Different types of business

Question 1

Difference between incorporated and uncorporated business?

Answer 1

1. An incorporated business exists as a separate legal entity from its owners and managers. There owners are generally not liable for business debts.
2. Unincorporated business are businesses run by individuals who have not set up a separate legal entity and have full personal liability for the debts of the business (sole traders, partnership and limited partnership).

Question 2

Sole traders

Answer 2

1. sole trader/proprietor/practitioner is sb who runs unincorporated business on their own as a self employed person
2. most common form of business medium in UK
3. Sole trader may have employees but sole trader is the person who owns business and have unlimited liability.
4. Sole trader pay income tax as self employed person

Question 3

Partnership

Answer 3

1. two or more people “carrying on a business in common with a view of profit.
2. Unincorporated business but involves more than 1 person running the business
3. Partnership Act 1890 (PA 1890) governs partnership, provides a default partnership agreement for partners
4. Partners may decide to enter an agreement to disapplies some of provisions of PA 1890, if not, PA applies, and its provision will be implied.
5. Partnership is not a separate legal entity. Partners are personally liable for all of debts of partnership.
6. Individual partners are taxed as self imployed individuals paying income tax on their share of profit of partnership. Companies partners are liable for corporation tax on their share of profit.
7. Partners are not employees, they own the business. There may be “sleeping partners” who are not involved in day to day matters and only in maling fundamental decisions about the business.

Question 4

Limited partnership

Answer 4

1. There must be at least 1 general partner with unlimited liability for partnership debts. However, it can have a limited partner with limited liability.
2. The limited partner must not
   (a) control or manage LP
   (b) have power to take binding decisions on behalf of LP
   (c) remove their contribution to LP as long as it is in business.
   If they breach any of above, they will be treated as general partner.
3. Limited partnerships Act 1907 (LPA 1907) governs LP.
4. LP must be registered with Registrar of Companies before start trading.
5. Only 50k LP in existence

Question 5

Companies: common types of companies

Answer 5

1. Private companies limited by shares:
   a) Register with Registrar of Companies in accordance with Companies Act 2006 (CA 2006)
   b) separate legal personality and limited liability
   c) Decision making: company’s director or company’s shareholders
2. Public companies limited by shares (plc) : a company limited by shares which has complied with requirement of CA 2006 to be plc.

Question 6

Conditions for a company to be public company

Answer 6

1. the constitution must state that it is a public company.
2. the words “public limited company” or “plc” (or Welsh equivalent) must be included at the end of company name;
3. the company’s owners must invest a specified minimum amount for use by the compnay:
   a) allotted share capital must be at least “authorised minimum” currently GBP 50,000 (ss761 and 763 CA 2006)
   b) each alloted share must be paid up to at least a quarter of its nominal value, plus the whole premium on it (s586 CA 2006)

Question 7

Advantages of being a public company?

Answer 7

1. can raise money by offering shares to public
2. can apply to join stock market in UK : London Stock Exchange’s Main Market and the Alternative Investment Market.
3. public traded companies are more regulated than unlisted public companies and private companies to protect the public.

Question 8

Limited Liability partnerships

Answer 8

1. LLP is formed under Limited Liability Partnership Act (LLPA 2000).
2. LLP is a cross between partnership and limited company.
3. LLP has a separate legal personality, offers its owners protection from liability for LLP’s debts, like a limited company.
4. LLP is run with the informality and flexibility given by a partnership, partners are taxed as if the business were a partnership rather than a company
5. LLP can be formed by 2 or more members carrying on a lawful business with a view of profit. Filing with Registrar of Companies at Companies House.
6. LLPA 2000 provide a default contract for partners.
7. Individual members of LLP must register with HMRC as self employed.

Question 9

Other types of business medium

Answer 9

1. Companies limited by guarantee: usually used for organisation are not seeking for profit such as professional society. Instead of buying shares, the members guarantee the company’s debt up to a specified amount, usually GBP 1.
2. Unlimited companies: unlimited liability rare in practice.
3. Community interest companies : LLC intented for business that wishes to use profits for public good, not for private profit.
   4.** Charitable incorporated organisations**: advantage of corporate stucture: reduced risk of personal liability
4. Overseas companies: governed by Overseas Companies Regulations 2009, under authority granted by CA2006. All overseas companies setting up a branch in UK must registered within 1 month of their opening.
5. Companies established by Act of Parliament or Royal Charter: only 45, more historic (e.g. Royal Bank of Scotland, railway and utilities).
6. Joint ventures: commercial enterprise undertaken by 2 or more parties,each party retain its own identity but generally pool their resources for specific purpose (e.g. NASA + Google do Google Earth). Could take in many forms: be governed by contract or may set up a corporate structure whichparties jointly control.

Question 10

Factors to be considered when choosing the type of business?

Answer 10

1. Liability
2. Tax
3. Formalities
4. Publicity of information
5. Cost
6. Status
7. Finance