The document discusses different business structures for startups, focusing on the advantages and disadvantages of sole traders and limited companies. It notes that sole traders have unlimited liability for debts but are simple to set up, while limited companies provide shareholders with limited liability but involve more administration. The key consideration is balancing minimizing investment risk with choosing an appropriate structure for the business.

1. Limited
Liability

2. Choosing the best legal structure
• There are several choices of business
structure for a start-up
• Setting up a new business is a simple,
straight-forward task
• The trick is to choose a legal structure to
minimise the risk of investment which is
also appropriate for the business
• The most important issue is whether the
entrepreneur is personally liable for the
debts of a start-up

3. Importance of limited liability
• An important protection for
shareholders in a company
• Shareholders can only lose the value of
their investment
• However limited liability does not
protect against:
– Wrongful or fraudulent trading, or
– When personal guarantees have been given by
directors

4. Sole trader
• The most common type of business structure
• Very simple and cheap to set up
• A sole trader is just an individual owning the
business on his/her own
• Remember that a sole trader can also employ
people – but those employees don’t share in
the ownership of the business
• The sole trader owns all the business assets
personally and is personally responsible for
the business debts. A sole trader has
unlimited liability
• Unlimited liability not too much of an issue if
the sole trader just deals in cash!

5. Sole trader + / -
Advantages Disadvantages
Quick & easy to set up – the Full personal liability – “unlimited
business can always be liability”
transferred to a limited company Harder to raise finance – sole
once launched traders often have limited funds of
Simple to run – owner has their own and security against
complete control over decision- which to raise loans
making The business is the owner – the
Minimal paperwork business suffers if the owner
becomes ill, loses interest etc
Easy to close / shut down
Pay more tax than a company

6. Limited company (1)
• Limited companies are separate legal entities to the
founders. A legal entity can own things itself (assets),
can sue and be sued
• Companies are owned by their shareholders and run
by directors.
• The shareholders appoint the directors (who in most
cases are one and the same people!) who run the
company in the interests of the shareholders
• Shareholders own a share of the company, but they
do not own the assets of the company and they are
not liable for the debts of the company

7. Limited company (2)
• The company owns the assets and
pays the debts. If the company
becomes insolvent (i.e. it cannot pay
its debts), then the company is closed
• Shareholders are not liable for any
debts owed by the company that
cannot be settled. That is the
importance of limited liability

8. Limited company (3)
• By far the most common form of limited
company is a private limited company.
Private means that the shares of the
company are not traded publicly on a
stock exchange
• By contrast, a public limited company
(“plc” after its name) tends to have a
larger value of share capital invested and
its shares may be traded publicly. It is
rare for a start-up to be a plc

9. Limited Company + / -
Advantages Disadvantages
Limited liability – protects the Greater admin costs
shareholders (the big Public disclosure of company
advantage) information
Easier to raise finance – both Directors’ legal duties
through the sale of shares
and also easier to raise debt
Stable form of structure –
business continues to exist
even when shareholders
change
Can pay less tax

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