Date: October 1, 2008
Assignment 1
Describe and explain the recognised types of business enterprises. What are some of their advantages and disadvantages when seen from the viewpoint of a proprietor or manager?
Introduction
In English Law, a business enterprise may be described as having the status of a “sole trader”, a “partnership” or a “company or corporation”.
The type of legal structure adopted for a business will have a considerable impact on the liability of the owner and any fellow owners and on the type and amount of tax that may have to be paid. I will attempt to discuss the above in this paper.
Types of business enterprises
Sole Trader
A sole trader is a business owned and operated by one individual though it could have a number of employees and is the most common structure for people starting out in business. Personal capital is normally used to set up. The business affairs are not dealt with separately from personal affairs and the proprietor does not need to register with any government bodies. A lot of small businesses are sole trades as there are very few legal formalities, obligations or constraints and the books and records that need to be kept are fairly straightforward. Business stationery must include business address and proprietor’s name. The proprietor must keep accurate and full records of income for the Majesty’s Revenue and Customs and records should be kept for at least six years. If the business is to be VAT registered, VAT transactions should be recorded. The books of a sole trade business should show
The Business plan on Intro To Business Businesses Product Consumers
Introduction to Business Business plays a major role within our society. It is a creative and competitive activity that continuously contributes to the shaping of our society. By satisfying the needs and wants people cannot satisfy themselves, businesses improve the quality of life for people and create a higher standard of living. It is a way for individuals to provide goods and services to ...
• Payments
• Receipts
• Credit Purchases
• Credit Sales
• Business Assets and Liabilities
A sole trader is obliged to inform HM Revenue & Customs within three months of operating the business and is also obliged to pay Class 2 and 4 National Insurance contributions. All business income and personal income will be taxed and needs to be declared on the owner’s personal tax return.
Advantages of sole trade
1. Administration is easy as the time and cost of registering with Companies House is inapplicable. All that needs to be done is to notify HMRC
2. No need for compliance with the large amount of legislation that regulates companies
3. National Insurance contributions for sole traders are usually lower than a company’s
4. Simple accounts can be kept without the need for an accountant saving costs
5. The proprietor is entitled to all the profits made by the business
Disadvantages of sole trade
1. Proprietor is personally liable for all business debts so personal assets such as houses, cars etc are at risk if debts cannot be repaid.
2. Proprietor gets less social security benefits
3. Finance is difficult to raise as lenders prefer to lend to companies or partnerships.
4. Business is harder to sell or pass down to children because there is no separate legal entity to transfer
5. Sometimes customers prefer to deal with limited companies than sole traders as they feel more secure
Partnerships
Partnerships are quite similar to sole trader businesses, except that more than one proprietor is involved. Like a sole trader, the business and personal affairs of partners are not legally separate, and personal assets may need to be used to meet partnership liabilities. Tax affairs are similar too, the new business must appear on personal tax returns and HMRC must be informed within 3 months of commencement. A separate tax return must be completed and submitted for the partnership in addition to the partners’ returns. Generally speaking, the partnership itself doesn’t pay income tax – the information from the partnership return is combined with the personal income of the partners to calculate their overall tax bill.
The Business plan on Swot Analysis Business One Company
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A new form of partnership entity, the Limited Liability Partnership, came into use in April 2001. This type of partnership is a separate legal entity from its members and has some of the benefits of a corporate structure – it can, for example, enter into contracts and offers limited liability to its member partners. However, unlike standard partnerships, LLPs are required to comply with a number of Companies House requirements – in particular the publication and audit of accounts. Other than professional partnerships like solicitors and accountants, there can’t be more than twenty partners in a partnership. It is normal and advisable though not a legal requirement for partnership agreements to be put in place detailing things like how much capital each partner contributes, how profits and losses will be shared, how much each partner can draw from the business, how the business will be run etc.
