Types of UK business structures with advantages and disadvantages
This essay seeks to analyse the different types of business structures in the UK, and assess the advantages and disadvantages of these business structures over each other. A company is dependent on different individuals joining together to do business, and a business is "any activity or enterprise entered into for profit," thus, it is very important to have a legal structure when starting up a business, so as to know what taxes to pay, the responsibilities involved, and how to make profits out of the business e.tc. In the UK, the possible options of business structures to consider when setting up a business could either be sole trading, partnership or company.
Sole trading is a business structure which deals with ownership of business by one individual who has complete control and responsibility over the management of the business. It is also known as being ‘self-employed’. As soon as a Sole trader sets up a business, they are under an obligation to register the business with the HMRC for income tax and national insurance purposes.
Another possible option could be starting up a business partnership, which is regulated by the Partnership Act 1890. It is formed by two or more people, with trust and confidence in each other, carrying on a business together, either by written agreement or by conduct to make profit (s1). Similarly to sole trading, “Partners in a business partnership are usually self-employed individuals,” therefore each partner will need to inform HMRC that they are now self-employed for tax purposes.” “Unlike a company, it is not a separate legal entity and requires no formal registration process.” Partners “share equal rights and responsibilities in relation to management of the business,” however, these rights and responsibilities may vary depending on the type of partnership. In a limited partnership, the general partner manages the business and is personally liable for the business debts, while a limited partner can invest capital into the business, but their personal liability is restricted to the amount of their business investment. In a limited liability partnership, the individual members have limited liabilities as to any debts which may arise from running the business, in the event of its being wound up. It has a legal personality separate from that of its members, and “mostly used by professional services firms like solicitors…”
The final option to consider could be that of a company, which is an important aspect in running a business, it is regulated and governed by the Companies Act 2006. “Once incorporated, it becomes a separate legal entity, distinct from its members,” it could either be limited or unlimited. “A limited company, because of its legal existence, can incur debts, enter into contracts, own property “sue or be sued without involving its members liability,” and employ people. Thus, it employs directors who will be responsible for the management of the company, and it has shareholders who own shares in the company. Companies can either, be limited by shares meaning “their liability is limited to the amount…unpaid on the shares held by them,” Or limited by guarantee, where “its members liability is limited to an amount the members undertake to contribute to the assets of the company in the event of its being wound up.” A limited company could either be public or private, and “a public company is a company with at least two shareholders, ‘PLC’ at the end of its name, 50,000 of authorized capital, and whose certificate of incorporation states that it is a public company.” However, “a private company is any company that is not a public company,” thus, it has one shareholder, and no minimum capital requirement, with ‘LTD’ at the end of its name. “Unlike a private company, a public company can offer shares to the general public.” An unlimited company does not have a limit to its member’s liability, provided by shares or guarantee, and it is rarely used for investment purposes.
These business structures have advantages and disadvantages over each other. One main advantage of sole trading over a partnership and a limited company is that in terms of decision making, “a sole trader can make decisions quickly and act on them swiftly, because there are no other decision makers to confer with.” However, the profits or loss of the business decision rests solely on the sole trader. “A sole trader is unable to take advantage of economies of scale in the same way as a limited company, who can afford to buy in bulk. Therefore, it might mean that they have to charge higher prices for their products or services in order to cover the costs.” In terms of regulations, sole trading and partnership businesses are less strictly regulated and requires slightly less administrative effort than setting up a limited company.
In terms of responsibilities, one advantage of partnership is that unlike a sole trader, partners can share the duties of managing the business amongst themselves, thus allowing them to make the most of their abilities by splitting the work according to their skills.” One obvious disadvantage is the disputes that may occur between the partners during the splitting of responsibilities and decision making. This dispute is likely to occur when not all the partners agree with the things being done, therefore in some situations, there is less freedom with regards to the management of the business. However, there is still more flexibility with partnership compared to limited companies where the directors only make decisions that are compatible with the shareholders desires, meaning that they are under an obligation to do the will of the shareholders.
In a limited company, one advantage is that directors are protected against any financial losses made by the company assuming no fraud has taken place. However, partners and sole traders do not enjoy such protection from financial claims if things go wrong with their business, because they are self-employed. Another advantage of a limited company is that taxation laws are more favorable to them than that of a sole trading and partnership business, meaning that in most cases setting up a limited company would be more beneficial than the other business structures. One disadvantage of a limited company is that “Set-up costs can be higher than with sole traders or partnerships.”
Subsequent to the above analysis, it is likely that a limited company could be a better business to set up than other business structures, because of the separate legal personality it enjoys. However, there are certain circumstances where the corporate entity may be disregarded. This is also known as piercing the corporate veil.”
Word count: 1091
Bibliography
BOOKS
Griffin S. Company Law (4th edn, Pearson, 2006)
Griffin S. company law handbook (1st edn, the law of society, 2008)
CASES
Lee (Catherine) v Lee’s Air Farming Ltd [1960] 3 All ER 420
Prest v. Petrodel [2013] UKSC 34
Macaura v Northern Assurance Co Ltd [1925] AC 619
Salomon v Salomon & Co Ltd (1897) AC 22
Williams v natural life health foods ltd (1998) 1 BCLC 689
ONLINE RESOURCES
‘Business’ http://dictionary.law.com/Default.aspx?selected=111 [accessed on 6th November 2015]
‘UK Company Structure’ http://www.qlegal.qmul.ac.uk/docs/122578.pdf (29 Jan 2014)
‘Legal structures: the basics’ https://www.nibusinessinfo.co.uk/content/partnerships [accessed on 6th November 2015
Types of partnership http://smallbusiness.findlaw.com/incorporation-and-legal-structures/types-of-partnerships.html/ [accessed on 8th November 2015]
Business structure: Limited Company, LLP Partnership or sole trader < http://accountsco.com/ltd-llp-or-partnership/> [accessed on 8th November, 2015]
‘Unlimited companies’ http://uk.practicallaw.com/cs/Satellite/about/8-383-9544# [accessed on 8th November, 2015]
‘Advantages and Disadvantages of a Sole Trader’ http://blog.thecompanywarehouse.co.uk/2010/05/24/advantages-and-disadvantages-of-a-sole-trader/ [accessed on 8th November, 2015]
‘Registering as a sole trader’ http://www.startupdonut.co.uk/startup/set-up-a-business/registering-as-a-sole-trader [accessed on 8th November, 2015]
‘How to set up in business as a partnership’ http://www.bytestart.co.uk/set-up-partnership.html [accessed on 8th November, 2015]
‘Business legal structures: pros and cons’ http://www.businesswings.co.uk/articles/Business-legal-structures-pros-and-cons [accessed on 8th November, 2015]
STATUTES
Companies Act 2006
Limited Partnerships Act 1907
Limited Liability Partnerships Act 2000