Business - Types of Medium (1) Flashcards
What are the two broad categories of business mediums?
Types of Business Model: Businesses in England and Wales can be unincorporated or incorporated.
(1) Incorporated: A business with its own legal personality distinct from its owners and managers.
(2) Unincorporated: A business without legal personality, meaning owners and managers are directly liable.
What types of business medium are unincorporated businesses?
- Sold traders
- General partnership
- Limited partnership
Liabilities, termination, taxation
What are sole traders?
Sole Traders: Sole traders are businesses run by a single self-employed person, and is the most common type of business.
(1) Liabilities: Sole traders may have employees, but the sole trader has ‘unlimited liability’.
(2) Termination: Sole traders typically end on death or retirement, but can be sold.
(3) Legislation: No dedicated legislation exists, but sole traders are subject to the general law.
Liabilities, termination, taxation
What are general partnerships?
General Partnerships: Partnerships are unincorporated businesses run by two or more people conducting business ‘in common with a view of profit’.
(1) Liabilities: Partners are jointly and severally liable for the debts of the business, with ‘unlimited liability’.
(2) Legislation: Partnerships are governed by the default Partnership Act 1890 model, but can devise bespoke agreements in respect of the business.
Liabilities, termination, taxation
What are limited partnerships?
Limited Partnerships: Partnerships with at least one general partner and some ‘limited partners’ whose liability is limited to their initial investment in the business.
(1) Liabilities: Limited partners have limited liability, but cannot control or manage the business, have no power to make binding decisions, and cannot withdraw their investment if the business is trading.
Breach: If they do so, they become general partners with unlimited liability.
(2) Legislation: Limited Partnerships are governed by the Limited Partnerships Act 1907. They must be registered with the Registrar of Companies to trade.
Which business mediums are unincorporated businesses?
- Private companies
- Public companies
- Limited liability partnerships
- Other companies
Liabilities, termination, taxation
What is a private company?
Private Companies: Companies with private shares, incorporated at Companies House.
(1) Liabilities: Companies benefit from separate legal personalities, meaning managers (directors) and owners (shareholders) have their liability limited to their investments in the business, and means that companies can enter into documents in their own right.
(2) Legislation: Governed by the Companies Act 2006.
(3) Taxation: Companies pay corporation tax directly.
Liabilities, termination, taxation
What are public companies?
Public Companies: Companies with shares tradable by the public on stock exchanges.
(1) Liabilities: Same as private companies.
(2) Legislation: Governed by the Companies Act 2006, more stringently than private companies.
(3) Taxation: Companies pay corporation tax directly.
Liabilities, termination, taxation
What are LLPs?
Limited Liability Partnerships: One or two members with a view of profit, incorporated at Companies House.
(1) Liabilities: Partners are limited in liability to the extent of their investment.
(2) Legislation: Partners are governed by the default Limited Liability Partnerships Regulations 2001 model, but can create bespoke agreements.
(3) Taxation: LLP partners pay income tax on their individual shares of LLP profits (whether or not distributed).
Aside from private companies, public companies, limited liability partnerships, which other business models are also incorporated?
(1) Companies Limited by Guarantee: Companies limited by guarantee of debts up to specified amounts. More common for non-profits.
(2) Unlimited Companies: Companies with unlimited liability - rare.
(3) Community Interest Companies: Companies who use their profits for public good, not private benefit.
(4) Charitable Incorporations: Charities with corporate structures and reduced liability, and not subject to both Companies House and Charity Commission.
(5) Overseas Companies: Foreign companies registered in the UK, required within one month of trading (Overseas Companies Regulations 2009).
(6) Royal Charter/Statute Companies: Companies originally established under statute or Royal Charter, of which 45 still exist, such as some Railway Operators.
(7) Joint Ventures: Two or more commercial entities combined for specific ventures, such as Google Earth (Google and Nasa).
What needs to be considered when deciding on the most appropriate businessm model?
A) Liability and Corporate Veil
Liability: The liability of businesses wildly differs.
(1) Incorporated: Incorporated businesses benefit from separate legal personality, meaning the directors and owners are only liable to the extent of their investment (Salomon v A Salomon).
Subsidiaries: Groups of companies also benefit from limited liability in respect of each business (Adams v Cape).
Exception: Corporate veil may be ‘pierced’ if there is serious impropriety, meaning business was specifically imposed to eschew a legal obligation by an individual (Prest v Petrodel).
(2) Unincorporated: Owners and managers tend to be the same people, and are unlimitedly liable. This means they are responsible for the debts of the business personally.
B) Administration
Administration: Administration is typically more burdensome for incorporated business.
(1) Incorporated: Companies and LLPs incur many costs, and must file many items with Companies house.
(2) Unincorporated: Unincorporated businesses generally only file HMRC related documents.
C) Costs and Taxation
Costs and Taxation: Costs and taxation differ.
(1) Costs: General costs are likely to be the same for most businesses, though legislative costs may be higher for incorporated businesses.
(2) Taxation: Whether one business is tax advantageous is a case-by-case issue.
D) Finances
Finances: The extent of funding will usually differ.
(1) Incorporated: Incorporated businesses can offer ‘floating charges’ as security, and companies can raise funds through shares issue (equity finance).
(2) Unincorporated: Unincorporated businesses rely on loans and individual investments and profits.
E) Publicity of Information
Publicity of Information: The extent of publicity differs by business model.
(1) Incorporated: Incorporated businesses are obliged to make public a lot of information, such as certain financial details. Much of this is available at Companies House or its own offices.
(2) Unincorporated: Unincorporated business need merely disclose the identity of its ownership and provide a service address for documents.
F) International Status
International Status: International status differs by business model. Companies benefit from the most prestige.
How does the legal structure of a sole trader, partnership and a company compare?
Sole trader:
Owned and operated by one individual. Unincorporated.
Partnership:
Owned and operated by two or more people. Unincorporated.
Company:
Separate legal entity distinct from owners and managers.
How does the liability of a sole trader, partnership and a company compare?
Sole trader:
Unlimited personal liability.
Partnership:
Unlimited personal liability.
Company:
Limited liability for members.
How does the management of a sole trader, partnership and a company compare?
Sole trader:
Full control.
Partnership:
Shared control between partners.
Company:
Directors manage company for members, subject to specified authorisation.
How does the taxation of a sole trader, partnership and a company compare?
Sole trader:
Taxed as income tax.
Partnership:
Taxed as income tax.
Company:
Taxed as corporation tax, dividends as income tax.
