The sole proprietor (sole trader)

This type of firm is owned by one person
This person provides all of the capital needed to form, operate, or expand the business
It is the easiest form of business to set up
Simplest and most common type of enterprise
It is more likely to fail than any other
Such businesses tent to have only a few employees and less machinery or capital than larger businesses
Less plant facilities
Fewer opportunities to make economies of scale
Their market tend to be less diversified than that of larger businesses
You are self-employed
Entirely responsible for all aspects of running your business
Especially suitable for small retail businesses.

You have unlimited liability: if the business is unable to pay the creditors they can take your personal possessions
You can suffer form lack of continuity: if you are unable to run the business, perhaps through ill health (even temporarily), then there will be no one to run the business
You have to provide all the capital
It will often be difficult to obtain loans of capital because the business of a sole proprietor is a bigger risk than large businesses
It may be difficult to expand
You may have to sell your possessions if the company goes into dept.

More owners incorporate into the business to form a partnership
They are regulated by the Partnership Act, e.g. two to twenty members are allowed
Exceptions to this rule are:
Banks which operate as a partnership are not allowed to have more than ten partners
Some professional partnerships are allowed to have more than twenty partners (e.g. solicitors, members of the Stock Exchange, accountants)
A contract sets out the rights of each partner, such as the way in which profits are to be divided
Act provides for equal sharing of profits
All partners are equally responsible for the debts of the business
A “sleeping” partner is one who invests in the business but takes no active part in running it, but he is fully liable with other partners for debts incurred by the business

At least one partner must accept unlimited liability
Some professions are not allowed to form a limited company, therefore they create partnership: solicitors, doctors and accountants are professions that are not allowed to have limited liability status
Two or more people start a business together
They agree on how the business will be operated
All partners are responsible for the debts of the partnership and profits
Losses are shared between them

Private Limited Company (Ltd.)

Liability is limited
This type of business must include Limited (or Ltd) in its title name
It is allowed from two to an unlimited number of members (shareholders)
The capital of the firm is divided into shares, but the shares are not sold on the Stock Exchange and they cannot be advertised for sale publicly – share have to be sold privately
Some firms may wish to keep ownership within a particular group of people, within a family or a religious group
Rules contained in its articles of association:
e.g. may restrict share transfer, requiring members to offer shares to existing shareholders before attempting to sell them to non-members
Minimum of two people form a company, becoming its shareholders
To establish such a company, specific administrative procedures must be followed:
Shareholders must appoint a director and a company secretary
Responsibilty of each shareholder is limited to the amount of money that they have contributed
Letters Ltd. after their name

Can have more people contributing capital than the sole proprietor or partnership
Have greater continuity than smaller businesses
Have limited liability
The financial risks that you are taking are restricted
Good way of sharing the pressure and work involved in starting a business
You can increase your capital by selling shares

May be limited in the capital they can raise because the shares cannot be offered for public sale
Capital raising possibilities can be further reduced if articles of association restrict share transfer
Audited accounts (Offenlegung der Konten) have to be available for inspection
There is danger that conflicts of personality could ruin your business
It is complicated and expensive to set up

Indicate its public status by including the letters plc in the title name
It is allowed form two to an unlimited number of shareholders
It can advertise shares and debentures (Optionsscheine) for public sale
Capital raising easy: public company shares are listed on the Stock Exchange
Encourage people to contribute to the original share capital because they know they can easily sell their shares second-hand on the stock market
When an investor buys shares they become a part owner: this entitles (ermächtigen) them to a share of the company’s profit, gives them the right to some say in the way that the company is operated
Usually the shareholders elect a small committee called a board of directors to decide on behalf of the shareholders. Chairperson is also elected to regulate board meetings
Board appoint a managing director to carry out the day-to-day operation of the firm
Public is able to buy and sell their shares on the Stock Exchange
Letters plc after their name
Minimum share capital for a public limited company is £50,000
Unsuitable choice for small businesses

Have limited liability
Enjoy maximum continuity
Can raise large sums of capital
Large size enables them to enjoy “economies of scale”, such as being able to buy supplies in bulk
Size allows them to buy special equipment which will save in labour and expense
Find it easier to borrow money than smaller businesses because they are less risk than smaller firms
You can increase your capital by selling shares

Formation involves considerable documentation and expense
Company, employees and shareholders become too detached from one another because of large size
Ease of transfer to share ownership can lead to “takeover” bids for company
Tend to develop too many rules
The annual accounts of the company are open to public inspection which reduces confidentiality of the firm