Introduction to Types of businesses
Starting a Business Post Covid-19 Era.
With the news of the development of Covid-19 Vaccine, the end to this pandemic is insight. Covid-19 has undoubtedly had severely impacted all types of business around the world. It is hoped by the International Monetary Fund and exchequer that there will be a surge in new entities entering into the market especially within the Tech, IT and artificial intelligence sectors.
In this article we will explore different types of legal business arrangements prospective entrepreneur and start-ups can look into to make an informed decision that which legal setup is right for their long- and short-term needs and ambitions
Incorporated and Unincorporated Business Entities
Businesses can be run either as an unincorporated or incorporated form. There are pros and cons of both for example and unincorporated businesses require very few administrative steps to be taken to be formed under the law. The most common forms of unincorporated business in the UK are the sole traders and traditional partnerships.
In contrast, to establish an incorporated business, the due process must be followed and the new business or start-up must undergo a formal registration process before they can legally exist.
The most common forms of incorporated business in the UK are the private limited company, the public limited company and the limited liability partnership
Incorporated businesses are separate legal entities than their owner who are generally the shareholders whereas an unincorporated business is usually treated as being the same as its owners, with no separate legal status. A common example of an unincorporated business is a sole trader or partnership.
As an unincorporated business, there is no legal distinction between the business and the owner. This means that the sole trader’s business assets and personal assets are treated as the same. If the business fails, it is not just the sole trader’s business assets but also the sole trader’s personal asset will also bear the brunt of any claim by the creditors.
Whereas in the case of incorporated business the liabilities of the business cannot be enforced against the shareholder or directors except in very limited circumstances.
A sole trader is someone who runs a business on his own as a self-employed person. This includes corner shops, a hairdresser, a lawyer etc. To start a business as a sole trader no particular legal steps are required. One can start working from the sanctuary of their home however, the sole trader must register with HM Revenue and Customs (HMRC) for tax purposes. The sole trader pays income tax as a self-employed person. The business has no legal status of its own as an unincorporated business
Unlimited Liability of the Sole Trader
If the sole trader is unable to pay off all the debts using his business and personal assets, he may be made bankrupt. This is known as ‘unlimited liability’.
A sole trader has the right to make all decisions affecting the business and owns all the assets of the business. If the sole trader is unable to pay off all the debts using his business and personal assets, he may be made bankrupt.
The liability is shared by the owners of the business, if the sole trader or partnership owes some money, it means that the sole trader is personally liable. If the business cannot pay the money the liability can be enforced personally against the sole trader.
Death and Retirement of Sole Trader
When the sole trader retires or dies, the business ceases, although the business or individual assets may still be sold if a buyer or buyers can be found to settle any sole trading debts.
Partnerships are also unincorporated entities. A partnership is formed when two or more person starts a commercial activity, together, with a view of making profit or money Partners can undertake any business activity they like. Partnerships are governed principally by the Partnership Act 1890. The partnership will be run on the basis of a contract, which may be written or oral. However, it is important to note that like sole traders the partnership and partners are jointly and severely liable. It is important to have a tailored partnership agreement in order to avoid any legal issues. In the absence of a partnership agreement, the Partnership Act of 1890 will be the default agreement, which can lead to an injustice.
There are no formalities which need to be satisfied, such as registration with a public body, in order to form a partnership. However, each partner must register with HMRC for tax purposes. The partners will divide the profits or losses of the business between them. In a partnership made up solely of individuals, the partners are taxed separately as self-employed individuals, paying income tax on their share of the profits of the partnership
Unlimited Liability for Partnership.
The partners have unlimited liability for the debts of the partnership. This means that, as with a sole trader, if the partnership fails, creditors can pursue not just the assets used by the business but the personal assets of the partners themselves.
Joint and Several liabilities
This liability is also said to be joint and several among the partners, allowing a creditor the choice of seeking the full amount of debt from any one individual partner or from all the partners together.
Death or retirement of the partner
In the absence of an agreement whether oral or written, when a partner dies or retires, then the partnership will come to an end. However, in practice, partners general agree that upon the death or retirement of a partner, his share will be bought out by the remaining partners so that the partnership continues.
Limited Liability Partnership
The Limited liability partnerships are formed under the Limited Partnerships Act 1907 A limited partnership is similar to a partnership in that there must be at least one general partner who has unlimited liability for all the debts of the partnership. However, unlike a normal partnership, an LP is permitted to have a limited partner whose liability is limited to the amount he initially invested in the business.
A company is an incorporated business entity. A company in the UK is formed by registering certain documents with a public official, the Registrar of Companies, in accordance with the requirements of the Companies Act 2006 (CA 2006). So, whereas the partners in a partnership or a sole trader can start trading immediately, steps need to be taken to set up a company before it can start trading.
Limited v Unlimited Companies
The most common form of company formation is a limited company, which means that the liabilities or debts of the company are the debts of the company only. These debts or liabilities cannot be enforced against its directors or shareholder, hence the liability is limited and this legal arrangement is referred to as limited liability company and shown in the legal documents by the use of the word Limited or LTD.
Whereas an unlimited liability company is one which does not have any limit on the liability of its members. The members of a company are its owners. If the owners wish to run their business through an unlimited company then they will be required to use not only the company’s assets but also, if necessary, their personal assets to pay off the company’s debts.
Limited by shares or by guarantee
A limited company may limit the liability of its shareholders (ie owners) in one of two ways: (a) by shares; or (b) by guarantee (CA 2006, s 3(1)). A company which is limited by guarantee is a much less common type of limited company. It is usually used for organisations that are not seeking to make a profit, such as charities, members’ clubs (eg sports clubs), professional societies and property management companies. The members (ie owners) of the company guarantee, in the event, that their company is wound up (ie brought to an end), that they will pay a specified sum to the creditors under s 3(3) of the CA 2006. The owners’ liability is limited to that sum, regardless of the amount of the debts of the company. It is usually £1.
A company limited by guarantee is therefore useful for non-profit organisations which wish to limit their members’ liability but have no need for the members to contribute large amounts of money to run the company. Another advantage of this type of company is that it is easier to make changes in ownership than in a company limited by shares. A company which is limited by shares is by the far the most usual form of a limited company. They take two forms: a private company limited by shares or a public company limited by shares.
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While every effort has been made to ensure the accuracy of the information provided in this article, it does not constitute legal advice and cannot be relied upon as such. Each legal case and issue may have unique facts and circumstances, as a result legallex does not accept any responsibility for liabilities arising as a result of reliance upon the information provided. For further help and guidance, you can always rely on and seek advice from our experienced lawyers.