Business Definitions

What is a business?

When we talk about business in relation to business management we are concerned with the trading and management of a firm which is an entity involved in commercial transactions or engagements.

In the UK, businesses can be found in a wide range of shapes, sizes and disciplines but at its most basic level, a business will be constituted in one or other of the following categories:

  1. Sole Trader – this is a business entity that is owned and run by just one individual; there is no legal distinction between the owner and the business. Quite simply, this means that the owner will receive all the profits from the business when times are good but, conversely, he or she also has unlimited responsibility for any losses and debts.
  2. Partnership – this is a business entity in which two or more people share the risks, costs and responsibilities of being in business. In the UK, there are three types of partnerships: ordinary, limited and limited liability partnerships (LLP).
    –  Ordinary partnerships do not have a legal existence of their own as there is no distinction between the partners and the business. For example, if a partnership has debts, every person who makes up that partnership is jointly liable for that debt.
    –  Limited partnerships are made up of a mixture of ordinary partners and limited partners. In this type of partnership, the ordinary partners retain joint liability for any debts but the limited partner’s are offered an amount of legal protection, with their debts being limited to they amount of money they have invested in the company.
    –  Limited liability partnerships (abbreviated to LLP), must have at least two designated members. LLPs must register as a business at Companies House and submit annual returns; each partner’s liability is limited to the amount of money they have invested in the company.
  3. Private Companies – there are two types of private company: limited and unlimited. The latter is very rare so we will concentrate here on just the former – the private limited company.
    –  Private limited companies exist as a seperate legal entity and are administered by company directors. As such, the company must be registered at Companies House to whom the directors must submit annual returns. The company finances are completely seperate from those of the company directors. A company may be limited by shares or by guarantee:
    –  if a company is limited by shares it means that members’ liability is limited to the amount of shares they have purchased; they may lose the value of those shares, but nothing more.
    –  if a company is limited by guarantee it means that members’ liability is limited to an agreed amount the members have agreed to pay to the company in the event of it ceasing to trade.
  4. Public Limited Companies (PLC) – these companies exist as a seperate legal entity and are the only companies in which the general public are able to buy and sell shares; this is done through the stockmarket. The liability of each shareholder is limited to the amount they have paid for their shares; members are not responsible for the company’s debts unless they have expressly given guarantees. A PLC must have at least two shareholders, have issued shares to the public at a minimum value of £50,000 and be registered (incorporated) at Companies House.