The sole trader
Many individuals aspire to owning and running their own business being their own boss, making their own decisions. For those who decide to turn their dream into a reality, becoming a sole trader (or sole proprietor) offers the simplest and easiest method of trading.As the name suggests, a sole trader is a business owned by one individual who is self-employed and who may, in some cases, employ other people on either a full time or a part-time basis. Normally using personal funds to start the business, the sole trader decides on the type of goods or services to be produced, where the business is to be located, what capital is required, what staff (if any) to employ, what the target market should be and a host of other aspects concerned with the establishment and running of the enterprise. Where the business proves a success, all profits accrue to the owner and it is common for sole traders to reinvest a considerable proportion of these in the business and/or use them to reduce past borrowings.Should losses occur, these too are the responsibility of the sole trader, who hasunlimited personal liability for the debts of the business.Despite this substantial disadvantage, sole proprietor ship tends to be the most popular form of business organisation numerically. In the United Kingdom, for example, it is estimated that about 80 per cent of all businesses are sole traders and in some sectors notably personal services, retailing, building they tend to be the dominant form of business enterprise. Part of the reason for this numerical dominance is the relative ease with which an individual can establish a business of this type. Apart from minor restrictions concerning the use of a business name if the name of the proprietor is not used few other legal formalities are required to setup the enterprise, other than the need to register for Value Added Tax if turn over exceeds a certain sum (e.g. £58 000 in 2004/5) and/or to full fill any special requirements laid down by the local authority prior to trading (e.g. some businesses require licences). Once established, of course, the sole trader, like other forms of business, will be subject to a variety of legal requirements (e.g. contract law, consumer law, employment law) though not the requirement to file information about the business in a public place. For some, this ability to keep the affairs of the enterprise away from public scrutiny provides a further incentive to establishing this form of business organisation some of which may operate wholly or partly in the black economy (i.e. beyond the gaze of the tax authorities).
A further impet us towards sole ownership comes from the ability of the individual to exercise a considerable degree of control over their own destiny. Business decisions including the day-to-day operations of the enterprise as well as long term plans are in the hands of the owner and many individuals evidently relish the risks and potential rewards associated with entrepreneurial activity, preferring these to the relative safety of employment in another organisation. For others less fortunate, the push of unemployment rather than the pull of the marketplace tends to be more of a deciding factor and one which clearly accounts for some of the growth in the number of small businesses in the United Kingdom in the later part of the twentieth century.Ambitions and commitment alone, however, are not necessarily sufficient to guarantee the survival and success of the enterprise and the high mortality rate among businesses of this kind, particularly during a recession, is well known and well documented. Part of the problem may stem from developments largely outsidethe control of the enterprise including bad debts, increased competition, higher interest rates, falling demand and factors such as these affect businesses of all types and all sizes, not just sole traders. Other difficulties, such as lack of funds for expansion, poor marketing, lack of research of the marketplace and insufficient management skills are to some extent self-induced and emanate, at least in part, from the decision to become a sole proprietor rather than some other form of business organisation. Where such constraints exist, the sole trader may be tempted to look to others to share the burdens and the risks by establishing a partnership orco-operative or limited company or by seeking a different approach to the business venture, such as through franchising. These alternative forms of business organization are discussed in detail below.
The Partnership Act 1890 defines a partnership as ‘the relation which subsists between persons carrying on a business in common with a view to profit’. Like the sole trader, this form of business organisation does not have its own distinct legal personality and hence the owners the partners have unlimited personal liability both jointly and severally. This means that in the case of debts or bankruptcy of the partnership, each partner is liable in full for the whole debt and each in turn maybe sued or their assets seized until the debt is satisfied. Alternatively, all the partners may be joined into the action to recover debts, unless by dint of the Limited
Partnership Act 1907, a partner (or partners) has limited liability. Since it tends to be much easier to achieve the same ends by establishing a limited company, limited partnerships are not common; nor can all partners in a partnership have limited liability. Hence in the discussion below, attention is focused on the partnership as an unincorporated association, operating in a market where its liability is effectively unlimited.
