Pros and Cons of Different Business Structure
Private Limited Company is differentiating to two types, which are by share and by guarantee. Majority amount of the trading companies are private companies limited by shares. There are over one million such companies registered at Companies House and each company must have the word 'Limited' or 'Ltd' at the end of its name. Many private companies are very small and no minimum capital requirement in respect of a private limited company and it is commonly less than £100. Approximately 90% of private companies are small or medium sized companies which mean that they can simplify accounts at Companies House, rather than full accounts. A private company may not offer shares or debentures to the public Companies Act 1985, sec. 81. The rule is every company must deliver an annual return to Companies House within 28 days of its made-up date. (Companies Formation Worldwide, nd) Company's directors and secretary are responsible for ensuring that the annual return and gives a true picture of the management structure and capital (if applicable) of the company at the made-up date. 5
Private Limited Company by guarantee is similar as private company limited by shares, but it does not have a share capital. It is generally used for charities, clubs, community enterprises and some co-operatives companies which are non-profit distributing. Same as Private Limited by share, Company Limited by guarantee is also registered at Companies House. It has a set of memorandum and articles, directors, etc and are subject to the requirements of the Companies Acts (except those relating to shares). (Companies Formation Worldwide, nd) This type company not consist shares and shareholders, but consists members, who meet and control the company through general meetings. Directors are often called a management committee or council of management, etc but in law are still company directors and subject to all the rules that affect other directors. A company limited by guarantee confers limited liability as effectively as a company limited by shares. The memorandum states that the members of the company guarantee to pay its debts, but only up to a fixed amount each. Usually that sum is £1.00, and no member can be liable for more than that amount if the company fails. 5
b. Pros and Cons of Different Business Structure 6
2.1 Sole Proprietorship 6
i. Easy to Form and Wind up: With a very small amount of capital, a sole proprietorship business is very easy to form. There is no required with any legal formalities except for those businesses which required license from local authorities or health department of government. We can wind up the business at any time because the formation is very easy. (Sole Proprietorships, nd) 6
2.2 Partnership 8
2.3 Private Limited Company 10
Question 2 12
a.Adrian. (2010) "Advantages and Disadvantages of Partnership | The Company Warehouse Blog - Company Formation and Business Startup Advice." [online] (Cited on 20 Oct. 2010) Available from <URL: http://blog.thecompanywarehouse.co.uk/2010/03/01/advantages-and-disadvantages-of-partnership/>. 15
f.Richard A. Mann and Barry S. Roberts (2005) Smith and Roberson's Business Law (13th edn), South Western Educational Publishing (cited on 17 October 2010) 15
Question 1a. Business Structure
1.1 Sole Proprietorship
A sole proprietorship is unincorporated businesses owned by one person and fully conducts the business itself. It is the easiest and used individual assets and properties to form the business. The capital required by a sole proprietorship to form business is totally arranged by the sole proprietor. Capital resources normally from saving money or by borrowing from friends, relatives or loan from bank. The owner of the business alone takes all decision to run the business. Therefore, sole traders need alone bears all the risk of the business. Profit and loss of the business will all belongs to sole proprietorship due to nobody else shares with the sole proprietor.
Furthermore, the liability of the sole proprietor is unlimited. To implies this, case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities. The formation and operation of a sole proprietorship form of business organization requires almost no legal formalities; no documents need to be field. (Courtland L. Bovee, John V. Thill, Michael H. Mescon, 2009) However, for the purpose of the business and depending on the nature of the business, the sole proprietorship has to have a seal. He may be required to obtain a license from the local administration or from the health department of the government, whenever necessary. Last, business of the sole proprietor comes to the end with the will of the owner or upon his death. Many farms and small service businesses are sole proprietorships, as are home-based business such as computer programmer, consultant.
When a person started a business himself seems little intimidating, he might start to share the risks and benefits of going into partnership form. Partnership form is a legal association of two or more people as co-owners of a business for profit. There are 3 types of partnership which are general partnership, limited partnership and limited liability partnership. General partnership is consist two or more persons and formed business without any formality, and no document been field too. Therefore, if two or more people conduct a business and do not file with the State to form another type of business organization, a general partnership will result by default. A partnership may elect not to be a separated taxable entity, in which case only the partners are taxed. Partners have unlimited liability for the partnership’s debts. (Richard A. Mann and Barry S. Roberts, 2005) Each partner has an equal right to control of the partnership. Partners may assign their financial interest in the partnership, but the assignee may become a member of the partnership only if all the members consent. The death, bankruptcy, or withdrawal of a partner dissolves a partnership.
