Partnerships – Two or More People. Ordinary, Limited, Limited Liability

Outcome 3 Assessment Notes

Sole trader

• No legal formalities and it is very easy to set up (no registration fee) – only thing that is required is that the owner must be registered with HM revenue and customs, pay tax on earnings and register to pay VAT is their turnover is above a certain point.
• New small business owners are most likely to be sole traders.
• Advantages – having control of business, keeping all profits made, the start-up costs are low, flexible in changing legal structure later if situation changes, all information is private, can offer a more personal service to customers.
• Disadvantages – constant/unlimited liability for debts because they are not seen as separate by the law (worst case scenario, if business goes into debt the owner risks everything), capacity to raise capital is limited, hard to make all decisions on your own and take holidays, higher prices for their products to cover costs.

Partnerships – two or more people. Ordinary, limited, limited liability.

• Might be a Deed of Partnership (agreement showing rights and obligation of each partner).
• Partnership Act 1890 states that all partners have an equal say.
• The same act states that partners have implied authority unless stated otherwise.
• Owner must be registered with HM revenue and customs, pay tax on earnings and register to pay VAT is their turnover is above a certain point.
• Advantages – do not have to pay income tax, easy to establish, more than one owner so there is an increased ability to raise funds, wider knowledge, skills, resources, improved management.
• Disadvantages – partners are responsible/liable for each other’s actions. Joint and several liability means that if third party sues one partner, all partners are sued and have to pay the money, unstable – in case a person wants to withdrawal etc.

Private limited company – LTD

• Registered under the Companies Act 2006. No minimum level of capital required. Shares can only be traded/listed on the Stock exchange. Only one director, commonly family business.
• Must send an annual return to company’s house.
• Limited by shares – owned by members (shareholders). Each member is liable for original value of shares they were issued but didn’t pay for.
• Limited by guarantee – members financially back it up to an agreed amount.
• Must tell HM Revenue & Customs (HMRC) that it exists and is liable to Corporation Tax. It must then pay any Corporation Tax that's due and submit a Company Tax Return to HMRC.
• Advantages – company is seen as separate entity, so the owners finances and belonging are safe, have a legal precedent to guide and direct shareholders, unlimited life, additional taxes benefits and lower corporation task.
• Disadvantages – set up costs are more expensive than partnership or sole trading, pays annual fees, owners have less personal control due to compliance issues.

Public limited company - PLC

• Incorporated under the same act as above. Minimum of 2 directors and a minimum share capital of £50,000. Float on the market – regular shares a company has issued to the public that is actually available for trading.
• PLCs are the only type of business that can raise money by selling shares to the general public.
• Advantages – better access to capital – raising capital from new investors, liquidity (shareholders can buy and sell shares), growth/expansion opportunities, prestigious profile, credibility (transparency in accounts, operating under a stricter legal regime)
• Disadvantages – more regulatory requirements so not easy to set up (i.e. trading certificate, two directors, secretary), company directors accountable for external shareholders, higher transparency level – disclosing more data to anyone, ownership/control issue.

Veil of Incorporation

• Companies have separate entities from its owners, so shareholders cannot be sued for the debts of a company (unlike sole traders).

• Limited liability: investor’s and owners private assets are not at risk if the company fails. Sole traders – can be held responsible for all debts. Any other companies – only held responsible for the value of their investments in business.

Limited Company

• To gain the certificate of incorporation awarded by registrar of companies, private and public companies must have these documents :

1. Memorandum of Association – legal statement signed by all current shareholders to prove their agreement.
2. Articles of Association – written rules about running the company that shareholders and officers (directors or company secretary) have to agree.

• Must also send copy of annual accounts to company registrar and hold an annual general meeting and invite all shareholders.
• Profits – paying dividends to shareholders (or if not paying interest on any borrowing the company has made). Rest of profit can be retained and saved and then put back into the company.