The three main types of business are: * Sole Trader – Consists of a single sole owner who owns all the assets of the business and which has no legal incorporation. The owner has unlimited liability of the business. * Partnership – Similar to a sole trader except there are more than one owner (normally 2-20). Partnership is a contractual agreement under a contact uberrimae fidel (utmost good faith). Owners are ‘jointly and severally’ liable and liability is unlimited. Private (Ltd) and Public (PLC) Limited Companies – Limited companies are legal entities in their own right and have a formal incorporation process.
Owners (shareholders) have limited liability. 2) Sole Traders The main advantage of setting up as a sole trader business is that it is relatively cost free and easy. With no legal incorporation formalities to complete there is little in the way of red-tape to start a sole trader business and the owner can keep simple unaudited accounts. To set up as a sole trader the owner will have to register as self-employed with HM Revenue and Customs within 3 months.
Another big advantage of setting up as a sole trader is the owner owns all the assets and makes all the decisions with no one to answer to, enabling the owner to make decisions without any hindrance or interference from boards, shareholders etc. It also means that all profits go to the owner However, setting up as a sole trader also means that the owner has sole responsibility for the business and therefore unlimited liability for all debts incurred by the business. Being a sole trader can make it harder to raise capital as well.
Without being publicly registered, banks will be less inclined to lend and may look to secure any lending against personal assets, such as the home. With no shares to offer either it is hard to attract finance from investors. Partnerships Setting up as a partnership has many of the same advantages as a sole trader with little red-tape and no legal incorporation formalities but with the obvious exception that there is more than one owner of the business (between 2 and 20). To set up as a partnership a contractual agreement will be entered into known as a Partnership Agreement.
This will set out the structure of the partnership. Under the Partnership Act 1890, the partnership will provided with a separate legal identity distinct from the partners allowing it to enter into third party contracts but there is still no obligation to formally register with the Register of Companies. However, as with a sole trader business the downside is that there is unlimited liability for all the partners. Furthermore, all partners are ‘jointly and severally’ liable for actions and debts of the firm even if caused by another partner.
Also setting up as a partnership can have complications down the line if conflicts arise between partners. Again, as with a sole trader, it can be hard to obtain finance with banks less likely to lend without sufficient securities and investors unlikely to put up capital with no shares to offer. Limited Companies Setting up business as a Limited Company is much more complex. Compared to sole traders and partnerships there is a lot more bureaucracy and red-tape involved in the setup of a limited company with a formal legal incorporation process.
This involves registering a name with the Companies House (note: there are certain restrictions on the names you can register like an existing registered name or names containing ‘Royal’ or ‘British’) along with supplying a Memorandum and Articles of Association, details of the directors, company secretary and shareholders as well as a registered office address. It is also advised to draw up a shareholders agreement to help all members know where they stand.
There are costs associated with starting up a limited company such as registration fees, potential accountant/lawyer fees and (with staff and premises) insurance such as Employers Liability Insurance and Public Liability Insurance. Another downside to setting up as a Limited company is the complexity of tax registration with HMRC such as Corporation Tax, PAYE, NI contributions, VAT etc. However, it is worth noting that a lot of the time and effort associated with forming a limited company can be negated by buying an ‘off-the-shelf’ company or by using a reputable company registration agent.
For a public limited company (PLC) it is also compulsory, under the Companies Act 1985, to have a trading certificate in order to commence trading, this is issued once a minimum share capital value of ? 50,000 has been established. In setting up a limited company, it has the immediate benefit of being able to raise capital much more easily than a sole trader or partnership either by banks normally being more willing to lend or by selling shares (this is especially the case for PLCs being able to sell shares publicly) 3)
In setting up business as a partnership, Gurpreet and Samuel will first want to draw up a Partnership Agreement to clarify the structure of the partnership , for example each partner’s responsibilities. This will be important in helping to avoid conflict in the future as well as help to resolve disputes. As set out in the Partnership Act 1890 each partner, in principle, will have the authority to enter the partnership into agreements and contracts. All partners are jointly and severally liable for all the debts and actions of the partnership.
This means that each partner is liable for any debts or actions even if caused by the other partner. Like a sole trader business this liability is unlimited and although a creditor’s first course of action would be an action against the partnership, if this failed the next course of action would be to pursue the partners and so each partner’s personal assets could be a risk. If either Gurpreet or Samuel were to leave the partnership then they would relinquish this liability.
