’ in law. This means that a company can be the legal owner of business assets, and can sue or be sued in its own right in the law.
The following table differentiates between the key characteristics of each type of entity.
| Business structure | Owned by… | Personal liability of owner | Management |
|---|---|---|---|
| Sole trader | One person | Personal liability of the business | Business managed by its owner |
| Partnership | Several individuals working together | Personal liability of partners | Business managed by its owners |
| Company | Business | Limited | Larger companies are managed by professional managers |
| Business structure | Raising capital | Financial accounting and auditing |
|---|---|---|
| Sole trader | Capital for the business is provided by its sole owner. Likely to be limited in amount. | Some financial accounts needed for tax purposes |
| Partnership | Capital for the business is provided by its owners. Often limited in amount | Financial accounts needed for the benefit of the partners |
| Company | Capital for the business is provided by its shareholders. Public companies can raise new capital from investors in the stock market. Most very large businesses are companies. | Fairly strict regulation of financial reporting by companies. Also legal requirements for audits (except perhaps small companies). |
- Tags: Business Entities, Characteristics, Company, Partnership, Sole Trader
- Level: Level 1
- Uploader: Samuel Duah