TB - starting a new business - types of business medium

Question 1

what are the two types of business medium

Answer 1

• unincorporated businesses (sole traders/partnerships)
• incorporated businesses (private and public limited companies/limited liability partnerships)

Question 2

what is the fundamental distinction between unincorporated businesses and incorporated businesses

Answer 2

an incorporated business has its own legal identity or separate personality and needs to be reg with CH

it’s an artificial ‘person’ created by law and is legally distinct from those who own and run the business

Question 3

key term - unincorporated business (does it have its own legal identity)

Answer 3

an unincorporated business doesn’t have its own legal identity (or separate personality) - there’s no legal distinction between the business and its owners and managers

Question 4

key term - incorporated business (does it have its own legal identity)

Answer 4

it has its own legal identity (or separate personality)
there’s a legal distinction between the business and its owners and managers

Question 5

practice q - Niamh is the only director and shareholder of a plc. the company has entered into a contract with your client, Linda, and failed to perform its obligations. should Linda consider legal action against Niamh, the limited company or both

Answer 5

Linda should consider legal action against the limited company only - as a separate (artificial) legal person, it owes the contractual obligations to her

Question 6

what is a sole trader/proprietor

Answer 6

someone who’s self employed and owns and runs their own unincorporated business

Question 7

can a sole trader have employees

Answer 7

yes but they are still the sole owner of the business

Question 8

sole traders may be involved in any trade, business or profession and can be anything from window cleaners and hairdressers, to accountants and solicitors - what does the term sole practitioner sometimes refer to

Answer 8

sole traders/proprietors who have a profession (eg dentist) rather than a trade (eg shopkeeper)

Question 9

as an unincorporated business, there’s no legal separation between the business and the sole traders personal affairs/assets - what is an advantage and disadvantage to this

Answer 9

advantage - keeping ownership and management simple

disadvantage - sole traders have unlimited liability

Question 10

key term - unlimited liability

Answer 10

a business owner is personally and directly responsible for all debts and liabilities incurred

Question 11

unlimited liability - a business owners personal assets (eg any property they own or money held in bank accounts even if unrelated to the business) will be at risk, and they can be made bankrupt if the business is unsuccessful - true or false

Answer 11

true

the concept of unlimited liability is a key disadvantage of carrying on business as a sole trader and its implications can have serious consequences

Question 12

practice example

katrina set up business as a hairdresser several years ago, but the liabilities of the business now exceed its assets by over £100k . K has savings of 50k and a house worth 200k.
the realisable assets of the business amount to 20k - how would you advise K

Answer 12

as a sole trader K will be personally liable for the debts of the business
the business is unincorporated so doesn’t have its own legal identity (or separate personality)
there’s no legal distinction between the business and its owner/manager
therefore K’s personal assets will be at risk (including her home) if she’s unable to satisfy the debts of her business

Question 13

although unlimited liability can be a sig disadvantage of being a sole trader, a key advantage is that there’s no specific formalities or legal processes required to set up the business - do self employed people need to register with HMRC

Answer 13

self employed people do need to register with HMRC and some sole traders may be required to register for VAT
however the additional costs of forming a company are avoided

Question 14

are there onerous ongoing formality, decision making, filing and disclosure requirements for sole traders

Answer 14

no (unlike companies)

this can make being a sole trader more attractive, private and less expensive

Question 15

sole traders pay income tax on their trading profits and capital gains tax on their capital gains - true or false

Answer 15

true - they will usually obtain tax advice when deciding on the type of business medium

Question 16

practice example

R wants to set up his own business as a business cleaner. His funds are modest and his liabilities and financial investment will be low. He’s keen to keep things simple and not to incur substantial expense. How would you advise R with regard to the most suitable business medium for him

Answer 16

although the benefits of limited liability may be sig for those investing large sums and taking sig risk, it would appear that the costs and administrative burden of setting up a limited company would not be appropriate here. therefore in this situation it would be advisable for R to operate his business as a sole trader