Enterprises come in many different sizes and types from the individual running a business on their own as a sole trader to the very large public limited companies with thousands of employees. We’re going to focus on the small to medium-size enterprises, commonly abbreviated as SMEs.
In this lesson, we’ll learn about:
As mentioned in the lesson introduction, the term SME stands for Small and Medium-Size Enterprises. Though, in fact, we actually classify these into three different categories. Micro, small and medium.
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 actually makes up 96% of all businesses. This also makes up 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 to 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.
Research an example of a micro, small and medium-sized business. Are some businesses you know smaller than you thought?
Not all enterprises are profit-making. Some businesses are not-for-profit, such are 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.
A sole trader is a business that is run by a single self-employed individual (though they can still have employees).
The biggest key feature of being a sole trader is that the business owner is not legally separate from the business itself. So the owner would be responsible for all of the business’s debts. This means they might need to pay for these debts out of their own personal cash. This is known as having unlimited liability.
Despite this major 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 (as you are the sole owner). It’s also much simpler to set up 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. Much like sole traders, it’s also simple to set up, has less paperwork and tax is simpler.
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 ownership of the company is split up into shares that gives each shareholder a percentage ownership of the business. These shareholders may not have any role in the running of the company. The shareholders do get to elect a board of directors who will run the business though.
There are actually two types of limited companies:
Other than the limitation of liability, 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.
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 does have the complexity of setting up as you need to register with company house still 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 above legal business structures, or alternatively may be registered as a charity or co-operative.
Research examples of each of these types of profit-making enterprises. What types of businesses tend to be sole traders or partnerships?
So to summarise what we’ve learnt in this lesson: