1. Business Organisations Flashcards
Different types of business organisation
Sole Trader
A individual in business, trading in his or her name, or under a trading name.
Partnership
A group of individuals working together as partners in business
Limited liability partnership
An incorporated form of partnership, with a separate legal entity, where members are able to limit their personal liability for the debts of the business.
Limited company
An incorporated business with a separate legal entity, owned by shareholders and run by directors.
Charity
An organisation, run by trustees, which uses its resources to fund charitable activities under its control.
Incorporated definition?
Formed into a legal corporation, ie. a separate legal body.
Sole trader
Ownership - sole trader owns
Management - sole trader manages
Debts - sole trader liable for entire debt of business
Taxation - income tax on profits
Ownership terminology - Capital
Distributions - Drawings by owner
Accounting regs - None / financial statements are private and not available to public
Partnership
Ownership - the partners own the business
Management - all partners entitled to take an active role
Debts - partners are each liable for entire debt of partnership
Taxation of profits - each partner liable for income tax on their share of profits
Ownership terminology - capital
Distributions - drawings by partners
Accounting regs
- partnership act 1890
- partnership agreement
- financial statements are private
Limited liability partnership (LLP)
Ownership - owned by members but a separate legal entity
Management - all partners entitled to take an active role
Debts - members can lose up to their investment in the LLP
Taxation of profits - each member liable for income tax on their share of profits
Ownership terminology - Capital
Distributions - drawings by members
Accounting regs
- Limited liability partnership act 2000
- LLP agreement
- financial statements available to public through companies house
Limited company
Ownership - owned by shareholders but a separate legal entity.
Management - managed by directors on behalf of shareholders
Debts - shareholders can lose up to their investment in the company
Taxation of profits- corporation tax paid on profits
Ownership terminology - Equity
Distributions - dividends paid to shareholders
Accounting regs
- Companies act 2006
- Financial Reporting Standards
- Financial Statements are available to public through companies house
Charity
Ownership - run by trustees for charitable purposes for the public benefit
Management - trustees run the charity
Debts - for unincorporated charities (ie. not formed as a company) trustees may be liable
Taxation of profits - exempt from tax where income used for charitable purposes.
Ownership terminology - net assets form the funds of the charity
Distributions - distributions for charitable activities.
Accounting regs
- Charities act 2011
- Charity regulators - the Charity Commission
- Statement if Recommended Practice (SORP) or FRS (Financial reporting standard) 102
- Financial statements are available to the public through the Charity Commission
Sole Traders pros and cons
- independence, no need to consult
- after expenses all profits belong to owner
- in a small business with few employees , personal service and supervision by the owner are available at all times.
- easy to establish legally, either owners name or a trading name
- Unlimited liability for the debts of the business. This means if he sole trader becomes insolvent the owners personal assets may be used to pay business debts
- all losses of the business are the owners responsibility
- expansion is limited to owner ploughing back profits or borrowing from a lender like a bank
- owner usually has to work long hours and may be difficult to find time to take holidays. Risk of illness slowing down or stopping business.
Sole traders financial statements
- SPL
- SFP
No definitive format
No specific legislation
No accounting rules in the form of accounting standards
No annual returns to make to companies house
Annual income tax returns, stating profit
VAT returns and payments if registered.
Partnership pros and cons
Advantages over sole trader
- possibility increased capital
- individual specialisations
- cover for holidays and illness
Disadvantages
- decisions take longer because of consultation
- possible disagreements
- each partner liable in law for dealings and debts of whole business
- retirement of one partner may adversely affect running of the business.
Partnership financial statements
SPL
SFP
No definitive format
No specific legislation (partnership act 1890 may apply re sharing P or L)
No accounting rules in the form of accounting standards
No annual returns to make to companies house.
VAT returns if registered.
Each partner responsible for annual income tax return.
Incorporated status - 2 main types
Limited liability partnerships (LLPs)
Limited companies
Advantages / Pros of incorporation
- main advantage is limit on liability for members (LLP) or shareholders (Limited company) to the amount of their investment.
- continuing existence of the business as a separate legal entity.
