Business Structures: Types, Characteristics And Legal Regulation

This report explores the four principal business structures, and provides an evaluation of each. The business structures I will be discussing are as follows: Sole Proprietorship, Partnership, Limited Liability Partnership and Registered Company.

Sole Proprietorship

This is a one-man/woman business. Anyone can set up a business and start trading under their own name, or a business name. The sole trader has total control and all the profits are his or hers. Total responsibility for legal liabilities and financial risks of the business falls on the sole trader. They provide all start-up capital, which will usually be a bank loan secured by a mortgage on the owner’s home. There is the risk of bankruptcy as the sole trader is personally liable for all business debts.

Partnership

A partnership involves two or more people working together with the intention of sharing profit. This business structure can be described as an unincorporated association, an organisation with no legal personality of its own. Traditionally, it is favoured by many professionals, including accountants. Facilities can be shared which may not be affordable for a sole trader. In a partnership, start-up capital and expertise can be drawn from a number of people. The partners often raise contributions through a bank loan, for which they are personally liable for. There are types of partnership. These are Traditional Partnership, Limited Partnership and Limited Liability Partnership.

The Traditional Partnership is usually formalised by a written agreement, referred to as the partnership deed. This isn’t compulsory; the partnership may be implied by the conduct of two or more continuing the business as joint proprietors intending to make and share the generated profit. The partnership exists from when the business starts functioning. A written partnership agreement makes it clearer and acts as evidence indicating the name and nature of the business, as well as the amounts invested by each partner. Such a partnership can involve ‘sleeping partners’. They are involved in providing capital and taking a share of the profits. In this case, the agreement should state which partners are responsible for management. As previously stated, there must be at least two partners. Partner relationship involves trusting each other. Each partner’s duties include making a full disclosure to each other regarding relevant issues to the business, declaring personal financial benefit received arising from the business, and only to compete with the firm with consent of the other partners. When carrying out business on behalf of the firm, a partner is seen as an agent. The act only within their legal authority and must fulfil their duties with reasonable care and skill. The Partnership Act 1890, which governs the creation and regulation of partnerships, states that partners have clear authority to execute any transaction relating to the business. Any resulting contract is automatically binding to all partners, regardless of whether they signed it or not. Partners are personally liable for any unsettled debts, even if legal action is taken against a partnership in its own name. A partnership may be dissolved due to a number of reasons. Partnerships may be formed with a specific lifetime stated in the agreement. The sole purpose of the partnership may be achieved. If provisions are not made, dissolution can occur due to death or bankruptcy of a partner. The partnership’s purpose may become illegal, in which case the contract will be frustrated. If there is no provision in the agreement, the partnership will terminate if a partner decides to leave. The court can be asked to dissolve the partnership on the grounds of incapacity of a partner or misconduct by a partner. A partnership can also be dissolved by court if it is just and equitable to do so like in the case where a business can’t continue without making a loss.

The second type of partnership is the Limited Partnership. The Limited Partnerships Act 1907 allowed the creation of such a partnership. It includes a number of sleeper partners who don’t have an active role in running the business and are only liable for the amount of capital they invest. The managing partners again have unlimited liability. Decisions may be better as they are made only after discussions. Similarly to a sole proprietorship, capital is generated from within the business, through bank loans and partners’ money. Generally, there would be more capital available than in a sole proprietorship. Sleeper partners can also be included. However, managing partners will be personally liable for any unpaid debts and liabilities. There is a lack of sources of capital and, together with unlimited liability, limits business development. Furthermore, there may be greater inflexibility as decisions need to be agreed on collectively and unanimously. If this doesn’t happen, conflict between partners may arise.