In essence, a partnership comes into being when two or more people establish a business which they own, finance and run jointly for personal gain, irrespective of the degree of formality involved in the relationship. Such a business can range from a husband and wife running a local shop as joint owners, to a very large firm of accountants or solicitors, with in excess of a hundred partners in offices in various locations. Under the law, most partnerships are limited to 20 or less, but some types of business, particularly in the professions, may have a dispensation from this rule(Companies Act 1985, s 716). This same Act requires businesses which are not exempt from the rule and which have more than 20 partners to register as a company.
While it is not necessary for a partnership to have a formal written agreement, most partnerships tend to be formally enacted in a Deed of Partnership or Articlessince this makes it much easier to reduce uncertainty and to ascertain intentions when there is a written document to consult. Where this is not done, thePartnership Act 1890 lays down a minimum code which governs the relationship between partners and which provides, amongst other things, for all partners to share equally in the capital and profits of the business and to contribute equally towards its losses.In practice, of course, where a Deed or Articles exist, these will invariably reflect differences in the relative status and contribution of individual partners. Senior partners, for example, will often have contributed more financially to the partnership and not unnaturally will expect to receive a higher proportion of the profits.
Other arrangements including membership, action on dissolution of the partnership, management responsibilities and rights, and the basis for allocating salaries will be outlined in the partnership agreement and as such will provide the legal framework within which the enterprise exists and its co-owners operate.Unlike the sole trader, where management responsibilities devolve on a single individual, partnerships permit the sharing of responsibilities and tasks and it is common in a partnership for individuals to specialize to some degree in particular aspects of the organisation’s work as in the case of a legal or medical or veterinary practice. Added to this, the fact that more than one person is involved in the ownership of the business tends to increase the amount of finance available to the organisation, thus permitting expansion to take place without the owners losing control of the enterprise. These two factors alone tend to make a partnership an attractive proposition for some would-be entrepreneurs; while for others the rules of their professional body which often prohibits its members from forming a company effectively provide for the establishment of this type of organisation.
On the downside, the sharing of decisions and responsibilities may represent a problem, particularly where partners are unable to agree over the direction the partnership should take or the amount to be reinvested in the business, unless such matters are clearly specified in a formal agreement. A more intractable problem is the existence of unlimited personal liability a factor which may inhibit some individuals from considering this form of organisation, particularly given that the actions of any one partner are invariably binding on the other members of the business. To overcome this problem, many individuals, especially in manufacturing and trading, look to the limited company as the type of organisation which can combine the benefits of joint ownership and limited personal liability a situation not necessarily always borne out in practice. It is to this type of business organization that the discussion now turns.
In law a company is a corporate association having a legal identity in its own right
(i.e. it is distinct from the people who own it, unlike in the case of a sole trader or partnership). This means that all property and other assets owned by the company belong to the company and not to its members (owners). By the same token, the personal assets of its members (the shareholders) do not normally belong to the business. In the event of in solvency, therefore, an individual’s liability is limited to the amount invested in the business, including any amount remaining unpaid on the shares for which they have subscribed. One exception to this would be where a company’s owners have given a personal guarantee to cover any loans they have obtained from a bank or other institution a requirement for many small, private limited companies.
Another occurs where a company is limited by guarantee rather than by shares, with its members’ liability being limited to the amount they have under taken to contribute to the assets in the event of the company being wound up. Companies of this type are normally non-profit-making organisations such as professional, research or trade associations and are much less common than companies limited by shares. Hence in the discussion below, attention is focused on the latter as the dominant form of business organisation in the corporate sector of business.
Companies are essentially business organisations consisting of two or more individuals who have agreed to embark on a business venture and who have decided to seek corporate status rather than to form a partnership. Such status could derive from an Act of Parliament or a Royal Charter, but is almost always nowadays achieved through ‘registration’, the terms of which are laid down in the various Companies Acts. Under the legislation, enacted in 1985 and 1989, individuals seeking to form a company are required to file numerous documents, including aMemorandum of Association and Articles of Association, with the Registrar of Companies. If satisfied, the Registrar will issue a Certificate of Incorporation, bringing the company into existence as a legal entity. As an alternative, the participants could buy a ready-formed company ‘off the shelf’, by approaching a company registration agent who specializes in company formations. In the United Kingdom, advertisements for ready-made companies appear regularly in magazines such asExchange and Mart and Dalton’s Weekly.
