LEGAL IDENTITIESCHAPTER 8

CHOICE OF BUSINESS ORGANISATION

SMALL BUSINESS

Sole Ownership

Shared Ownership

Sole TraderLimited

CompanyPartnership

Limited Company

Cooperative

Limited Company

Limited CompanyResponsibilities

Shareholders Responsibilities. Directories Responsibilities.

To act honestly, and in the company’s best interests.

To have regard for the interests of employees as well as shareholders.

To comply with the requirements of the companies Act.

Limited CompanyThe Memorandum & Article of Association

Memorandum of Association. Name of the Company. Location of the registered office. The objects of the company. The limited liability of the shareholders. The share capital and structure. The name of signatories.

Articles of Association. Formation of a Limited Company.

Limited liability for shareholders. Some Formalized structures (e.g.

directors meetings) make management clearer.

Income tax paid only on salaries drawn; higher rates of personal tax can be avoided when profits are retained.

No limited to contributions made to a pension scheme with tax relief.

ADVANTAGES

Limited Company

Finance easier to raise externally especially from equity.

Easier to widen ownership base. Existence not threaten by death or

personal bankruptcy of one of owners. Possibly higher perceived status.

ADVANTAGES

Limited Company

More time consuming & expensive to setup.

complicated & time consuming to conform to requirements of Companies Act.

Loss of confidentiality as some records are publicly filed.

Audit & accounting costs higher. Higher national insurance contributors.

DISADVANTAGES

Limited Company

Double tax when company pays corporation tax on profits & capital gains, and shareholders are personally taxed on dividends.

As employees, directors have worse cash flow of taxes under PAYE than self-employed.

Limited liability reduced. Directors can be held personally liable if

company trades while insolvent.

DISADVANTAGES

Limited Company

SOLE TRADER

Legal Status

Setting Up & Record keeping.

SOLE TRADER

Straight forward & easy to setup. Make all the decisions & keep all the

profits. No audit of accounts required legally. No public disclosures of records. Business losses can be offset against

other income. Self-employment defers income tax &

reduces national insurance contributions.

SOLE TRADERADVANTAGES

Unlimited Liability. No additional funds. Transfer of ownership less flexible. Possible status problems perceived by third

parties. All profits taxed as personal income. Self-employed national insurance

entitlements have less benefits. Tax relief on pension contributions

restricted.

SOLE TRADERDISADVANTAGES

PARTNERSHIP

Partnership Act 1890… All partners have an equal vote in how the

business should be run; All partners have invested equally in the

business; All partners have an equal share of profits; Partners will not receive any salary; Partners will not receive interest on their

capital invested.

PARTNERSHIP

The Partnership Agreement

Details of Partners. Duration of Partnership. Capital contributed by partners. Calculation & division of profits. Management & control of business. Dissolution.

PARTNERSHIP

PARTNERSHIP

Partners’ Responsibilities.

Easy to setup. Access to the experience of other partners. No audit of accounts legally required. Confidentiality is maintained. Losses from the business can be offset

against other income. Can be relatively easily transferred to a

limited company. Benefits of self-employment.

PARTNERSHIPADVANTAGES

Liable for debts. Partners estate can still be liable for their after

death. Death, bankruptcy retirement dissolves

partnership. Less flexibility in transferring ownership. High Degree of mutual trust required. Profits taxed as income. Self-employed national insurance entitlements have

less benefits. Tax relief on pension contributions restricted.

PARTNERSHIPDISADVANTAGES

CO-OPERATIVES

CO-OPERATIVES

Industrial & Provident Societies Act 1965-75 Controlled by members. Membership is not restricted. Each member has equal vote. Surpluses & profits are shared between

members. Share capital remains at its original value. Interest is limited.

CO-OPERATIVES

Background.

Types of co-operative. Endowed Co-operatives. Defensive Co-operatives. Job-creation Co-operatives. Alternative Co-operatives.

High level of commitment. Increased motivation. Equal sharing. Higher satisfaction from work.

CO-OPERATIVES

ADVANTAGES

Lack of management. Insufficient Finance. Difficulties to access market place. Difficult economic conditions. Decision making can become

confused. Finding members is difficult. Low survival rate.

CO-OPERATIVESDISADVANTAGES

Checklist for choosing appropriate formChecklist for choosing appropriate formCategoriesLiabilities

Records & Accounts

Setting Up

CompanyLiability Limited, but personal guarantees & directors’ obligations can reduce limitations.

Legal accounting & audit requirements. Account filed open to inspection.

Formalities of registration, although can buy off-the-peg.

Sole traderAll assets liable including those not involve in

the business.

No strict accounting or audit

requirements. Records not available for public inspection.

No formalities except registering as self-employed.

PartnershipLiabilities extends to business debts of other partners.

As for sole trader.

As for sole trader, except partnership agreement strongly advised to prevent problems, specially of dissolution.

Checklist for choosing appropriate formChecklist for choosing appropriate formCategoriesRaising Money

Selling Up

Status

Tax, National Insurance & Pensions

CompanyWide choice, including further equity investments.

Flexible, as can sell part of all of shares.Possibly higher perceived status.

Employee status PAYE, high national insurance, but full benefits. unlimited co. contributions on pension. Corp. tax on co. profits. Losses retained in co.

Sole traderOperations limited to overdraft or loan.

Can only sell assets; difficult if selling part of business.Possibly lower perceived status.

Insurance cheaper but fewer benefits. Tax-deductible pension contributions restricted. Losses can be offset against tax on other income.

PartnershipOverdrafts, loans or new partners with money.

As for sole trader.

As for sole trader.

As for sole trader.

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