Types of Liability & Not-For-Profits
Business: BTEC Level 3 National Extended Diploma, topic 1.1.3
Unlimited vs Limited Liability
Businesses with unlimited liability (sole traders and partnerships) are much easier to set up because you don’t need to incorporate. The process of incorporating can be expensive and time consuming.
Can change legal structure
- As businesses grow, their legal structure often changes. This is because businesses often need more capital (money) to grow.
- Most private limited companies become public limited companies because selling the shares on the stock exchange allows them to raise finance to fund their company’s expansion.
Access to finance
- It is normally easier for limited companies to get bank loans than sole traders or partnerships.
- This will help them raise more capital to grow. Because of this, sole traders and partnerships often decide to incorporate the business.
Not-For-Profit Organisations
Any profit made by not-for-profit organisations is reinvested (put back) in the business. Any profit cannot be kept by the owners. There are lots of types of not-for-profit organisations and they can have different aims:
Charities
- Charities, like Oxfam or Save the Children, are a type of not-for-profit organisation.
- Getting charitable status lets a business get tax relief and lets it apply for certain grants. For a business to get charitable status, they must follow rules and regulations.
Social enterprise
- Social enterprises, like the Big Issue or TOMs are another form of not-for-profit organisation.
- They are more similar to for-profit businesses in that they make a surplus through selling goods or services. This profit is reinvested to support the social enterprise’s aim.
Unincorporated association
- Not-for-profit organisations can choose to be an ‘unincorporated association’ but, like sole traders and partnerships, the people who manage it have unlimited liability.
- This means that they get no profit and they are legally responsible for all of the organisation’s debt.
- Bigger organisations, like Oxfam, tend to be incorporated so that the people running it are protected from unlimited liability.
Test yourself on Types of Liability & Not-For-Profits
Why do most private limited companies become public limited companies?
Why do most companies try to become incorporated?
What are charities like Oxfam?
What do the people who run 'unincorporated associations' have?
What are some types of not-for-profit organisations?