Size & Types of Enterprise

The term “enterprise” is just another word for a business.

However, this term is more commonly used to describe where an individual has shown the initiative and taken on the risk of starting their own business.

Enterprises come in many different sizes and types, from the individual running a business on their own as a sole trader to large public limited companies with thousands of employees.

In this lesson, we’ll learn about:

1. The different sizes of SMEs
2. The types of profit-making enterprises

As mentioned in the lesson introduction, the term SME stands for Small and Medium-Size Enterprises.

However, we actually classify these into three different categories:

• Micro
• Small
• Medium

Let’s look at each of these sizes of SMEs in more detail.

A micro-sized enterprise is a business that has up to 10 employees.

In 2020, there were 5.7 million micro-businesses in the UK, which makes up 96% of all businesses. These businesses also account for 33% of all UK employment and 21% of UK turnover.

Micro businesses are often operated as sole traders or partnerships, especially on the lower end of this size scale.

They also are often run by the owner on a day-to-day basis.

As well as being defined by their size, micro-businesses also have a turnover of less than £632,000 a year and less than £316,000 on their balance sheet.

A small-sized enterprise is a business that has between 10 and 49 employees.

These make up just 4% of all businesses in the UK, though they contribute 15% of all UK employment and 15% of all UK turnover.

Small-sized businesses are more likely to be operated as a limited company (we’ll learn more about what this means later).

Small businesses will have a turnover of £10.2 million or less and less than £5.1 million on their balance sheet.

A medium-sized business is one that has between 50 and 249 employees.

This makes up just 1% of all UK businesses, though they do contribute to 13% of all UK employment and 16% of UK turnover.

Medium-sized businesses are typically well-established businesses. They will operate as a limited company.

A medium-sized business will have a turnover of less than £36 million and a balance sheet of less than £18 million.

Not all enterprises are profit-making. Some businesses are not-for-profit, such as charities.

However, of course, most businesses do aim to make a profit.

But these profit-making businesses can fall into a number of different classifications.

• Sole trader
• Partnership
• Limited
• Limited Liability Partnership (LLP)
• Social Enterprise

Let’s look at each of these types of profit-making enterprises in more detail.

A sole trader is a business run by a single self-employed individual (though they can still have employees).

The most significant feature of being a sole trader is that the business owner is not legally separate from the business. So, the owner is responsible for all of the business’s debts.

This means they might need to pay these debts out of their cash. This is known as having unlimited liability.

Despite this significant disadvantage, there are some benefits to being a sole trader.

You get to keep all the business profits (after tax) and have full control over how the business is run.

Setting up is also much simpler, as you don’t need to register anywhere. There is less paperwork involved, and tax is far simpler.

A partnership is where the business is owned and operated by two or more people, and profits are split between these owners.

Much like a sole trader, the owners of a partnership have unlimited liability over the business’s debts.

An advantage of a partnership over a sole trader is that there is shared responsibility for the company’s debts. They don’t just fall on one single person.

Having multiple owners can also help raise funds when starting a business.

Like sole traders, it’s also simple to set up, has less paperwork, and has simpler tax.

A limited company is where we incorporate a business so that it is its own entity in the eyes of the law.

This means there is a legal distinction between the business and the owners, and as such, the business owners are not responsible for the business’s debts. This is known as limited liability.

The company’s ownership is split up into shares, which give each shareholder a percentage of the business.

These shareholders may not have any role in the running of the company, but they do get to elect a board of directors who will run the business.

Being a limited company can also be more tax-efficient once you’re earning a certain level of income.

However, there is a lot more paperwork involved in setting up and running the company and tax is more complicated to handle.

There are actually two types of limited companies.

Public Limited Companies

The company is listed on the stock exchange, and anyone can purchase shares in the business.

Private Limited Companies

The company is not publicly listed, and the shares are held privately by members.

An LLP is like a cross between a partnership and a limited company.

Much like a limited company, LLPs must be incorporated with Companies House which gives the partnership limited liability.

However, profits are divided equally between partners and tax is handled by each partner individually. This means that, unlike a limited company, an LLP does not pay corporation tax.

So, an LLP has the limited liability of a limited company but the simplified tax of a partnership.

However, it is still complex to set up as you need to register with Companies House, and you don’t have the tax benefits that can come from being a limited business.

A social enterprise is a business that prioritises social goals over shareholder profits.

However, in many cases, a social enterprise will still generate profits which it will re-invest in the enterprise to help it grow and better achieve its social goals.

The Big Issue is an example of a social enterprise.

Social enterprises will still have one of the previous legal business structures, or alternatively may be registered as a charity or co-operative.

SME stands for Small and Medium-Sized Enterprises.

Micro-enterprises have up to 10 employees.

Small enterprises have 10 to 49 employees.

Medium-sized enterprises have 50 to 249 employees.

Sole traders are businesses run by a single self-employed individual.

Partnerships are owned & operated by two or more people.

Sole traders and partnerships have unlimited liability.

Limited companies are incorporated businesses recognised as separate legal entities.

LLPs are a mix of partnerships and limited companies.

Social enterprises prioritise social goals over shareholder profits.