(1) Forms of business organisations Essays - Free Essays

(1) Forms of business organisations Essays - Free Essays (1) Forms of business organisations Sole Trader: Business owned by one person (generally quite small) but sole trader can have employees Counts as self-employed Individual pays income tax No need to make financial information publicly available Sole trader has UNLIMITED LIABILITY No need to keep formal accounting records No legal procedure required to end the business Business seizes when the owner dies Partnership "A group of sloe traders" Company counts as a legal person JOINT and SEVERAL LIABILITY: all partners are equally liable to all debts. Creditors will sue whoever has the most money ie whoever is most likely to pay Profits don't have to be shared evenly Can share the load/responsibilities with partners Partnerships pay income tax 3 sorts of partnerships: Traditional Partnership: defined by the Partnership Act 1890. Two or more people working together. Not a formal company but may have a trading name. Relatively small number of partners. Unlimited liability. Each partner is equally responsible for debts regardless of profit sharing ratio Limited Partnership: guided by the Limited Partnerships act 1907. Composed of a number of sleeping partners who have limited liability. You still need one general active partner with limited liability Limited Liability Partnership (LLP): governed by the Limited Liability Partnerships Act 2000. Has many features of a company but it is still a partnership. Partnership does NOT end when one of the partners dies. Limited Liability. Used mainly by professional firms eg accountants, lawyers, architects, etc. The Company Incorporated following procedures in the Companies Act 2006 Consequences of incorporation: Separate legal personality. We sign legal documents as a company, we are sued as a company, we enter in to contracts as a company (a legal entity) Shareholders have limited liability (normally the amount you invested at the start ie the nominal value of the shares) May have to sign a personal guarantee (you act as a guarantor by providing personal collateral against the debt) if you're a small company Company may be legally liable The company is owned by shareholders, run by directors/managers Public v Private Companies: Public limited= PLC, Private Limited=Ltd Specified in the memorandum PLC still has limited liability Must have at least 50000 authorised capital, 25% of which is paid up If you want to be quoted on the stock exchange you have to be a PLC. But not all PLC's are quoted on the stock exchange PLC has different reporting standards Any other company is Private(Ltd) Limited v Unlimited Companies Unlimited companies are rare Limited companies can be set up for under 200 Limited to the sum invested or what they have agreed to invest (shareholders are not personally liable) Advantages and Disadvantages ADVANTAGES DISADVANTAGES Sole Trader complete control freedom to make decisions easy to set up simple record keeping Unlimited Liability Partnership someone to share load/responsibilities with more funding to work with more expertise Unlimited Liability Limited Company Limited Liability Administratively much more complicated (2) Partnerships General Partnership: an unincorporated business where all partners have unlimited liability. You have joint and several liability Key Legislation: Partnerships Act 1890 (PA 1890) Definition (S1): The relation which subsists between persons carrying on a business in common with a view of profit' The relation which subsists - partnership is a relationship (between people) NOT a legal entity therefore it does not have a separate legal personality Between persons - a company can be a partner in a partnership, but you need at least one partner with unlimited liability Carrying on a business - (S45) covers everything (every trade, occupation or business) In common - carrying out business together With a view of profit - non-profit organisations eg charities can't be partners. Can have a partnership that fails making profit (doesn't have to have made a profit, just needs to try making a profit) Partnership starts when you start carrying on business, not when deed of partnership is signed Different Sorts of partners: Salaried Partner: receives a salary instead a share of the profits (May or may not have limited liability depending on their agreement. Decided by the courts judgement) Equity Partner: general partner who receives a share of the profits (and losses) Sleeping Partner: partner who invests in the business but doesn't actively manage the business. Court decides whether or not the sleeping partner has unlimited liability Khan v Miah (2001): 3 individuals decided to open a restaurant: bought furniture, equipment, advertised but there was a fallout before restaurant opened and partnership was dissolved - was a partnership formed? (important because if yes, then joint liability for purchases). HELD yes there was a partnership because although they hadn't started trading,