Under British law a distinction is made between public and private companies.
Public limited companies (PLCs) not to be confused with public corporations, which in the UK are state-owned businesses are those limited companies which satisfy the conditions for being a ‘PLC’. These conditions require the company to have:
A company which meets these conditions must include the title ‘public limited company’ or ‘PLC’ in its name and is required to make full accounts available for public inspection. Any company unable or unwilling to meet these conditions is therefore, in the eyes of the law, a ‘private limited company’, normally signified by the term ‘Limited’ or ‘Ltd’.
Like the public limited company, the private limited company must have a minimum of two shareholders, but its shares cannot be offered to the public at large, although it can offer them to individuals through its business contacts. This restriction on the sale of shares, and hence on their ability to raise considerable sums of money on the open market, normally ensures that most private companies are either small or medium sized, and are often family businesses operating in a relatively restricted market; there are, however, some not able exceptions to this general rule (e.g. Virgin).
In contrast, public companies many of which began life as private companies prior to‘going public’ often have many thousands, even millions, of owners (shareholders)and normally operate on a national or international scale, producing products as diverse as computers, petro-chemicals, cars and banking services. Despite being out numbered by their private counterparts, public companies dwarf private companies in terms of their capital and other assets, and their collective influence on output, investment, employment and consumption in the economy is immense.
Both public and private companies act through their directors. These are individuals chosen by a company’s share holders to manage its affairs and to make the important decisions concerning the direction the company should take (e.g. investment,market development, mergers and so on). The appointment and powers of directors are outlined in the Articles of Association (the ‘internal rules’ of the organisation) and so long as the directors do not exceed their powers, the share holders do not normally have the right to intervene in the day-to-day management of the company. Where a director exceeds his or her authority or fails to indicate clearly that they are acting as an agent for the company, they become personally liable for any contracts they make. Equally, directors become personally liable if they continue to trade when the company is insolvent and they may be dismissed by a court if it considers that an individual is unfit to be a director in view of their past record (Company Directors Disqualification Act 1985).It is usual for a board of directors to have both a chair person and a managing director, although many companies choose to appoint one person to both roles.
The chairperson, who is elected by the other members of the board, is usually chosen because of their knowledge and experience of the business and their skill both internally in chairing board meetings and externally in representing the best interest of the organisation. As the public face of the company, the chairperson has an important role to play in establishing and maintaining a good public image and hence many large public companies like to appoint well-known public figures to this important position (e.g. ex-Cabinet ministers). In this case knowledge of the business is less important than the other attributes the individual might possess, most notably public visibility and familiarity, together with a network of contacts in government and in the business world.
The managing director, or chief executive, fulfils a pivotal role in the organisation, by forming the link between the board and the management team of senior executives.
Central to this role is the need not only to interpret board decisions but to ensure that they are put into effect by establishing an appropriate structure of delegated responsibility and effective systems of reporting and control. This close contact with the day-to-day operations of the company places the appointed individual in a position of considerable authority and they will invariably be able to make important decisions without reference to the full board. This authority is enhanced where the managing director is also the person chairing the board of directors and/or is responsible for recommending individuals to serve as executive directors (i.e. those with functional responsibilities such as production, marketing, finance).