Limited partnership starts with at least one general partner and at least limited partner to form a business. It is formed by filling a certificate of limited partnership with the State. A limited partnership may elect not to be a separate taxable entity, in which case only the partners are taxed. Publicly traded limited partnerships however are subject to corporate income taxation. In general partnerships have unlimited liability for the partnership’s debts whereas limited partners have limited liability. Each general partner has an equal right to control of the partnership; limited partners have no right to participate in control. Partners may assign their financial interest in the partnership, but the assignee may become a limited partner only if all of the members consent. (Richard A. Mann and Barry S. Roberts, 2005) The death, bankruptcy or withdrawal of a general partner dissolves a limited partnership; the limited partners have neither the right not the power the power to dissolve the limited partnership.
A registered limited liability partnership (LLP) is a general partnership that, by making the statutorily required filing, limits the liability of its partners for some or all of the partnerships obligations. To become an LLP, a general partnership must file the State and application containing specified information. All of the States have enacted LLP statutes. Except for the filling requirements and the partners’ liability shield, the law governing LLPs is similar to the law governing general partnerships. The tax authorities in the United Kingdom have confirmed that the taxation base of a limited liability partnership will follow the procedure operated in the past for partnerships. The Limited Liability Partnership itself will not be liable for taxation on profits arising within the partnership, but the profits will be assessed to tax separately on the individual partners. (Richard A. Mann and Barry S. Roberts, 2005) A limited liability partnership must be a commercial venture operating for profit. Changes in the tax rules are anticipated to confirm that operation through a limited liability partnership by a charity or in relation to investment in shares or property will not be allowed.
1.3 Private Limited Company
Private Limited Company is differentiating to two types, which are by share and by guarantee. Majority amount of the trading companies are private companies limited by shares. There are over one million such companies registered at Companies House and each company must have the word 'Limited' or 'Ltd' at the end of its name. Many private companies are very small and no minimum capital requirement in respect of a private limited company and it is commonly less than £100. Approximately 90% of private companies are small or medium sized companies which mean that they can simplify accounts at Companies House, rather than full accounts. A private company may not offer shares or debentures to the public Companies Act 1985, sec. 81. The rule is every company must deliver an annual return to Companies House within 28 days of its made-up date. (Companies Formation Worldwide, nd) Company's directors and secretary are responsible for ensuring that the annual return and gives a true picture of the management structure and capital (if applicable) of the company at the made-up date.
Private Limited Company by guarantee is similar as private company limited by shares, but it does not have a share capital. It is generally used for charities, clubs, community enterprises and some co-operatives companies which are non-profit distributing. Same as Private Limited by share, Company Limited by guarantee is also registered at Companies House. It has a set of memorandum and articles, directors, etc and are subject to the requirements of the Companies Acts (except those relating to shares). (Companies Formation Worldwide, nd) This type company not consist shares and shareholders, but consists members, who meet and control the company through general meetings. Directors are often called a management committee or council of management, etc but in law are still company directors and subject to all the rules that affect other directors. A company limited by guarantee confers limited liability as effectively as a company limited by shares. The memorandum states that the members of the company guarantee to pay its debts, but only up to a fixed amount each. Usually that sum is £1.00, and no member can be liable for more than that amount if the company fails.
Question 1b. Pros and Cons of Different Business Structure
2.1 Sole Proprietorship
1.Easy to form and wind up
1. Limited Capital
2. Unlimited Liability
3.Fully Control, Quick Decision and Prompt Action
3. Lack of Continuity
4. Close Personal Relation
4. Limited Size
5. Flexibility in Operation
5. Lack of Managerial Expertise
2.1.1 Advantages of Sole Proprietorship
i. Easy to Form and Wind up: With a very small amount of capital, a sole proprietorship business is very easy to form. There is no required with any legal formalities except for those businesses which required license from local authorities or health department of government. We can wind up the business at any time because the formation is very easy. (Sole Proprietorships, nd)
ii. Direct Motivation: A sole proprietor alone gains the profits without sharing and needs to bears the risk of losses too. If he works hard, then there is a possibility of getting more profit and nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard and smart.
iii. Fully Control, Quick Decision and Prompt Action: In a sole proprietorship business, the sole traders need to fully conduct the business himself. He is the planner, who co-ordinates every activity in an efficient manner. He needs take any decision on his own because no one else is involved in. Thus, the decision making becomes quick and prompt action. (Sole Proprietorships, nd)
iv. Close Personal Relation: The sole proprietor responsible to maintain good personal contact with the customers and employees. Sole proprietor get to know the individual likes, dislikes and tastes of the customers through direct contact. It improves and maintaining relations with the employees who can helps business runs smoothly.
v. Flexibility in Operation: The sole proprietor is able change the nature and scope of business operations without any partner’s discussion. A sole proprietor can expand or curtail his business according to the requirement of the trends. Example, those who runs clothing stall can change the style of decoration of stall in order to attract customers.
