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

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 traders Benefits and disadvantages of being a sole trader 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

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. Husband & wife partnerships Run video clip from internet – from link scroll down to “Couples working together” BUSS1.7 Choosing the right legal structure

Partnerships Benefits and disadvantages of being a partnership 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 5 Key factors – you tube Run video clip from internet 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

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

BUSS1.7 Choosing the right legal structure Limited Companies Incorporation Companies must be registered (Incorporated) at Companies House. http://www.companieshouse.gov.uk They must send to the Registrar of Companies the following: A Memorandum of Association – name, registered office and what the company will do Articles of Association – the rules for running the company Form 10 – details of directors and company secretary 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

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. Summary video Run video clip from internet 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. BUSS1.7 Choosing the right legal structure

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. Could be role play or written Written – response to a letter in a business magazine