Limited Liability Partnership

The Limited Liability Partnership (LLP) is the third type of partnership and is governed by the Limited Liability Partnerships Act 2000. They can be described as partnership/company hybrids. This partnership requires registration with the approval of the Companies Registrar. It requires an incorporation document. Once registration is complete, the LLP becomes a legal entity and each partner’s liability limited to the amount they invest in the firm. Property can be held by the LLP, and can sue and be sued in its own name. For the purposes of tax, LLPs are recognised as partnerships even though they are incorporated. Incorporation means that the LLP must publish annual audited accounts to the Companies Registrar which are made available to the public. In partnerships other than LLPs, business affairs aren’t subject to public scrutiny than those of a sole proprietorship. Relevant tax returns must be submitted and the planning requirements of local authority regarding business use of the premises must be met.

The LLP business structure is unique due to its mixture of individual and collective rights. It offers infinite flexibility as there is no requirement for an ‘LLP agreement’ to be written. Partnership agreement regulations apply here. LLPs offer the same benefits as partnerships with the extension of limited liability. This aids in a more protected investment allowing for possible expansion. However, there is the requirement of certain documents and financial statements to be submitted in this business structure. Hence, the cost of setting up and running a LLP is higher than that of a traditional and limited partnership.

Registered Company

This is a corporation formed in compliance with the registration procedures in the Companies Act 2006 and overseen by the Companies Registry. There are a number of purposes of the registration process. It checks, before trading, whether a business is financially feasible, has a good chance of success, and will most likely be managed properly for legal purposes. It provides a public record of similar businesses, which may be analysed by interested parties before dealing with them. It protects against fraud. It allows the Companies Registrar to continue supervising the company. There are two types of registered companies; public company and private company.

According to the Companies Act 2006, a public company is limited by shares, ‘plc’ is stated after its name, liability is limited, it is registered at Companies House, and ‘public company’ is declared in its certificate of incorporation. It must have at least £50,000 issued share capital. It is a public company because its shares can be transferred to members of the public. Listed shares can be traded on the London Stock Exchange. Hence, capital can be raised easily. Shares are only listed if an application for listing satisfies the requirements of Financial Services and Markets Act 2000 and Listing Rules issued by the UK Listing Authority. Usually, only large public companies will be able to list their shares.

The Companies Act 2006 tells us that any registered company, which isn’t a public company, is a private company. It is required to add ‘limited’ or ‘Ltd’ after its name. With this business structure, shares can only be held by participants in the business. Majority, or all, of the shareholders manage the business. The transfer of shares is controlled by rules of the company. If a member was to leave, he or she may be required to sell back the shares to existing members, or gain permission before selling them to a third party.

With a registered public company, more capital is available as shares can be sold publically compared to private registered companies. In both types, the business is a separate legal entity so liability is limited. However, formation costs are high. Certain documentation needs to be completed and submitted. Accounts must be published and are available to the public. Profits are also distributed to shareholders through dividend payments. Ownership and control are separated as the shareholders own the company but the Board of Directors makes the decisions. There may be a conflict of interest causing problems within the business.

Conclusion

Having discussed and assessed each business structure, I have come to the conclusion that each of them has its own advantages and disadvantages. A sole proprietorship allows for flexibility in procedures, avoids significant regulation and allows employees to be taken on. However, liability is unlimited so their personal assets are at risk in the event of unpaid debts of the business. Furthermore, this is a business structure where there is only one individual running and managing it. A traditional partnership isn’t much different; the only added benefit is that more capital is available as resources can be shared between partners. There may actually be less flexibility in implementing procedures of the business as it requires the agreement of all partners. The business can be operated in private without public scrutiny. A Limited Liability Partnership fulfils most of the aims. Partners’ liability is limited to the amount they invest into the business. The costs of setting up the business are higher as certain documents must be submitted. This type of partnership is subject to public scrutiny. A registered company does have the benefit of more sources of capital through the selling of shares but again costs in running the business are great. Financial statements must be submitted and are available for public scrutiny. Shareholders may own the business but it is controlled by the Board of Directors.

Bibliography

1. Adams, A 2016, Law for Business Students, 9th edn, Pearson Education Limited, Harrow
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3. Macintyre, E 2016, Business Law, 9th edn, Pearson Education Limited, Essex