2.1.2 Disadvantages of Sole Proprietorship
i. Limited Capital: In sole proprietorship business, normally are sole traders himself raise a huge amount of capital to start business. Insufficient capital of the business hardly made the business grow smoothly and expansion.
ii. Unlimited Liability: If sole proprietor fails to pay the business obligations and debts arising out of business activities, personal properties have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities.
iii. Lack of Continuity: The continuation of sole proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. (Sole Proprietorships,nd)
iv. Limited Size: In sole proprietorship form of business organization there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
v. Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be poor in marketing. But due to limited financial resources, it’s unable to employ a professional manager. Thus, the business lacks of the professional to giving advice and help to conduct the business. (Sole Proprietorships,nd)
1. Startup Costs
2. Unlimited Liability
3 Raising Capital
4. Decision Making
4. Profit Sharing
5. Uncertain life
2.2.1Advantages of Partnership
Startup Costs: Capital of starting a partnership is relatively cheap and is not consisting file startup papers like corporations. Partnerships main startup costs usually come from legal fees in drafting a partnership agreement. A partnership agreement base on the contract between the partners on how they will run the business. Partnership agreements are not compulsory, but highly recommended. (Adrian, 2010)
Taxation: Corporations face double taxation when dividends pass through to shareholders, however in a partnership, the partnership can avoid double taxation and distribute to the partner their share of profits and losses.
Raising Capital: Partnerships can sell equity, a share in ownership of the partnership. This allows the partnership to raise money to operate the business, known as capital. Corporations have the easiest time raising capital selling interest through stock ownership, however sole proprietorships have the hardest time raising capital because they cannot sell an equity interest. (Adrian, 2010)
Decision Making: Partners share the decision making and can be picked for business ideas and for the solving of problems that the business encounters.
2.2.2 Disadvantages of Partnership
Disagreements: Disagreement is the most common cases in the partnership case because people are likely to have different ideas in conducting business. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to make sure that everyone is alert of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved. (Adrian, 2010)
Unlimited Liability: Commonly Partnerships are subject to unlimited liability such as financial risks of the business. This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model.
Taxation: Partners must submit a Self Assessment tax return each year and required to register as self employed with HM Revenue & Customs. The current laws mean that if the partnership (and the partners) brings in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company. (Adrian, 2010)
Profit Sharing: Inconsistency happens where one or more partners aren’t putting a fair share of effort into the running of the business because partners share the profits equally.
Uncertain life: The partnership firm has no legal existence separate from its partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership.
2.3 Private Limited Company
1. Limitation of Liability
1. Profit Sharing
2. Lower Taxes
2. Paying Taxes
3. No Trading
4. Decision Making
4. High Expenditure
2.3.1 Advantages of Private Limited Company
Limitation of Liability: The Private Limited Company is a separate corporate body and liability for payment of debts stops with the owners, shareholders are not personally legally responsible. The directors are only liable if they continue to trade and incur liabilities after it becomes apparent the Ltd Company is bankrupt. .(Walter J. Johnson, 2010)
Lower Taxes: Lower corporation tax offered a Private Limited Company advantages over self employment in recent years. Corporation tax rates have increased from 20 per cent to 22 per cent in recent years. Incorporation still has tax saving advantages dependent upon the net taxable profit. Thus, the Private Limited Company advantages come from the flexibility of being able to determine the proportions of salary and dividends taken compared with a sole trader whose basic accounts are subject to tax at fixed tax rates and thresholds. There are significant Private Limited Company advantages regarding tax liability compared to a sole trader where net income is below the upper earnings threshold.(Walter J. Johnson, 2010)
Control: Becoming a Private Limited Company has greater resources or access to capital investment than sole traders. A private limited company has access to finances through selling shares. Usually, shares are owned by sole traders, family, relatives, friends, and employees. This mean new issue of shares cannot sell to open market. Furthermore, existing shareholders can sell their shares only when agreement from others shareholders. Additionally, the former is able to remain their controlling interest. .(Walter J. Johnson, 2010)
Decision Making: Directors can be picked for business ideas and for the solving of problems that the business encounters in general meeting.
