Lernzettel: Understanding Business Structures and Liability

📋 Course Outline

1. Liability and business ownership
2. Sole traders
3. Partnerships and limited liability forms
4. Private limited and public limited companies
5. Not-for-profit organisations
6. Public sector organisations

📖 1. Liability and business ownership

🔑 Key Concepts & Definitions

• Limited liability : Limited liability means owners’ liability for business debts is capped, usually tied to the amount they have invested.
• Unlimited liability : Unlimited liability means owners are personally liable for business debts, so personal assets can be at risk if debts aren’t paid.
• Limited liability company taxes : Separate taxation describes how a limited company is treated separately from its owners for tax purposes.

📝 Essential Points

• Liability type affects debts, business governance, and how the business raises funding.
• Unlimited liability can put owners’ personal assets, such as property they own, at risk if the business cannot pay debts.
• Limited liability usually limits owners’ exposure to the extent of their investment.

💡 Memory Hook

Limited caps risk; unlimited exposes personal assets.

📖 2. Sole traders

🔑 Key Concepts & Definitions

• Sole trader : A sole trader is one person running their own business, typically small and set up with relatively few regulations.
• Unlimited liability sole trader : For sole traders, unlimited liability means the owner is responsible for all business debts.

📝 Essential Points

• A sole trader has unlimited liability and is responsible for all the debts of the business.
• A sole trader can take all profits for themselves.
• Sole traders make decisions alone and the owner is not a separate legal entity from the business.
• Sole traders typically raise funding from personal sources, using profits reinvested or loans from family and friends.

💡 Memory Hook

One owner = all decisions = unlimited risk.

📖 3. Partnerships and limited liability forms

🔑 Key Concepts & Definitions

• Partnership : A partnership is when two or more people start a trade or profession together with the aim of making a profit.
• Limited liability partnership : A limited liability partnership (LLP) is a partnership type with a separate legal entity that can own property and enter contracts.
• Limited partnership : A limited partnership is a partnership form that must be registered and can have liability and legal personality depending on where it is registered.

📝 Essential Points

• A partnership has three types: partnerships, limited liability partnerships, and limited partnerships.
• A partnership should use a partnership agreement to set partners’ rights and responsibilities, profit sharing, and what happens on death, retirement, or new partners.
• Without a partnership agreement, the Partnership Act (1890) can apply to partners’ terms.
• Unlike a conventional partnership, an LLP can own property or enter into contracts because it has a separate legal entity for assets and liabilities.

💡 Memory Hook

Partnership agreement sets the rules; LLP adds a legal “wrapper” for assets.

📖 4. Private limited and public limited companies

🔑 Key Concepts & Definitions

• Private limited company : A private limited company (Ltd) is a company where ownership and management can be split, and shares are traded privately.
• Public limited company : A public limited company (PLC) is a limited company whose shares can be bought and sold via the stock exchange.
• Articles of Association : Articles of Association are the governing document that companies must operate in accordance with.

📝 Essential Points

• A private limited company must have at least one director and commonly has the owner as both shareholder and director in smaller family businesses.
• A private limited company trades shares privately, usually between family and friends.
• A public limited company is controlled by directors, and most PLCs include independent non-executive directors as required by the Corporate Governance Code.
• Shares of a public limited company are freely bought and sold on the stock exchange, supporting finance-raising through that route.

💡 Memory Hook

Ltd = private share trading; PLC = stock exchange trading.

📖 5. Not-for-profit organisations

🔑 Key Concepts & Definitions

• Not-for-profit organisation : A not-for-profit organisation pursues objectives such as social, environmental, or charitable aims rather than distributing profits to external shareholders.
• Surplus : A surplus is profit-like money that not-for-profit organisations retain and reinvest rather than distributing to shareholders.
• Incorporated not-for-profit : An incorporated not-for-profit is one of the two not-for-profit structures that can be used depending on the organisation’s setup.

📝 Essential Points

• Not-for-profit organisations do not normally issue dividends and typically retain surplus inside the organisation.
• Not-for-profit organisations can be incorporated or unincorporated.
• Private-sector not-for-profits include most charities and voluntary/community organisations, and also sports and housing associations.
• Public-sector not-for-profits still aim to avoid profit as a primary objective, using taxpayer-related funding streams such as taxes to pay for services.

💡 Memory Hook

No dividends; surplus stays and is reused.

📖 6. Public sector organisations

🔑 Key Concepts & Definitions

• Public sector organisation : A public sector organisation provides public services and is accountable to government, rather than being driven by private shareholder profit.
• Taxpayer funding : Taxpayer funding is funding provided through taxes under government budgeting for public services.

📝 Essential Points

• Public sector organisations provide public services such as emergency services, healthcare, education, housing, refuse collection, and social care.
• Public sector organisations are accountable to the government.
• Public sector organisations are funded by the taxpayer, with the government setting a budget that they must operate within.

💡 Memory Hook

Government accountable + tax budget limits spending.

📊 Synthesis Tables

Liability: limited vs unlimited

Type	Owners’ debt liability	Impact on personal assets
Limited liability	Liability for debts is capped, usually linked to investment	Personal assets are generally not exposed beyond the limited scope described
Unlimited liability	Liability for debts is not capped	Personal assets such as property can be at risk if debts aren’t paid

⚠️ Common Pitfalls & Confusions

1. Confusing ownership and management in limited companies, where management is not automatically the same as ownership.
2. Thinking not-for-profit means no profit at all, when they may make a surplus that is reinvested.
3. Assuming sole traders have separate legal personality, when the owner and business are not separate.
4. Mixing up who controls a PLC, since shareholders own the company but directors control it.
5. Forgetting that partnership terms may default to the Partnership Act (1890) when no agreement is used.
6. Overlooking the registration-location difference for limited partnerships in Scotland versus England and Wales, and Northern Ireland.

✅ Exam Checklist

1. Define limited liability and unlimited liability and state the effect on owners’ personal assets.
2. State what “limited liability” and “unlimited liability” mean specifically for debts of the business.
3. Describe what a sole trader is and give typical features of setup and size.
4. Explain the liability and profit rights of sole traders regarding business debts and profits.
5. Explain how sole traders make decisions and whether the owner is a separate legal entity.
6. Describe sole trader funding routes and the typical difficulty of bank lending without a formal business plan.
7. Define a partnership and distinguish it from other business structures by its purpose and participants.
8. List the three types of partnerships named and state what a partnership agreement covers.
9. Explain the legal consequence of not having a partnership agreement for partnerships.
10. State how LLPs differ from conventional partnerships regarding legal entity, property, and contracts.
11. State key governance and funding-related features of private limited companies (directors and shares).
12. State key governance and funding-related features of public limited companies (directors, non-executives requirement, and stock exchange shares).
13. State the defining characteristics of not-for-profit organisations, including dividends and external shareholders.
14. Explain how not-for-profit organisations are funded and how surplus is handled.