Like the managing director, most, if not all, executive directors will be full-time executives of the company, responsible for running a division or functional area within the framework laid down at board level. In contrast, other directors will have a non-executive role and are usually part-time appointees, chosen for a variety of reasons, including their knowledge, skills, contacts, influence, independence or previous experience. Sometimes, a company might be required to appoint such a director at the wishes of a third party, such as a merchant bank which has agreed to fund a large capital injection and wishes to have representation on the board. In this case, the individual tends to act in an advisory capacity particularly on matters of finance and helps to provide the financing institution with a means of ensuring that any board decisions are in its interests.In Britain the role of company directors and senior executives in recent years has come under a certain amount of public scrutiny and has culminated in a number of enquiries into issues of power and pay. In the Cadbury Report (1992), a committee, with Sir Adrian Cadbury as chairperson, called for a non-statutory code of practice which it wanted applied to all listed public companies. Under this code the committee recommended:
The committee’s stress on the important role of non-executive directors was at heme taken up in the Green bury Report (1995) which investigated the controversial topic of executive salaries in the wake of a number of highly publicized pay rises for senior company directors. Greenbury’s recommendations included:
an end to payments for failure. Green bury was followed by a further investigation into corporate governance by a committee under the chairmanship of ICI chairman Ronald Hampel. The Hampel Report (1998) called for greater shareholder responsibility by companies and increased standards of disclosure of information; it supported Cadbury’s recommendation that the role of chairperson and chief executive should normally be separated. As might have been anticipated, the Hampel Report advocated self-regulation as the best approach for UK companies.
As far as the issue of non-executive directors was concerned, this was investigated further by the Higgs Committee which was set up in 2002 and which reported the following year. In essence the Higgs Report set down a code of nonbinding corporate guidelines regarding the role of non-executive directors on company boards. Like the Cadbury Report, Higgs recommended that the role of chairperson and chief executive should be kept separate and that the former should be independent, though not necessarily non-executive. As for non-executive directors,
Higgs recommended that at least half the board should be independent and that non-executives should play key roles in areas such as strategy, performance, risk and the appointment and remuneration of executive directors. The latter issue, in particular, has been an area of considerable controversy in the UK in recent years and seems destined to remain so for some timeCo-operatives.
Consumer co-operative societies
Consumer societies are basically ‘self-help’ organisations which have their roots in the anti-capitalist sentiment which arose in mid-nineteenth-century Britain and which gave rise to a consumer co-operative movement dedicated to the provision of cheap, unadulterated food for its members and a share in its profits. Today this movement boasts a multibillion-pound turn over, a membership numbered in millions and an empire which includes thousands of food stores (including the All days convenience chain purchased in 2002), numerous factories and farms, dairies, travel agencies, opticians, funeral parlours, a bank and an insurance company, and property and development business. Taken together, these activities ensure that the Co-operativeGroup remains a powerful force in British retailing into the early twenty-first century.
Although the co-operative societies, like companies, are registered and incorporated bodies in this case under the Industrial and Provident Societies Act they are quite distinct trading organisations. These societies belong to their members (i.e.invariably customers who have purchased a share in the society) who elect Area Committees to oversee trading areas. These committees have annual elections and meetings for all members and these in turn appoint members on to regional boards and elect individual member directors to the Group Board. The Group Board also includes directors of corporate members who are representatives of other societies.Individual stores may also have member forums. Any profits from the Group’s activities are supposed to benefit the members. Originally this took the form of a cash dividend paid to members in relation to their purchases, but this was subsequently replaced either by trading stamps or by investment in areas felt to benefitthe consumer (e.g. lower prices, higher-quality products, modern shops, and so on)and/or the local community (e.g. charitable donations, sponsorship). The twiceyearlycash dividend has, however, recently been reintroduced.
The societies differ in other ways from standard companies. For a start, shares arenot quoted on the Stock Exchange and members are restricted in the number ofshares they can purchase and in the method of disposal. Not having access tocheap sources of capital on the stock market, co-operatives rely heavily on retainedsurpluses and on loan finance, and the latter places a heavy burden on the societieswhen interest rates are high. The movement’s democratic principles also impingeon its operations and this has often been a bone of contention as members havecomplained about their increasing remoteness from decision-making centres. Somesocieties have responded by encouraging the development of locally elected committees,to act in an advisory or consultative capacity to the society’s board ofdirectors and it looks likely that others will be forced to consider similar means ofincreasing member participation, which still remains very limited. The movement’s historical links with the British Labour Party are also worthnoting and a number of parliamentary candidates are normally sponsored at generalelections. These links, however, have tended to become slightly looser in recentyears, although the movement still contributes to Labour Party funds and continuesto lobby politicians at both national and local level. It is also active in seekingto influence public opinion and, in this, claims to be responding to customerdemands for greater social and corporate responsibility. Among its initiatives arethe establishment of a customer’s charter (by the Co-operative Bank) and the decisionto review both its investments and the individuals and organisations it doesbusiness with, to ascertain that they are acceptable from an ethical point of view.
