Business ownership within England and Wales

There are many ways in which a business may be owned under the legal system of England and Wales.

Different types of ownership are suitable for organisations depending on the degree of control the owners wish to have over the business. The choice of ownership methor also relates to the organisations ability to raise funds for the business activities. The ownership method also alters the rules under which the company must be administered.

Because ownership is key part of business planning it is essential to take into consideration:

The three main forms of ownership for starting business are: Sole-trader, Partnership and Limited company.

Sole Trader

This is a business where any one person is the owner. Their business is unincorporated so the owner is ultimately personally liable for the business. Sole traders are able to control the business – make all of the decisions. This makes the business highly adaptable. However raising the capital for such businesses may be quite difficult because it is a risky option for investors.

These businesses are often quite small however the number of them is very large. Examples of these businesses are mostly found in the service sector such as electrical repair, retail shops, hotels and driving instructors.

The business is easy to set up, there is no formal procedures and operations can commence immediately (unless there is special permission required). The owner is able to decide the way which is the business he has the flexibility to restructure or dissolve the business as he sees fit. This enables the organisation to be quickly adaptable however competitors which are able to gain capital more quickly are more likely to succeed when there is a need to be more flexible.

Sole traders do not need to keep detailed accounting information however it may benefit them to as some groups such as lenders may require this information. They have to pay taxes themselves which does require them to keep some information.

Sole traders have unlimited liability which means that the law does not see them as separate from their business, there is no difference from the money of the business and that of the sole trader meaning that if the business occurs debts then so does the owner. This is a key factor to take on and failure may lead to the loss of possessions and bankruptcy.

Partnership

Partnerships are defined by the Partnership Act of 1890: "The relationship which subsists between persons carrying on a business in common with a view of profit". A partnership is neither incorporated nor registered as a company; generally partnerships consist of ordinary partners who are legally liable for the business.

By starting this type of business you are able to raise capital more freely. The business is not reliant upon one persons skills. The business can use different persons strong points to their advantage. This is applicable to accountants – one may be able to give advice easily, whereas the other member finds he or she is more capable of sorting accounts. These partnerships are most prevalent among the professional industries such as architects, doctors and solicitors.

Partnerships are able to start trading straight away however they may need to wait to get the correct licences. If the partnership is trading under a different name other than that of the partners the organisation must have the names of the partners available to the public; this may mean putting them on documents they must have the name and address at which documents may be served.

Full partnerships have consist of between two and twenty persons but more commonly the amount is under six ordinary partners. They are governed by the Partnership Act of 1890 which ensures that every partner is equally liable for the business even if he or she owns just 1% of the organisation. This is why it is important to set out a Deed of Partnership (partnership agreement) which will outline what each partner has put into the business, what are the responsibilities of each partner and how they will share the profits and losses.

Limited Partnerships

These are where one or more general partners enter or allow 'limited partners' to go into business with them. Limited partners often called sleeping partners have limited liability where general partners have full liability arranged in their agreement of partnership.

This type of partnership is governed by the Limited Partnership Act 1908'.

Limited partners may not draw out or receive back any part of their contribution to the partnership during its lifetime; or take part in the management of the business or have power to bind the firm. If they do, they become liable for all the debts and obligations of the firm up to the amount drawn out or received back or incurred while taking part in the management, as the case may be.

This type of partnership has to be registered with the Registrar of Companies at Company House. Registration is charged at £2.00. The Form is LP5 it is the application for registration and the statement of particulars the following information is required. :-)

Name of the firm or partnership
Nature of the business
Principal place of business
The term, if any, for which the partnership is entered into.
If no definite term, the conditions of the existence of the partnership
Date of commencement
Name and address of the general partners
Name and address of the limited partners and the amounts contributed
Signatures of all the partners and the date

Limited partnerships may not normally consist of more than twenty persons. However, under section 717 of the Companies Act 1985 there are a number of exceptions to this rule, including:

In a limited partnership, it is the general partner who remains liable for the debts and obligations of the entity. For larger risk exposure, a company (corporation) may be formed to serve as the general partner. A corporate general partner is protected from direct attack by a judgment creditor because the ultimate liability for the debts and obligations rests with the shareholders. By spreading share ownership, individual exposure is considerably reduced. Even without a corporate general partner, risk can be spread by distribution of limited partnership shares. If a judgment creditor obtains a charging order against one partner, the order goes to that partner's share in distributions from the partnership, and not to the entire business.

