buss1.7 choosing the right legal structure starting a business choosing the right legal structure...
TRANSCRIPT
BUSS1.7 Choosing the right legal structure
Starting a Business
Choosing the Right Legal Structure for the Business
"Synergy: The combined effect of individuals in collaboration that exceeds the sum of their individual effects."
Stephen R. Covey “Our choice of people to associate with, both personally and business-wise, is one of the most important choices you make. If you associate with turkeys, you will never fly with the eagles.”
Brian Tracy
BUSS1.7 Choosing the right legal structure
In this topic you will learn about Sole traders, partnerships, private
limited companies and public limited companies
Not-for-profit businesses
BUSS1.7 Choosing the right legal structure
Sole traders
A sole trader is an individual who owns and runs their own business. A sole trader has to register as self-employed with Her Majesty’s Revenue and Customs (HMRC).
The sole trader has to keep a record of all income and expenses and at the end of the tax year they have to fill in a self assessment tax return for HMRC.
Any profits made by the sole trader are classed as income and are therefore taxable through income tax and national insurance.
A sole trader has unlimited liability. This means that they are personally responsible for all debts run up by the business. Therefore, their home and all of their assets might be used to pay off any debts that they may incur and are unable to pay.
Read more at bplans.co.uk
BUSS1.7 Choosing the right legal structure
Sole tradersBenefits and disadvantages of being a sole trader
Benefits Cheap and easy to
set up All profits go to you You make the
decisions Financial records
remain private Motivation is high
as the success of the individual and the business are one and the same
Disadvantages Unlimited liability Limited capital for
investment Little specialist skills –
the owner is a ‘jack of all trades’ or will have to buy in specialists
Difficult to find cover when ill – although sole traders often do employ people
BUSS1.7 Choosing the right legal structure
Partnerships
A partnership is where two or more people share the costs, risks and responsibilities of being in business together.
As with a sole trader, each partner has to register as self employed with HMRC and will have unlimited liability. This means that each partner is equally responsible for debts incurred.
Each partner will take a share of the profits made by the company.
Usually, each partner has a share in the decision making. They normally manage the business but can delegate responsibility.
‘Sleeping’ partners invest in, but do not manage, the business.
Run video clip from internet – from link scroll down to “Couples working together”
Husband & wife partnerships
BUSS1.7 Choosing the right legal structure
PartnershipsBenefits and disadvantages of being a partnership
Benefits Risks, costs and
responsibilities are shared
More scope for specialist skills
Simple and flexible Financial records
remain private More capital can be
raised than as a sole trader
Disadvantages Unlimited liability Arguments can occur
with decision making If a partner dies, resigns
or goes bankrupt the partnership is dissolved
Trust becomes a significant element between partners – a written agreement between the partners should be drawn up
Run video clip from internet
5 Key factors – you tube
BUSS1.7 Choosing the right legal structure
Limited Liability Partnerships
A Limited Liability Partnership (LLP) is similar to a partnership. However, partners have limited liability up to the amount of money that they have invested in the business and any personal guarantees that they have given to raise finance.
An LLP is taxed as a partnership but otherwise it is very similar to a limited company. It needs to become incorporated (see Limited Companies) and needs to register and file accounts with Companies House.
An LLP must have at least two designated members who have additional legal responsibilities to the other partners.
BUSS1.7 Choosing the right legal structure
Limited Companies
Limited companies exist in their own right. The owners and the company are separate legal entities. Therefore, the company’s finances are separate from the owner’s personal finances.
Shareholders are the owners of limited companies. They have limited liability and are not responsible for the company’s debts. They can only lose the money that they have invested in the business in the form of shares.
Limited companies also differ from sole traders and partnerships because they belong to shareholders, liability is limited to the company’s assets.
Companies pay Corporation Tax (CT) on profits at a rate of 21% (up to £300 000 profit).
Separate legal entity
BUSS1.7 Choosing the right legal structure
Limited Companies
IncorporationCompanies must be registered (Incorporated) at Companies House. http://www.companieshouse.gov.uk
They must send to the Registrar of Companies the following:1. A Memorandum of Association – name, registered office and
what the company will do2. Articles of Association – the rules for running the company3. Form 10 – details of directors and company secretary4. Form 12 – declaring that they comply with company law
They must deliver to Companies House each year a true and fair set of accounts along with an annual return (a snapshot of company information).
BUSS1.7 Choosing the right legal structure
Limited Companies
Both Private and Public Limited Companies share common fundamentals.
They exist in their own right, operating as separately from the personal finances of the owners.
Shareholders have limited liability.
Both have access to more investment through shareholders.
However, Public Limited Companies are open to more public scrutiny and are open to hostile takeovers (if anyone can obtain 51% of shares in the company).
Read more at Business Link
BUSS1.7 Choosing the right legal structure
Private Limited Companies
Private Limited Companies have Ltd. after the company name.
They can have one or more members e.g. shareholders but, unlike PLCs, they cannot offer shares to the public for sale. Therefore, they cannot raise capital through the stock market.
A Ltd. Company must have at least one director and they must be at least 16 years old.
Normally, shareholders can only sell to other shareholders, often at a discount to the real value of the shares. They are ‘locked in’ and either sell at the price that they are offered, or not sell at all.
The shareholders are often family members and have a say in the running of the company.
Run video clip from internet
Summary video
BUSS1.7 Choosing the right legal structure
Public Limited Companies
Public Limited Companies have plc after their name.
They must have a minimum of two shareholders and have issued at least £50 000 of shares to the public before they can trade.
Public limited companies can raise money by selling shares on the stock market.
Public limited companies have access to far greater amounts of capital that can be used for rapid expansion.
There is normally a divorce between ownership and control. The shareholders own the company but the management (Chairperson and Board of Directors) run the company.
BUSS1.7 Choosing the right legal structure
Not-for-profit Businesses
This sector covers areas that are voluntary e.g. charities and other organisations that do not have profit as their overriding goal e.g. unions.
The ‘Third Sector’ is an area that is mainly seen to have an ethical stance on business activities in the UK.
Business Link states that ‘A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.’
These businesses attract a range of investors and employees, from the billionaire philanthropist to the young idealist.
Activity – choosing the right legal structure
Max and Zoë have been friends throughout university and are excited at the prospect of graduation this summer, they are not however keen to take on a graduate training job and are considering going into business themselves. Max’s speciality is web design whilst Zoë is renowned for her exceptional graphic design skills and creativity. Max and Zoe are unsure as to whether to go it alone or join forces. They have approached you to advise them on the best legal structure for their business(es).
Briefly outline to Max and Zoë what options are available to them.
What additional information would you ideally like to know before making a recommendation?
Recommend a suitable legal structure for Max and Zoë, state any assumptions made and justify your answer.