Sole Trader Business Structure
The decision of the business structure is one of the key business decisions, leading to effect on the liabilities, manner of control on the business, manner of control of assets, tax implications and role of other individual in the business. There are four key business structures in the UK namely Sole trader, Partnership, Limited liability partnership and the Limited company. Each of the business structure is distinct from each other in terms of varied aspects and the decision must be undertaken on the basis of careful analysis of various factors. The aim of the following work is to assess the varied features of different business structures, in relation to applicability of legal framework, roles and liabilities, manner of creation and termination and others.
In order to select one of the business structures, it is imperative to first understand the different features of each of the business structures, which are elaborated as follows.
This is the most popular form of business structure suited for the small businesses with limited capital funds as well as limited business functions. As the name suggests, there is a single business owner in this set up. The first step to start a sole trader business is to register a name. The business can function in the name of either the owner or a new name which must not be same as an existing trademark. After the name registration, the necessary records must be prepared and kept. These are invoices, records of business and personal incomes, records of business expenses, VAT records (if registered) and grants if any. Since there is only one person that has whole and sole responsibility of the business, the taxation liability shall be of the owner, as assessed through self assessment, and owner should register for the same. The primary advantage of sole proprietorship is that it is easy to establish and manage as minimum records and paper work is necessitated. The yet another advantage are in form of sole beneficiary of profits, privacy of operations and business strategies, and full control over the affairs. However, there are certain disadvantages as well of this form of business structure. The most crucial disadvantage is in form of unlimited liability. Since only owner is responsible for affairs, if the business funds are insufficient to address the creditor claims, the personal assets could be called for. The yet another disadvantages are in form of lack of funds, inefficient business management, lack of continuity of business, and weak bargaining position. The sole owner is responsible for the capital as well as management, and thus the credit availability is not that easy because of limit creditworthiness of one individual.
Partnership is defined as the relationship between persons that have been associated to run a business, with a common objective of earning profits. It is imperative to note that such a relationship is on continuous basis and not a one time event. The law governing the partnership business in UK is the Partnership Act 1890. According to the said legislation, a partnership is not a separate legal entity in the eyes of the law, as that from the partners. For a business partnership to come into existence, the partners must form an agreement between themselves. It is imperative to note that the law does not mandates compulsory formation of agreement, however, such an agreement leads to definition of rights and duties of each partner, as well as other significant matters such as profit sharing ratio in a concise and clear manner. After the agreement, a name must be decided which must not be similar to other business name. As the name suggests, the liability in such a form of business structure is divided among the partners. Thus, each partner shall be responsible for his or her own acts, and shall be responsible towards each other as well. It is imperative to note that the partners of a firm are in capacity of agents of firm as well as each other. Thus one partner can bind the firm as well as other partners for the acts done by him, unless he did not have authority to carry on the said act. Each of the partner’s share of profits is taxed as individual income, and the firm profits are taxed separately. The key advantages of partnership business are easy creation, sharing of losses, profits as well as liabilities, expanded pool of funds and privacy in the business management. The key disadvantages of such a business arrangement are in form of unlimited liability of partners, difficulty in funding as well as lack of professional management as partners generally engage in management.
Partnership Business Structure
The yet another popular form of business structure is that of LLP, which is a combination of features of both a partnership as well as a company. The key disadvantage of partnership that is the unlimited liability of partners have been addressed in this business structure, as the liability of members here is limited to the amount of capital contribution. The key feature of this business structure is that it is a separate legal entity in the eyes of law as governed by the Limited Liability Partnerships Act 2000. Like partnership, a private agreement governs the relationship between the LLP members and is taxed like a partnership. Further, like a company, an LLP is in nature of a body corporate. The LLP is established by forming the private agreement, and electing a nominated partner, as required by law. The key advantages of this business structure are in form of security of personal assets of members, flexibility of business operations, holding of properties and assets in name of LLP, and protection of partnership name and business by registering the business. In addition the advantage is that the LLP can be operated at different levels of membership that is designated and non designated members can be appointed. The key disadvantages are listed as follows. There is a lack of privacy as financial accounts are required to be filed with the Companies House. In addition, there are other legal formalities. The profits cannot be retained in similar way as that of a company. The LLP can be dissolved by filing an application for declaring the LLP as defunct and removing the name from the Companies House Register.
The Company Or Corporate Is The Most Popular Form Of Business Structure As Governed By The Companies Act 2006 In The Uk. It Is An Incorporated Association and is established by registering as per the Companies Act requirements. It is a separate entity in the eyes of the law, which means the personal assets of shareholders are secure. The shares are transferable and this ensures the longevity in the life of company irrespective of life of the members. The company has its own common seal and can hold properties and assets in its own name. Further, the company can sue the members as well as be sued by members or creditors in its own name. Though it seems that the company is absolutely distinct from its members, the courts can still lift the corporate veil as and when deemed necessary in the public interest. This in nature of vicarious liability and in case of events like fraudulent business transactions or negligence of business conduct, the true persons behind the affairs of the company could be asked to make good the damages sustained.
Since the company is a separate legal entity, the functions can be managed either by the member themselves or they can elect the individuals having the professional qualifications to do so known as the directors. The companies act lays down the duties of directors in a detailed manner. The key features of the duties of the directors of a company are that they must function in nature of agents of the company as well as members and must exercise the powers in the best interest of stakeholders. Thus, while the company would be held responsible for the acts undertake by the directors in their professional capacity, there can arise personal liability for directors as well in case of conflict of interest, gross negligence of professional duties, and acting beyond the authorities. There are two important documents that govern the operations and functions of a company namely the Memorandum and the Articles of Association. For the formation of a company, these documents must be registered with the Companies House along with the other formalities such as registering the name, decision of members who would subscribe the shares, decision on the director names, the business objective and others. The MOA refers to the document that governs the relationship of the company with the subscribers and other stakeholders and defines the important elements that are authorised and paid up share capital, the business object, registered place and others. The AOA is the document that lays down the manner in which the company shall function, the rules and processes, the manner of appointment and removal of directors, the manner of conduct of company meetings and other such matters. Both the documents must be in their respective prescribed form.
The key advantage of company formation is large pool of capital funds as well as resources, the limited liability of members, separate identity of company, easy availability of credit, and high goodwill. There are certain disadvantages as well such as complexities in business management as there are a range of procedural formalities, lack of privacy of affairs, and possible conflict of interest due to the involvement of the professional directors.
The business structure that has been recommended for IOM Solutions is that of the company. This is because said business structure has a range of benefits and provides room for expansion of business operations in future. In addition the professional management through directors can lead to efficient business results as well as easy credit availability.
Conclusion
The discussions conducted in the previous parts lead to the conclusions that the choice of business structure is a key business decision and the same must be undertaken with the careful examination of different features, business objective as well as availability of funds and security of personal assets. The key features of sole proprietorship, partnership, LLP as well as company have been examined at length along with the manner of their establishment and dissolution. The company form of business structure has been assessed to be most superior as compared to the other forms of business structure with features like limited liability, separate legal entity as well as professional management. Therefore, the said business structure has been suggested to the IOM Solutions.
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