legal structure of businesses

MODULE 1

CLASSIFICATION OF BUSINESS

Legal Structure

Introduction

• Ownership • Control • Way finance is raised • Distribution of profits

Main types of business in private sector differ in terms of:Main types of business in private sector differ in terms of:

Sole Trader

• Owned / run by one person.• Rarely employ large no. of people.• Owner complete responsibility.• Main source of finance – personal

savings, bank loans.• Simplest / most common structure.• Common in tertiary sector eg local

butcher.

Sole Trader

• Trading Licence for certain goods eg alcohol.

• VAT registration over a certain amount.

Legal Requirements on Formation

Sole Trader

• Easy to set up. • Small amount of capital. • Personal control, independence,

freedom.• No formal set of accounts.

Relative Advantages

Sole Trader

• Keep profits (after tax).• Speedy decisions. • Direct contact with customers –

feedback.• Closer working relationship -

management / employees.

Relative Advantages

Sole Trader

• Owner responsible for debts.

• Unlimited liability – personal assets at risk.

• Difficult to raise capital – growth limited.

• Long hours, difficult to cover holidays / illness.

Relative Disadvantages

Sole Trader

Relative Disadvantages

• Business worries not shared.

• Division of labour / specialisation difficult.

• Owner - non specialist – expertise thinly spread.

• Lack of continuity.

Partnership

• Two or more owners - Partnership Act 1890.

• Ordinary – all partners unlimited liability.

• Limited – at least one partner has unlimited liability.

• Professions – dentistry, solicitors, accountants.

Partnership

• Minimum 2, maximum 20. Exceptions.

• Share in capital, profits / losses - Deed of Partnership.

• Disputes usually settled by majority.

• Comply with concept of ‘utmost good faith’.

Legal Requirements on Formation

• Easily formed.

• More finance available – expansion easier.

• Management / risks shared.

• Financial affairs private.

• Greater continuity.

Relative Advantages

Partnership

• Unlimited liability.

• Slower decision making.

• Possible conflict. • Profits shared.

• Membership limited

Relative Disadvantages

Partnership

• Some partnerships allowed more than 20 partners.

• Banks - no more than 10.

Partnership

NBNB

Limited Companies

• Separate legal identity to owners.

• Incorporated businesses / registered companies.

• Private (Ltd’s) & Public (PLC’s).

• Shareholders elect directors to run the business. Directors appoint: Chairman, MD, Company Secretary.

Limited Companies

• One or more owner / shareholder.

• Directors – family or friends

• Generally smaller – common in UK.

Private Limited Companies

Limited Companies

Private Limited Companies

• Transfer of shares – restricted.

• Owner of family firm can enjoy greater capital, continuity and limited liability without giving up too much control.

Limited Companies

Public Limited Companies

• Two or more owners / shareholders.

• Can sell shares to general public.

• Larger than Ltd’s - greater capital - ease of share transfer.

• Limited Liability.

• Greater capital.

• Greater continuity.

Relative Advantages

Limited Companies

• Opportunities for specialisation / economies of scale.

• Status. • Ltd. – protected from take-overs

(share transfer restricted).

Relative Advantages

Limited Companies

• Expensive to set up / run (particularly PLC).

• Less flexible – restricted to M of A and A of A.

• Accounts audited – costly.

Relative Disadvantages

Limited Companies

• Personal guarantee may still be required for loans.

• Ltd – shares not offered for public sale.

• PLC – lack of privacy.

Relative Disadvantages

Limited Companies

• PLC – threat of take-over.

• PLC – divorce of ownership / control.

• PLC – shareholder interest – short-term profits.

• PLC – many procedures – slower to react to change.

Relative Disadvantages

Limited Companies

Limited Companies Legal Requirements

PRIVATE PUBLIC

Must submit to the REGISTRAR OF COMPANIES (at Companies House, Cardiff):

FORM 10 & FORM 12Director & Secretary Details + Registered Office.

Director(s) signature(s) witnessed by legal person.

MEMORANDUM OF ASSOCIATIONAuthorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders.

ARTICLES OF ASSOCIATIONInternal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s)

Must submit to the REGISTRAR OF COMPANIES (at Companies House, Cardiff):

FORM 10 & FORM 12Director & Secretary Details + Registered Office.

Director(s) signature(s) witnessed by legal person.

MEMORANDUM OF ASSOCIATIONAuthorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders.

ARTICLES OF ASSOCIATIONInternal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s)

Issued a CERTIFICATE OF INCOPORATION

Can START TRADING Must produce a PROSPECTUS(history, prospects, invitation to buy shares)

Must issue SHARES to the value of at least £50,000 (of which a quarter must be paid)

Must then receive a TRADING CERTIFICATEfrom Registrar of Companies before it can start trading

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CLASSIFICATION OF BUSINESS

Legal Structure