- enhancement of credibility of the biz (sounds more substantial)
- access to finance may be easier
- transfer of ownership may be easier (eg sale of shares in a ltd company)
Disadvantages / Cons of incorporation
- main disadvantage is more complex to set up and higher costs of record keeping and annual returns
- info filed at companies house is in public domain
- business finances must be kept entirely separate from those of owners, contrasts with sole trader who can take drawings as and when required.
Limited liability partnership info
Often preferred format for professional partnerships because of the limited liability protection.
An LLP is set up through a process of legal incorporation, which requires certain documents to be submitted to the Registrar of Companies at Companies House.
Also advisable (but not legally required) to have a members agreement setting out rights duties and obligations of members (can be written or oral)
Although it’s called a partnership, owners are called members
All LLPs must have 2 or more ‘designated members’ who are responsible for ensuring legal and accounting requirements are carried out
Eg.
Keeping accounting records.
Arranging for audit if required.
Preparing and submitting the LLPs Confirmation statement and annual accounts to Companies House.
The confirmation statement is….
The confirmation statement is submitted by LLPs and limited companies to Companies House in order to confirm that all the information required by the Companies Act 2006 has been submitted to Companies House.
LLP financial statements
SPL
SFP
Supporting notes to the Financial statements (depth of info required varies with the size of the LLP)
Auditors report (smaller LLPs may be exempt from audit)
Financial statements show how profit or loss from the SPL is shared out amongst the members and incorporates the accounting rules of the members agreement.
The accounting requirements including the level of detail to be disclosed together with the order of items in the SPL and SFP are set out in :
FRS 102: The Financial Reporting Standard applicable in the uk & Republic of Ireland. (Sample layouts of financial statements are given in FRS 102)
The LLPs Confirmation Statement and Annual Accounts must be filed at Companies House by the designated members of the LLP,where they are available for public inspection.
Limited Companies incorporate by …
Limited Companies incorporate by registering under the Companies Act 2006 and by submitting certain documents to the Registrar of Companies at Companies House.
The Articles of Association set out the written rules about running the company that have been agreed by the shareholders, directors, and the company secretary. (Model Articles of Association are available from the Companies House at www.gov.uk)
Annual accounts comprise:
SPL
SFP
Supporting notes to the financial statements (depth of info required varies with the size of the company)
*Directors report to shareholders (no equivalent for LLPs)
Auditors report (smaller companies may be exempt from audit)
Accounting rules:
Companies follow accounting rules set out in the Companies Act 2006 and in Financial Reporting Standards (or International Financial Reporting Standards). Sample layouts of SFP and SPL are provided within these, including the level of detail to be disclosed, together with the order in which items are to be stated.
The company’s Confirmation Statement and Annual Accounts must be filed at Companies House by the directors, where they are available for public inspection.
Charities are set up…
To provide charitable activities within the scope of the charity. Most income is from donations, grants and funding. Most expenditure is finance for their charitable activities.
Main rules governing charities are set out in…
- The charities act 2011
- the Charity Commission, which is the regulator for most charities
- The statement of recommended practice (SORP) Accounting and Reporting by charities. Or FRS 102, The financial reporting standard applicable in the UK and Ireland.
Charities are restricted …
…in what they can do and how they work
- must follow charity law
- purpose must be for public benefit
- governed by a trust deed. Sets out Name, objects & powers, And deals with appointment of trustees, how meetings are to be run, and the required financial statements. (Model available at charities commission at gov.uk)
- they are run by trustees, who do not usually benefit but under certain circumstances could become liable for debts.
- they are independent of other organisations
- most charities register with the Charity Commission.
Charities Financial statements
All but the smallest charities prepare financial statements comprising
Statement of financial activities
Statement of financial position SFP
Cash flow statement
Supporting notes to the FSs
Trustees annual report (like directors report)
Auditors report (large) or Independent Examiners Report (medium sized)..no audit normally required for small charities.
These comprise the charity’s Annual Return which must be filed by the trustees with the Charities Commission where available for public inspection.
Limited company financial statements
SPL
SFP
Supporting notes to the FSs (depth varies with size)
Directors report to shareholders
Auditors report (small cos may be exempt)
