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Get to Grips With Book Keeping: Types of small business

by Andy Lymer and Nishat Azmat

There are three main categories of business; sole trader, partnership and limited liability companies. Any of these three categories can however, be a small business. The British Bankers Association (BBA) embeds its own definition within the introduction of its voluntary code, The Business Banking Code (March 2008). Here small business customers are defined as sole traders, partnerships, limited liability partnerships and limited companies with an annual turnover of under £1 million, as well as associations, charities and clubs with an annual income of under £1 million. This may be typically much larger than you may think of as ‘small’.

A legal definition of small business also exists in UK law – this is when at least two of the following three facts are true of your business – less than 50 employees, turnover of less than £6.5million and asset value of no more than £3.26million.

The sole trader is an individual entering into a business venture alone, either selling goods or providing a service. For accounting purposes the business is regarded as a separate economic entity.

A partnership is a business with two or more people. A legal agreement is normally drawn up called a partnership deed which sets out the rights and duties of each partner and specifies how they will share the profits.

There are two forms of limited liability company, the private limited company (Ltd) and the public limited company (plc). The Ltd cannot offer its shares to the public and be quoted on the stock exchange. It tends to be more of a family-run company or where the shareholders will often have (or have had) an active role in running the business. The plc is quoted on the stock exchange to enable any member of the public to purchase its shares, because of this the plc has to satisfy more onerous regulations. In both types of company, the owners are called shareholders as they share the ownership as well as the profits. Both these companies have the benefit of limited liability, which means that the risk to any of the shareholders is limited to the amount they have invested in the company, and their personal possessions are safe.


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