Limited liability partnerships

The Limited Liability Partnership Act of 2000 came into effect 6 April 2001, making Limited Liability Partnerships (LLPs) available to two or more persons wishing to enter business. The legislation has been formed by cross referencing, meaning that there is no sight statute which contains the legislation applicable to LLPs; this means that there are several hundred sections applicable to LLPs.

The Company Directors Disqualification Act of 1986 is applied to the LLPs, making it so that a disqualified director is unable to join LLPs and so members of may also face the same proceedings as directors.

The key features of limit liability partnerships are:

It is essential for a limited liability partnership to have at least two designated members; these are selected by the agreement of the other members the rights and responsibilities are drawn upon the limited liability partnership agreement.

Their duties are as follows:

All members not just designated members are agents of the LLP they do have responsibilities to which have yet to be developed by the courts. Typical obligations its to act in the interests of the LLP, avoid conflicts of interest and prohibition on the making of secret profits.

A limited liability partnership has not got the same structure which is usually required be a company which has in statute provision for the structure of directors or board structure of management. It is for the members to create an LLP Agreement which is a separate document which is not to be given to Companies House it is to be held by the members themselves.

The main reasons for having an LLP agreement is that the default provisions in the absence of the agreement allows for all members of the LLP is that every member is to take part in the managements of the organisation, members are entitled to share profits equally. There is no member which is entitled to remuneration for acting in the business or management of the LLP.

The default provisions are limited in many issues such as in the nature and extent of capital contributions made by members and how disputes can be resolved. Within the LLP agreement it is highly recommended that there should be Alternative Dispute Resolution (ADR) Clause which allows for organisations to opt for attribution or mediation to allow them to settle disputes without the need to go to court; court cases can often take a long time and are much more expensive than attributions where cases are often settled within 2–3 days and are of much less expensive. When this clause is in place then if a party goes to court then the case will be thrown out; attribution allows for legal bodies to settle their differences in private and it has many more benefits.

The LLP agreement should cover subjects such as:

Members of LLP are subject to the statute and under the LLP agreement or in the absence of any agreement under the default provisions contained in the regulations.. Designated members have extra responsibility and have the responsibility to act within the statutory obligations.

The advantages of being an LLP include:

The drawbacks include:

This is a new form of structure which means it is an untested format other legal structures such have companies of tried and tested formats and may be a more desirable model as they do have a long history and persons are able to see what formats work

Sole Traders and Partnership NIC and Income Tax

When starting up the business you will need to register as self-employed with HM Revenue & Customs and fill in form CW1- “Becoming self-employed and registering for National Insurance contributions and/or tax”. This form also enables registry as a sole-trader or a partnership; also you are able to inform them of your intentions of gaining employees ensuring that you pay their contributions. If this is not registered within three month then he is at risk of occurring a fine.

National Insurance Contributions are paid at fixed rate of £2.10pw- Class 2 NIC; in the 2006/2007 period however if you earn less than £5,035 you are able to get small earnings exemption. If the sole-trader reaches the threshold of £33,540 then he will have to pay Class 4 NIC this tax band is charged on a percentage.

Also sole traders must also pay Income Tax they do this by filling in the self-assessment form which also allows the Inland Revenue to calculate Class 4 NIC; this is simple to fill the information needed is usually costs, sales and profits; if turnover is above £15,000 you may have to keep a detailed profit and loss and balance sheet.

