The three main types of business are:
- Sole Trader – A sole trader consists of a single owner who owns all the assets of the business and has no legal incorporation. The owner has unlimited liability for the business.
- Partnership – Similar to a sole trader, a partnership has more than one owner (normally 2-20). It is a contractual agreement under 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 with formal incorporation processes. 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. There are no legal incorporation formalities to complete, so there is little red tape involved in starting a sole trader business. The owner can keep simple unaudited accounts. To set up as a sole trader, the owner must register as self-employed with HM Revenue and Customs within 3 months.
One major advantage of establishing as a sole trader is that the owner possesses all the assets and has full autonomy in decision-making, without any influence or impediment from governing bodies or shareholders. Additionally, all profits accrue solely to the owner. However, being a sole trader also entails the owner bearing solitary responsibility for the business and assuming unlimited liability for all its debts. Furthermore, raising capital can be more challenging for sole traders.
Banks may be less willing to lend and may seek to use personal assets, like a home, as collateral if they are not publicly registered. Furthermore, without any shares to offer, it becomes difficult to attract investment from investors. On the other hand, setting up as a partnership has similar benefits to being a sole trader, such as minimal bureaucracy and no legal incorporation requirements. However, the key difference is that there are multiple business owners (between 2 and 20) in a partnership. To establish a partnership, a contractual agreement called a Partnership Agreement must be entered into.
The partnership structure will be established according to the Partnership Act 1890. This act grants the partnership its own legal identity, separate from the partners, enabling it to enter into contracts with third parties. However, there is no requirement to officially register with the Register of Companies, similar to a sole trader business. Nevertheless, unlimited liability for all partners remains a disadvantage. Additionally, all partners bear joint and several liability for the actions and debts of the firm, regardless of which partner caused them.
Setting up a partnership can lead to complications if conflicts arise between partners. Similarly, like a sole trader, it can be difficult to secure financing as banks are hesitant to lend without adequate securities and potential investors are unlikely to contribute capital without the provision of shares. On the other hand, establishing a Limited Company entails a more intricate process. Compared to sole traders and partnerships, the setup of a limited company involves more bureaucracy and red-tape due to the formal legal incorporation procedure.
To set up a company, one must register a name with Companies House, subject to specific restrictions regarding existing registered names or names containing ‘Royal’ or ‘British’. Additionally, a Memorandum and Articles of Association, information about directors, company secretary, shareholders, and a registered office address must be provided. It is advisable to draft a shareholders agreement to establish clarity among all members.
When starting a limited company, there are several expenses to consider. These include fees for registration, potential costs for accountants or lawyers, and insurance coverage for both employees and premises. This insurance may include Employers Liability Insurance and Public Liability Insurance. Furthermore, the process becomes more complex with tax registration requirements from HMRC, such as Corporation Tax, PAYE, NI contributions, and VAT. However, it is worth noting that the time and effort needed to establish a limited company can be reduced by either purchasing a pre-made company or seeking assistance from a reputable company registration agent.
Before a public limited company (PLC) can begin trading, it must obtain a trading certificate. This certificate is granted once the minimum share capital value of £50,000 has been reached, as mandated by the Companies Act 1985. Creating a limited company offers the immediate benefit of simplified capital raising compared to being a sole trader or part of a partnership. Banks are more receptive to providing loans to limited companies, and shares can also be sold, particularly for PLCs that have the option to sell shares publicly.
Gurpreet and Samuel need to create a Partnership Agreement that clearly defines the structure of their business partnership and outlines the responsibilities of each partner. This agreement is essential for avoiding conflicts and settling disputes in the future. According to the Partnership Act 1890, both partners have the power to enter into agreements and contracts on behalf of the partnership. Furthermore, all partners are collectively liable for the debts and actions of the partnership.
Both Gurpreet and Samuel are personally responsible for any debts or actions within the partnership, regardless of which partner caused them. This liability is unrestricted, much like a sole trader business. If a creditor is unable to collect from the partnership, they have the option to go after the individual partners and confiscate their personal assets as a final course of action. However, if either Gurpreet or Samuel were to leave the partnership, they would no longer bear responsibility for these debts or actions.
Despite ending the partnership, partners remain liable for their time and any obligations incurred during that period. Sole trader organizations have a single owner who assumes full responsibility for managing the company. The owner has complete autonomy in decision-making and possesses control and ownership over all revenue, profits, and assets. Taxable profits are subject to Schedule D income tax rates, resulting in the owner’s profits being taxed at personal rates.
Taxes on profits must be paid, regardless of whether the owner receives income from the business. It is not legally required to publicly file the company’s accounts. In sole trader businesses, the owner represents the organization in all contracts. The owner bears personal liability in case of disputes or breaches of contract. If needed, legal action will be taken against the owner rather than the business to fulfill contractual obligations or seek compensation.
Partnerships are managed by the partners, who make all decisions and own profits and assets according to the partnership agreement. The Partnership Act 1890 establishes legal provisions that outline the rights of partners in managing the partnership: * Partners equally share profits and losses * Partners equally share funds and capital * Partners have the right to participate in running the partnership * Partners must reach an agreement before a new partner can join.
Each partner can enter contracts that are binding on the entire partnership. However, within a partnership, contracts may be subject to reduction if all material facts have not been fully disclosed. In terms of managing a limited company, the owners, known as shareholders, have limited control over assets, profits, revenue, and actions compared to sole traders and partnerships.
It is the directors who are responsible for running the company. The Memorandum and Articles of Association define the rights and limitations of the directors and shareholders. If directors take actions that go against the terms stated in the Articles, shareholders can hold them accountable. This was illustrated in the case of Woods v Odessa Waterworks Co in 1889, where a dispute arose regarding dividend payments. There are additional legal requirements pertaining to the management of limited companies that must be fulfilled.
Legal requirements related to accounts and taxes involve different elements. Limited companies have a responsibility to pay corporation tax on their profits. Additionally, directors and other staff members must pay income tax on their salaries using PAYE. If the company employs individuals, it is also necessary to submit National Insurance contributions, which include both employer and employee NI contributions for salaries. Furthermore, HMRC requires the filing of annual accounts, while Companies House necessitates an annual return submission. The latter is made public, and failure to provide correct information or meet deadlines can lead to fines imposed on the company.
If a limited company has a turnover of over ? 5.6m (in financial years ending on or after 30 March 2005), it is mandatory for them to have an independent audit. It is crucial to understand that there are management variations between a private limited company (Ltd) and a public limited company (PLC). Ltd companies cannot offer shares to the general public, limiting their potential for capital raising compared to PLCs. Conversely, PLCs can be vulnerable to takeover due to their publicly available shares.
PLCs provide shareholders with the opportunity to have greater control over the company compared to Ltd companies. Additionally, Ltd companies have their own distinct identity and are legally separate from their directors and shareholders. This allows the business to continue operating even if it loses directors or shareholders, ensuring continuity. The separate legal personality of a limited company also has contractual implications. It has the ability to be sued and to sue under its own name, and is considered to have rights and obligations under contracts, similar to that of an individual.
The case of Salomon v Salomon & Co 1897 established that a company is considered a separate legal entity from its owners. This means that shareholders of limited companies are only liable for the value of their shares when entering into contracts, and their personal assets are not at risk in the event of bankruptcy. However, directors can still be held liable if they act negligently or if business loans are secured against personal assets. The case reference is Salomon v A Salomon and Co Ltd  AC 22. Another relevant case is 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)
‘Company Law Cases’; www.lawteacher.net, 2012 http://www.lawteacher.net/company-law/cases/ (Accessed 28/06/2012)