In Britain, workers’ co-operatives are found in a wide range of industries, includingmanufacturing, building and construction, engineering, catering and retailing.
They are particularly prevalent in printing, clothing and wholefoods, and somehave been in existence for over a century. The majority, however, are of fairlyrecent origin, having been part of the growth in the number of small firms whichoccurred in the 1980s.
As the name suggests, a workers’ co-operative is a business in which the ownershipand control of the assets are in the hands of the people working in it, havingagreed to establish the enterprise and to share the risk for mutual benefit. Ratherthan form a standard partnership, the individuals involved normally register thebusiness as a friendly society under the Industrial and Provident Societies Acts1965–78, or seek incorporation as a private limited company under the CompaniesAct 1985. In the case of the former, seven members are required to form a co-operative,while the latter only requires two. In practice, a minimum of three or fourmembers tends to be the norm and some co-operatives may have several hundredparticipants, frequently people who have been made redundant by their employers and who are keen to keep the business going.The central principles of the movement democracy, open membership, social responsibility, mutual co-operation and trust help to differentiate the co-operative from other forms of business organisation and govern both the formation and operation of this type of enterprise. Every employee may be a member of the organization and every member owns one share in the business, with every share carrying an equal voting right. Any surpluses are shared by democratic agreement and this is normally done on an equitable basis, reflecting, for example, the amount of time and effort an individual puts into the business. Other decisions, too, are taken jointly by the members and the emphasis tends to be on the quality of goods or services provided and on creating a favourable working environment, rather than on the pursuit of profits although the latter cannot be ignored if the organisation is to survive. In short, the co-operative tends to focus on people and on the relationship between them, stressing the co-operative and communal traditions associated with its origins, rather than the more conflictual and competitive aspects inherent in other forms of industrial organisation.
Despite these apparent attractions, workers’ co-operatives have never been as popular in Britain as in other parts of the world (e.g. France, Italy, Israel), although a substantial increase occurred in the number of co-operatives in the 1980s, largely as a result of growing unemployment, overt support across the political spectrum and the establishment of a system to encourage and promote the co-operative ideal (e.g. Co-operative Development Agencies). More recently, however, their fortunes have tended to decline,as employee shareholding and profit schemes (ESOPs) have grown in popularity. It seems unlikely that workers’ co-operatives will ever form the basis of a strong third sector in the British economy, between the profit-oriented firms in the private sector and the nationalized and municipal undertakings in the public sector.
Public sector organisationscome in a variety of forms. These include:
_ central government departments (e.g. Department of Trade and Industry);
_ local authorities (e.g. Lancashire County Council);
_ regional bodies (e.g. Regional Development Agencies);
_ non-departmental public bodies or quangos (e.g. the Arts Council);
_ central government trading organisations (e.g. The Stationery Office); and
_ public corporations and nationalised industries (e.g. the BBC).
In the discussion below, attention is focused on those public sectororganisations which most closely approximate businesses in the private sector,namely, public corporations and municipal enterprises.
Private sector business organisations are owned by private individuals and groups who have chosen to invest in some form of business enterprise, usually with a view to personal gain. In contrast, in the public sector the state owns assets in various forms, which it uses to provide a range of goods and services felt to be of benefit to its citizens, even if this provision involves the state in a ‘loss’. Many of these services are provided directly through government departments (e.g. social security benefits) or through bodies operating under delegated authority from central government(e.g. local authorities, health authorities). Others are the responsibility of state-owned industrial and commercial undertakings, specially created for a variety of reasons and often taking the form of a ‘public corporation’. These state corporations are an important part of the public sector of the economy and have contributed significantly to national output, employment and investment. Their numbers, however, have declined substantially following the wide-scale ‘privatization’ of state industries which occurred in the 1980s and this process has continued through the 1990s and beyond with the sale of corporations such as British Coal, British Rail and British Energy.
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