The advantages and disadvantages of a partnership are like sole trader but there are some additional considerations:
Advantages of Partnerships
1. Flexibility to tailor the structure of the partnership to how one wants it through the partnership agreement
2. Responsibilty for managing the business is shared
3. Financial risks of the business is shared
4. A number of partners brings people with different skills involved in running the business
5. Extra money can be raised for the business by bringing in new partners who have to make a capital investment in exchange for becoming a partner
Disadvantages of Partnerships
1. Joint and several liabilities. Each partner is personally liable for all debts of the partnership even if they were caused by another partner.
The Term Paper on Sole Trader Company Business Partners
... (ostensible) authority). The partnership is bankrupt if all the partners are also bankrupt (excluding a limited partner under the Limited Partnership Act 1907. Limited Company There are many ... for the allotted share capital. Can on receipt of its certificate of incorporation limited can borrow and commence business. A LTD company needs only ...
2. Negligence of one partner can hold all partners liable
3. Disagreement between partners can cause problems in operating the business
4. Important business decisions such as entering into credit agreements can be made by one partner yet affect all partners if a properly drafted Partnership Deed is not in place.
Limited Liability Partnership
This is a new form of business entity that came into effect in 2001. It is a cross between a company and a partnership, operating as a partnership but limiting the liability of the members. LLPs have to be registered with Companies House and has its own separate legal entity. Members of a LLP are free to agree the relationship between them like partners do but the LLP itself is a separate legal entity owned by the members in that the LLP will be able to continue existing independent of membership changes.
Tax payments is like that of a partnership but annual accounts must be filed with Companies House within strict time frames.
Advantages of LLP
1. Members liability is limited though members may be asked for personal guarantees in some circumstances
2. Has the organisational flexibility of a partnership
3. The taxation is the same for that of a partnership
Disadvantages of LLP
1. Accounts must be prepared and filed annually with Companies House
2. Set up costs are involved
3. Not as easy to raise money as a company would
4. Companies House administration burden
Companies or Corporations
Limited Companies
A Company has a separate legal identity to that of the people who own the company. When a limited company enters into a contract or borrows money, its liability is limited to the amount invested in the company. The owners of a limited company own shares in it, and are not personally liable for debts incurred by the company.
Private limited companies which must contain ‘limited’ or ‘Ltd’ in its name, need only have one shareholder and cannot publicly trade their shares. By contrast, a public limited company which must contain ‘plc’, has its shares freely tradable on a recognised stock exchange. Some companies such as universities are limited by guarantee whilst very few companies are unlimited.
The Essay on Limited Liability Partnership (LLP)
Fred and Ginger are general partners in a business. They decide to purchase a building for the partnership. Ginger will put up the money for the building, and Fred will complete the remodeling. While inspecting the building, Fred is informed that the building is packed full of asbestos. He fails to tell Ginger of the presence of the substance. They buy the building and go into business. During the ...
Advantages of limited companies
1. Owners liability is limited to the initial cost of their shares.
2. Relatively easier to raise finance and easier to sell part of the business through selling shares
3. Employees are able to own shares in the business
4. Suppliers and customers may view limited companies more credible to do business with
5. Tax advantages for high earners who may be able to keep money in the business or in a pension scheme
Disadvantages of limited companies
1. Set up costs
2. Mass of legislation applying to companies.
3. Annual return must be filed at Companies House
4. Annual returns must be filed in a format that complies with recognised accounting standards. Small companies need only file a balance sheet and any information submitted to Companies House is public record so can be viewed by anyone.
5. For companies with very high turnovers, audited accounts must be produced and these costs are high
6. Companies are obliged to pay employer’s National Insurance contributions and most employees have to make contributions so total National Insurance is higher than for sole trader or partnerships.
Conclusion
There are a number of options available to anyone starting a business. Each has its own advantages and disadvantages and it is clear that what route is taken can only be determined through careful consideration of all the issues and factors involved.
Sources of Information / References
Spadaccini, M. (2007) Business Structures: How to Form a Corporation, LLC, Partnership, Sole Proprietorship, p6-15
Business Essentials (Supporting HND/HNC AND FOUNDATION DEGREES) Sept, 2007 1st
Edition
, {Accessed October 1, 2008}
