Ownership and governance
Introduced| English | Meaning |
|---|---|
| sole trader/səʊl ˈtreɪdə/ | A business owned and run by one person, who keeps the profits and has unlimited liability. |
| unlimited liability/ʌnˈlɪmɪtɪd ˌlaɪəˈbɪlɪti/ | The owner's legal responsibility for business debts without a fixed limit, potentially putting personal assets at risk. |
| partnership/ˈpɑːtnəʃɪp/ | A business owned by two or more people who share the profits and, usually, unlimited liability. |
| company/ˈkʌmpəni/ | A business that is a legal person separate from its owners, whose liability is usually limited. |
| shares/ʃeəz/ | Units of ownership in a company. |
| limited liability/ˈlɪmɪtɪd ˌlaɪəˈbɪlɪti/ | A legal arrangement limiting owners' responsibility for business debts to their investment or another specified amount. |
| governance/ˈɡʌvənəns/ | The rules and people that direct and control a company, such as its board and its reporting duties. |
| agency problem | agency problem |
Where will £40,000 come from?
- Nimbus wants £40,000 to open a third shop. The owner has £10,000 in savings. The rest could come from a bank, a partner or outside investors.
- Each source changes who decides and what the owner can lose. Choosing how to own the business is really a choice about money, risk and control.
Sole trader: one owner, all the risk
- A sole trader 个人独资 owns the business alone. They make every decision and keep all the profit.
- They also carry unlimited liability 无限责任: the business is not separate from them, so if it cannot pay its debts, their own savings and even their home can be taken.
A sole trader's shop closes owing £8,000 more than its assets are worth. Who must pay the £8,000?
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A sole trader is not separate from the business, so the debt is the owner's own debt. That is unlimited liability.
Partnership: shared money, shared debts
- In a partnership 合伙, two or more people own the business together. They pool money and skills and agree decisions between them.
- Each partner can usually be made to pay all the firm's debts, even those another partner ran up. Choosing a partner means trusting them with your own wealth.
Company: a separate legal person
- A company 公司 is a separate legal person: it owns its assets and owes its own debts. Its owners hold shares 股份, which they can sell.
- Shareholders have limited liability 有限责任: the most they can lose is what they paid for their shares. That is why strangers will invest in a business they do not run.
Which form is it?
Sort each feature to the ownership form it describes. Notice that limited liability and selling shares only appear together, with a board.
Which statements are true of a limited company? Select all that apply.
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Limited liability, sellable shares and public accounts all come with a company. Selling shares hands votes, and so some control, to the new shareholders.
Same failure, different losses
- Liability matters most when things go wrong. The form decides who pays the debts that the business's own assets cannot cover.
- Be careful with bank loans: a bank often asks a small company's owner for a personal guarantee, which puts the owner's own wealth back on the line for that loan.
- A bakery closes owing £50,000. Selling its ovens and stock raises £20,000.
- Unpaid debt: £50,000 − £20,000 = £30,000.
- As a sole trader, the owner must pay the £30,000 from personal savings, or lose personal property.
- As a company, the shareholders lose the money they invested, and the unpaid £30,000 falls on the people it owes, unless the owner personally guaranteed some of it.
A sole trader's bakery closes owing £50,000. Selling its ovens and stock raises £20,000. How much must the owner pay from personal wealth, in £?
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$50\,000 - 20\,000 = 30\,000$. With unlimited liability the gap falls on the owner. As a company without personal guarantees, it would fall on the people it owes.
A director who personally guarantees the company's bank loan is still protected by limited liability for that loan.
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The guarantee is a personal promise. If the company cannot repay, the bank can claim from the director's own wealth for that loan.
Governance: who watches the managers?
- In a company, shareholders elect a board of directors to run it for them. This system of rules, votes and reports is governance 治理.
- When managers (the agents) want different things from the owners (the principals), an agency problem 代理问题 appears: padded expenses, pet projects, short-term thinking. Owners answer with checks, such as audits, and with pay linked to results.
Match each term to its role in a company.
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Governance answers the agency problem in two ways, by watching (audits) and by aligning interests (incentives).
The form follows the financing
- Ask three questions: how much money is needed, who will provide it, and how much loss can the owner bear? The answers point to the form.
- Nimbus with £40,000 to raise and outside investors who will not risk more than their stake points to a company. A small café run on the owner's savings may stay a sole trader.
Nimbus needs £30,000 from investors who will not risk more than the money they put in. Which form fits best?
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Only a company caps the investors' loss at their stake and lets them hold sellable shares. As partners they could be made to pay all the debts.
Marks that slip away
- "A company is more professional." The form is chosen for money and risk, not image.
- Forgetting personal guarantees. They put the owner's wealth back at risk for that loan.
- Thinking shareholders run the company day to day. They elect directors; managers run it.
- Treating agency problems as rare scandals. They exist wherever managers and owners differ, so governance never stops.
You've got it
- Sole trader: one owner, full control, unlimited liability. Partnership: shared money and decisions, each partner liable for all the debts.
- Company: a separate legal person; shareholders have limited liability and can sell their shares, but control passes to a board.
- Governance answers the agency problem with checks and incentives. Choose the form from the money needed and the risk the owners can bear.