However, they would still remain liable for their time spent in the partnership (and therefore all actions and debts incurred during this time) even after they have left the partnership. 4) For sole trader organisations, management of the company is the sole legal responsibility of the owner. All decisions are made by the owner with no hindrance from others; all revenue, profits and assets are controlled and owned by the owner. Any taxable profits are paid at Schedule D income tax rates meaning the owners profits will be taxed at the appropriate personal rates.
Tax on profits is paid even if no income is drawn from the business by the owner. There is no legal obligation to file the company’s accounts publicly. In sole trader businesses all contracts for the organisation are entered into by the owner on behalf of the business. Any disputes or failure to honour contracts is the personal liability of the owner and if needed parties will pursue the owner, not the business, in court to fulfil contractual obligations or seek damages.
Partnerships, similar to sole traders, are managed by the partners with all decisions made, profits and assets owned as per the terms set out in the partnership agreement. However, under the Partnership Act 1890, there are various legal provisions which set out certain rights of partners in management of the partnership: * Partners share equally in profits and losses * Partners share equally in funds and capital * Partners have the right to participate in running the partnership * Partners must agree before a new partner can join
Each partner can enter the partnership into contracts and the contracts will be binding on the whole partnership. However, under the terms of a fiduciary relationship (the relationship partners within a partnership have in the eyes of the law) a contract can be open to reduction if it is deemed all the material facts of a contract have not been fully disclosed between the partners. In relation to management of a limited company’s owners are termed shareholders and as such control over the assets, profits, revenue and actions of the company can be much more limited in comparison to sole traders and partnerships.
Running of the company is the responsibility of those appointed as directors with the Memorandum and Articles of Association setting out what the company’s directors (and shareholders) may or may not do. So for example, shareholders can hold directors to account if actions are taken which contradict the terms outlined within the Articles as seen in Woods v Odessa Waterworks Co 1889 in a dispute over the nature of dividend payments. There are various other legal provisions relating to the management of limited companies that must be met.
There are several legal requirements relating to the accounts and tax. Limited companies must pay corporation tax on profits, with directors and any other employees paying income tax on salaries through PAYE. If the company has employees then National Insurance contributions must be paid, with the company paying employers as well as employee NI contributions on salaries. In addition to this annual accounts must be filed with HMRC as well as an annual return to Companies House to be made publicly available with the company liable for fines for incorrect information or missed deadlines.
If a limited company has a turnover of more than ? 5. 6m (in financial years ending on or after 30 March 2005) then an independent audit is compulsory. It is important to note that there are some differences in management between a private limited company (Ltd) and a public limited company (PLC). With Ltd companies, shares cannot be offered to the general public offering less potential for raising capital in relation to PLCs. However, PLCs can be open to take takeover due to the shares being publicly available.
Also with PLCs the directors are elected by the shareholders, giving shareholders the potential to exert more control over the company than in Ltd companies. Limited Companies have their own separate identity and are therefore legally distinct from their directors and shareholders in this regard. So the business can legally continue even with the loss of directors or shareholders providing a continuity of existence. This separate ‘legal personality’ therefore has contractual implications. A limited company can be sued and can sue under its own name and in the eyes of the law has rights and duties under contracts the same as a person.
This can be seen in the case of Salomon v Salomon & Co 1897 where a party was able to successfully sue as a creditor against a company he was sole owner of as the company was deemed a separate legal person distinct from its members. Due to this separate identity, shareholders of limited companies will have a liability limited to the value of their shareholding when entering into contracts and as such are not at risk of losing personal assets or bankruptcy (with the possible exception for directors if it is deemed they acted negligently or if business loans are secured against personal assets). Word count: 1,829] References Wood v Odessa Waterworks Co 1889; ‘Cases on Company Law’; www. cwgsy. net, 2012; http://www. cwgsy. net/private%2Fsljohn/compcases. html (Accessed 28/06/2012) Salomon v A Salomon and Co Ltd  AC 22; ‘Company Law Cases’; www. lawteacher. net, 2012 http://www. lawteacher. net/company-law/cases/ (Accessed 28/06/2012)
Cite this Hnc Bus Law Outcome 3 Assessment
Hnc Bus Law Outcome 3 Assessment. (2016, Oct 27). Retrieved from https://graduateway.com/hnc-bus-law-outcome-3-assessment/