2.3.2 Disadvantages of Private Limited Company
Profit Sharing: Many private limited companies, or PLCs, are very profitable. Unfortunately, these profits can become diluted because they must be evenly distributed among all shareholders, and many PLCs have up to 50 shareholders.
Paying Taxes: Registered directors of PLCs must maintain impeccable records of profits and losses, including income and expenditures. These records must be kept for at least seven years and are used to complete the corporation's tax returns every year. Private Limited Company must also pay taxes and insurance for their employees. (Day, Nellie., 2010)
No Trading: Shareholders in a Private Limited Company unable to sell or transfer their shares to the general public. The 50 or so shareholders that comprise a PLC must keep their shares and cannot trade them on any stock exchange.
High Expenditure: It is high cost to create Private Limited Company because have to pay taxes and employee insurance, also any legal fees or other incidentals involved in the business. Moreover, Private Limited Company spending high expenditure in lawyer and accountancy fees since the day of the business start. (Day, Nellie., 2010)"
To conclude this question, I would like to advise Sharon by using Partnership first. Reason that I choose partnership is because the capital required for Partnership is less than Private Limited Company. It’s only using startup cost for legal fees in doing partnership agreement. Somehow, this agreement is not compulsory for doing although is highly recommended.
Others than that, Private Limited Company needs to paying higher taxes than Partnership and by doing Partnership, it’s able to avoid double taxation. There is not high expenditure in Partnership business form but Private Limited Company are required for spending a lot of money in lawyer and accountancy fees because they need to do documentation and annual reports. So I highly recommended Sharon doing Partnership form for expanding her business.
Distinguish between ‘private companies’ and ‘public companies’.
A company is a legal entity, distinct from any individual persons, with the power to own property and conduct business. Corporations maybe classified as public or private. Public company mainly created to administer a unit of local civil government, such as a country, city, town, school district to conduct the public business. Public corporation is created by specific legislation by determines the corporation’s purpose and powers. Whereas, a private company is founded by individual for private purposes and has no governmental duties. Few differences we can obtain see through between public and privates companies in this article. (Companies Formation Worldwide, nd)
Firstly, name of public company must includes the words ‘Public Limited Company’ or its equivalent whereas name of private limited companies cannot ended with this words and must end with ‘Limited’ or its equivalent, such as Ltd unless the company has obtained permission to dispense with the use of the word ‘Limited’ in its name. Due to the minimum capital share, incorporate company as a Private Company can commerce business as soon as it is incorporated, whereas a Public Company must have a minimum paid-up capital £50,000 and any amount state by the statutory instrument. In addition, minimum number of members required to form a private company is 2, whereas a Public Company requires at least 7 members; maximum number of members in a Private Company is restricted to 50 and no restriction of maximum number of members in a Public Company. (Vakilno1, 2000)
In Private Company, there is complete restriction on the transferability of the shares through its Articles of Association, whereas there is no restriction on the transferability of the shares of a Public company. A Private Company may have 1 director to manage the affairs of the company, whereas a Public Company must have at least 2 directors. Due to the consent directors, Directors of Private company no need to give any consent, but the Directors of a Public Company must have file with the Registrar consent to act as Director of the company. In qualification of shares, the Directors of a Private Company need not sign an undertaking to acquire the qualification shares; Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the public Company. A Private Company need not offer the further issue of shares to its existing shareholders, whereas a Public Company has to offer the further issue of shares to its existing shareholders as right shares. Further issue of shares can only be offer to the general public with the approval of the existing shareholders in the general meeting of the shareholders only. Moreover, Private Company has no obligation to call the Statutory Meeting of the member, whereas of Public Company must call its statutory Meeting and file Statutory Report with the Register of Companies. (Vakilno1,2000)
Public companies usually provide an assurance of continuing operations above that of smaller, privately held businesses. Downturns in the economy or a change in the environment such as an increase in competition or regulatory changes often have a greater impact on private business than public businesses in terms of performance and market positioning. That higher risk may result in a discount in value for private businesses. Although private companies are more likely to receive valuation discounts than public companies, there is at least one area where they may receive a value premium. While the sale of a private company usually results in the purchase of the controlling interest in the business, ownership of public-company shares generally consists of a minority-share ownership which may be construed to be less valuable than a controlling interest position.