The form of business ownership affects → the types and amount of finance a business can obtain
→ Different forms of ownership have different → legal structures, liability, access to investors and ability to raise external finance
→ The main forms of ownership → sole trader, partnership, private limited company and public limited company
→ Example: A sole trader may rely mainly on personal savings and loans → while a public limited company can raise large amounts of finance by selling shares to the public
Sole Trader and Sources of Finance
→ Sole trader → a business owned and controlled by one individual
→ Main sources of finance →
→ personal savings
→ retained profit
→ bank loans
→ bank overdrafts
→ trade credit
→ loans from family and friends
→ Personal savings → often an important source of start-up finance because the owner has complete control over the business
→ Bank loans → may provide larger amounts of finance → but interest and repayments must be made
→ Retained profit → can be reinvested into the business once it becomes profitable
→ A sole trader generally cannot sell shares to outside investors → limiting the amount of equity finance available
→ Analysis: limited access to external equity finance → greater dependence on the owner’s funds and borrowing → potentially restricting the scale of expansion
→ Evaluation: the owner retains complete control → but the ability to raise large amounts of finance may be limited
Partnership and Sources of Finance
→ Partnership → a business owned by two or more partners who share responsibility for the business
→ Sources of finance may include →
→ partners’ capital
→ retained profit
→ bank loans
→ overdrafts
→ trade credit
→ loans from family and friends
→ More owners → potentially more personal capital available compared with a sole trader
→ Partners may contribute different amounts of capital → depending on the partnership agreement
→ Like a sole trader → a traditional partnership generally cannot raise finance by selling shares to the public
→ Analysis: several partners can contribute capital → greater internal finance → potentially greater ability to start or expand the business
→ Evaluation: finance may still be limited compared with a limited company because ownership cannot generally be offered to large numbers of outside shareholders
Private Limited Company and Sources of Finance
→ Private limited company → a company owned by shareholders where shares cannot be offered to the general public
→ Sources of finance →
→ shareholders’ capital
→ retained profit
→ bank loans
→ overdrafts
→ trade credit
→ venture capital
→ business angels
→ New shares can be issued to selected investors → allowing the company to raise additional equity finance
→ Example: A technology start-up may sell shares to venture capital investors → raising finance to develop a new product
→ Analysis: ability to issue shares privately → greater access to equity finance → reduced reliance on borrowing → potentially greater ability to finance expansion
→ Evaluation: existing owners may lose some control when new shareholders are introduced → and profits may have to be shared among more shareholders
Public Limited Company and Sources of Finance
→ Public limited company (PLC) → a company whose shares can be offered for sale to the general public
→ Sources of finance →
→ issuing shares to the public
→ retained profit
→ bank loans
→ corporate bonds
→ overdrafts
→ trade credit
→ The ability to sell shares publicly → provides access to potentially very large amounts of equity finance
→ Example: A large retail business may become a PLC and sell shares to thousands of investors → raising substantial finance for national or international expansion
→ Analysis: access to large-scale equity finance → greater investment capacity → expansion of production and operations → potential growth in revenue and market share
→ Evaluation: becoming a PLC involves greater regulation, disclosure requirements and costs → and existing owners may have less control because ownership is spread among many shareholders
Relationship Between Ownership and Finance
→ Sole trader → limited access to equity finance → mainly relies on owner’s capital and borrowing
→ Partnership → capital can be contributed by several owners → but shares cannot normally be sold publicly
→ Private limited company → can raise equity finance from selected shareholders and investors → greater access to finance than sole traders and partnerships
→ Public limited company → widest access to equity finance → can raise large amounts by selling shares to the public
→ As the business becomes larger and more complex → access to external finance generally increases
→ However → greater access to finance often comes with → greater loss of control, regulation and financial obligations
Ownership, Control and Finance
→ Raising equity finance → involves selling part of the ownership of the business
→ More shareholders → may mean existing owners have less control
→ Example: A sole trader retains 100% ownership → but a company that issues shares to many investors may have ownership divided among thousands of shareholders
→ Analysis: raising equity finance → greater funds available → but ownership becomes more widely distributed → existing shareholders may have less influence over decisions
→ Evaluation: owners must balance the need for finance against their desire to maintain control
Ownership and Risk
→ Sole traders and ordinary partnerships → owners may have unlimited liability
→ Limited companies → shareholders generally have limited liability
→ Limited liability may make investors more willing to provide finance → because their personal financial risk is generally limited to the amount invested
→ Analysis: limited liability → lower personal financial risk for shareholders → potentially greater willingness to invest → increased availability of equity finance
→ Evaluation: lenders may still assess the company’s financial strength carefully → and may require security or guarantees before providing loans
Analysis
→ sole trader → limited access to equity finance → greater reliance on personal savings and borrowing → potentially limits growth
→ partnership → several owners can contribute capital → greater internal finance than a sole trader → potentially greater ability to expand
→ private limited company → can raise finance from selected shareholders and investors → greater access to equity finance → potentially faster growth
→ public limited company → can sell shares to the public → access to substantial finance → greater ability to fund large-scale investment and expansion
→ greater access to equity finance → reduces reliance on borrowing → potentially lower interest costs → but may reduce existing owners’ control
Evaluation
→ The best form of ownership depends partly on → how much finance the business needs and the owner’s willingness to share control
→ A small business requiring relatively little finance → may benefit from remaining a sole trader because of simplicity and complete control
→ A rapidly growing business requiring substantial investment → may benefit from becoming a private or public limited company
→ Public ownership provides significant access to finance → but involves greater regulation, administration and pressure from shareholders
→ Equity finance does not require regular repayment like a loan → but ownership and future profits may have to be shared
→ Overall → the form of ownership strongly influences access to finance → sole traders and partnerships have fewer equity-financing opportunities, while limited companies can access a wider range of external finance → particularly public limited companies, which can raise substantial capital through the sale of shares to the public.