Business and Organisational Characteristics Flashcards
What are the different business models?
- Sole Trader
- Partnership
- LLP
- Private Limited Company
What are the key considerations when forming a business?
- Costs
- Risk: will the participants in the business have personal liability for debts of the business?
- Structure: does the business model provide a clear organisational structure? Is this flexible?
- Formalities: are there legal formalities that must be followed in running the business? How flexible is the business model regarding formalities?
- Privacy: to what extent is information about the business required to be publicly disclosed?
- Finance: how can the business raise capital?
- Decision making (control over the business)
- Growth of the business and employment of employees
- Tax
How can a business raise finance?
- The owners of the business can invest in it by making contributions of capital
- Outside investors may make a capital contribution
- The business may borrow money
- The business may invest its profits back into the business to help it grow
What is a sole trader business model?
The sole trader is the exclusive owner of the business. It is not a separate legal entity
What are the advantages of the sole trader model?
- Can start trading immediately
- No set up costs / no formalities
- Can keep all the profits
- Full control over decision making
- Complete privacy
- No formal structure
- No Companies House filing or procedural requirements
What are the disadvantages of sole trader model?
- Unlimited personal liability. This means the sole trader’s personal assets are potentially liable to be sold to meet any debts of the business
- Sole trader is not a separate legal entity. This means that contracts are formed between the sole trader and third parties = personally liable
What is the structure of a partnership?
- 2 or more people own the business and share the profits
- The partnership is NOT a separate legal entity
- Unless there is an agreement in place, partnerships are governed by Partnership Act 1890
- No formalities to create a partnership: formed automatically when there are two or more people working together with a view to profit
What are the advantages of a partnership?
- Can start trading immediately
- No set up costs / formalities
- Full control over decision making
- Complete privacy as no disclosure requirements to Companies House and no procedural requirements
What are the disadvantages of a partnership?
- Partners have unlimited personal liability. This means their assets may need to be sold to meet the debts of the business
- Traditional partners (under Partnership Act) are jointly and severally liable
- Not a separate legal entity. This means contracts are formed between partners and third parties
- Partnership Agreement is required otherwise, in absence of express agreement, Partnership Act applies in default
What is Limited Liability Partnership (LLP)?
It is a hybrid between a traditional partnership, with procedural flexibility and taxation, and a company with limited liability, registration and filing requirements
- 2 or more persons carrying on a lawful business with a view to profit can incorporate an LLP
- The partnership is a separate legal entity - has a separate legal personality
What are the advantages of an LLP?
- All partners have limited liability. Their liability to third parties is limited to the amount that they have agreed to pay under the terms of their partnership agreement
- Partnership is a separate legal entity. The partnership can enter contracts with third parties
- Flexible management procedures
- Organisational structure is very flexible and is decided between the partners in a formal written Members’ Agreement
What are the disadvantages of an LLP?
- An LLP must be registered at Companies House and is required to file annual accounts and other information. This means there are set up costs and formalities
- Disclosure obligations
- A members agreement is required, otherwise provisions of Limited Liability Partnership Regulations 2001 apply in default
What is a private limited company?
A company is a separate legal entity, distinct from its owners. This means that a company
- owns property
- enters into contracts with third parties
- can sue and be sued in its own name
- profits and losses belong to the company and not the shareholders
- company is liable for its own debts
What are the advantages of a Private Limited Company?
- Limited liability as shareholders are only liable to pay any amount unpaid on their shares
- Minimum of one person required to incorporate a company
- Easier to raise finance - funding can be obtained through use of equity or debt finance
What are the disadvantages of an LLP?
- There are set up costs and formalities. A company must be registered at Companies House (advise on constitutional documents and filing requirements)
- Disclosure obligations
- Governed by Companies Act 2006 - statute imposes strict requirements on how companies are run
Private companies (Ltd)
- Private companies are limited by shares
- The most common type of company
- No minimum share capital requirements
- Prohibited from offering shares to the public
- Can be formed by one person
- Only needs one director
- Can choose to have a company secretary (but is not obliged to)
- No longer required to hold an AGM
Public companies (Plc)
Public companies are limited by shares
- can offer shares to the public
- need a minimum of 2 directors and must have a company secretary
- minimum share capital requirement of £50,000
- requires a trading certificate before it can trade
- only public companies can be listed (but not all public companies are listed)
- required to have one annual general meeting each year
How can businesses change their model?
Many business start as sole traders/partnerships before converting to a limited company:
- An option for clients to start as sole trader/partnership to get the business started quickly with minimal costs
- Then may consider converting to attract long-term contracts with large companies, in line with their long-term business strategy and more options to raise finance
How does tax work for the different business models?
- Partnership: all partners pay tax separately to HMRC. The partnership itself is not liable to pay tax as it is not a distinct legal entity
- LLP: members of an LLP are taxed as partners would be. Individuals pay tax to HMRC
- Limited company: pays corporation tax for profits made; shareholders are liable to pay individual income tax
What should you advise partners (either partnership or LLP) in practice?
It is important that partners draw up a detailed agreement to deal with matters such as:
- profit share
- how new partners join the partnership
- what happens if a partnership leaves
This requires certainty for the business and unlikely that all default provisions will be most appropriate
What are the key constitutional documents of a company?
- The memorandum (for companies under CA 2006, it is no longer a constitutional document, but it is required to be filed at Companies House)
- Articles
Who are the key stakeholders in a company?
- The directors (board) - day to day management of the company
- Shareholders (‘members’) - own the company. Key decisions are reserved to shareholders
- Persons with Significant Control - shareholders holding over 25% of shares
Resolutions - Directors
Directors vote at Board Meetings
- pass board resolutions by simple majority
- each director present has one vote
- chair usually has casting vote if the votes are equal
- quorum is 2 directors
Resolutions - shareholders
Shareholders vote at General Meetings
- quorum is 2 shareholders (unless company has only 1 shareholder)
- Ordinary resolutions (simple majority - over 50% present and voting)
- Special resolutions (75% or over of those present and voting)
Written resolutions
Shareholders of private companies can pass resolutions in writing
- But cannot use written resolution for a vote to remove director or auditor
How do shareholders vote a general meeting?
Shareholders vote by a show of hands (each shareholder has one vote)
Unless a poll vote is demanded (gives each shareholder one vote per share held)
Who can call a poll vote:
- chair;
- directors;
- two or more shareholders; or
- any shareholder holding at least 10% of voting rights