Basic records will normally include:

Sole traders and partnerships have to pay tax even if they don not take money out of the organisation. This can be over come by becoming a limited company however the paperwork is more extensive, limited companies are able to do this because corporation tax rates are much lower than income tax rates.

Business which make more than £60,000 have to register for a VAT number they also need to charge their customers VAT, you also need to fill in the relevant VAT returns and send VAT payments to HM Revenue & Customs. VAT is paid on its purchases this is called input tax they also charge tax on sales this is called output tax; if a business gains more output tax from what it pays in input then it must pay the difference, if the business receives more input than output then HMRC will pay the difference. Generally the VAT is charged at 17.5% however many products and services may receive lower VAT or may be except.

Companies

There are four main types of companies which are as follows:

All companies are formed in close to the same way they register with Companies House. The document companies take with registering with Companies house are Memorandum of Association and Articles of Association. The Memorandum of Association sets out the companies name, where it is registered (England, Wales or Scotland), it sets out the companies objectives and it contains the information on the share capital.

The Articles of Association contain information on the internal structure of the organisation it covers information such as rules for internal structure and management; that articles deal with items such as meeting procedures, powers of the directors, members’ rights, procedures for paying dividends and winding up. These articles are quite long compared to Memorandum of Association, however the Companies Act 1985 has mechanisms to reduce the preparation of the articles of association. The Articles are to be signed by the persons described on the Memorandum.

The Articles are subordinate to the Memorandum which is defines the powers of the company. The purpose of the Articles is to outline the duties rights and powers of the governing body of the business the Memorandum and the Articles of Association may be read together to supplement it and to further description of matter.

The Memorandum of Association and the Articles of association are the constitution for the company, they are approved by licensing as they act as an artificial person so there is no single person to take responsibility they must operate within the capacity which is set. The corporations capacity is set within the Memorandum of Association Clause 3 (the objectives).

If companies act outside the objectives that it considered that the act is ultra vires- “beyond its power” and therefore void fortunately the Companies Act 1989 relaxed this rule allowing for the companies to statement “The company is to carry on business as a general commercial capacity”. This statement allows the company “to trade or carry on business with whatsoever and; the company has the power to do all such things as are incidental or conducive to the carrying on of any trade or business by it”.

There are also statutory forms which are to filled in and to be returned; Form 10 which is the Statement of the First Directors, Secretary and Registered Office; on the form you must inform Companies Housed of the company’s registered office and the names and addresses of its directors names and addresses its directors and of the secretary, Form 10cs my be needed a Form 10 only has room for 10 directors. Form 12, Declaration of Compliance with the Requirements of the Companies Act, this states that the company has met the legal requirements of incorporation.

Organisations are given a corporation number which is unique it last the whole life of the company it is used to identify the company.

Organisations will have to find out how much the company is worth before find the value for shares (nominal value) this is done by finding how well the business as done in the past and how well it is expected to do in the future; this is rather complicated and it is recommended that it to be done by a merchant bank.

Shareholders with the largest share have the most control over the business; if it is 50% they with have total control of the business, when shareholders have 5% the will have the right to participate at the AGM. Shareholders control of the business is that they are able to vote out directors when they find issue with the way which directors run the organisation this may be because of ethical issues and issues of directors taking large salaries while the company is doing unsuccessfully

There is also the directors of the company their duty is to the company and to the shareholders they make the decisions for the business driving the business forward, shareholders elect the directors of the company and secretary.

Private Limited Companies (limited by shares) / (limited by guarantee)

Private Limited Companies are one of the most common type of company. they have limited liability which refers to the shareholders’ who own the company as they have purchased the shares. They are only liable to the amount which they owe on the purchased share. These companies of often run by families because they are not able to advertise the sale of its shares to the general public and all the shareholders must agree to the sale, which can cause problems when dealing with unknown persons. There is allowed to be no-more than 50 persons in private limited companies.

Sources

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