Types of business

An entrepreneur must also decide what type of business to establish.

There are three main types of small business. Each has a distinct form and structure.

Sole trader

A sole trader is a business owned by one person. Many plumbers, electricians, window cleaners and other trades people work in this way. A sole trader may employ other people to assist on jobs, to take phone calls or do the bookkeeping. It is simple to set up a sole trader business. There are few legal formalities.

Sole traders have complete control of their business – they make their own decisions and take all the profits for themselves. However, sole traders can find it difficult to raise capital and they have liability for any debts incurred by the business. This means that sole traders potentially risk everything – their savings, their homes and other assets – if their business runs into trouble.

A partnership

This involves two or more people working together. The partners share the workload and the profits of the business. Partners will often have skills that complement each other and they can benefit from each other's ideas.

However, partnerships do not always run smoothly. There can be disputes between partners. Like sole traders, partnerships often find it difficult to obtain capital. Most partnerships do not have limited liability. This means that each partner can be held responsible for all debts incurred by the partnership.

A company

This is a legal entity. It is owned by shareholders. The shareholders bring capital into the business. Shareholders take less risk than sole traders or partnerships because they have legal protection called limited liability. This means that if the business cannot meet its debts, then the maximum sum that shareholders can lose is limited to their investment in the company. Company decision-making is steered by a board of directors.