Company law is used to control the various types of business organisation that exist in the UK.

There are many types of business unit suitable for different purposes and involving different legal obligations and imposing different liabilities. The most common are:

  1. sole traders
  2. partnerships
  3. private and public limited liability companies

Most small firms are sole traders or partnerships because they are simpler and so can be formed quickly.


Sole Trader

A sole trader is someone who is in business on their own as a self employed person, and it is the most popular way to run a business in the UK. The Sole Trader is personally liable for all of the debts of the business and bears the entire risk of the business operations. However, in return for the risk, they can take all the profit which the business may yield.

If a sole trader dies or retires then the business ceases.

 

Advantages

Sole traders can:

  1. Form business with little formality;
  2. No need to register with Companies House;
  3. No need to disclose financial information to any organisation apart from HMRC;
  4. Own all of the assets of the business;
  5. Take risks more easily than other forms of organisation;
  6. Maintain tight control over the business;
  7. Retain all profit;
  8. Make decisions without needing to refer to others;
  9. Alter the capital employed in the business.

 

Disadvantages

However, the downsides are:

  1. Can carry less prestige, in that some people prefer to deal with a limited company
  2. Personally liable for all debts;
  3. Everything depends on one person;
  4. Management of the business is in the hands of one person;
  5. Expansion may be difficult if financial resources are limited;
  6. Harder to sell the business as a sole trader.

Partnership

A partnership is formed by the association of at least 2 people, who share the risks and the profits of the business. It can be created informally and dissolved informally. It can be formed by a signed agreement, an oral agreement or even implied from the actions of the persons concerned.

A more formal arrangement would involve the use of a ‘partnership agreement’. This agreement is signed by all partners and contains the conditions under which the partners intend to carry out their business. The information contained would includes:

  1. Name of the partnership;
  2. Names of partners;
  3. Amount of financial contribution from each partner;
  4. Ratio in which profits and losses are to be accepted;
  5. How accounts are to be kept;
  6. Length partnership is intended to exist.

 

Advantages

A partnership has the following advantages:

  1. Set up with minimal formalities or expenses;
  2. No need to register with Companies House;
  3. No need to disclose financial information to any organisation apart from HMRC;
  4. Responsibilities can be shared and gives flexibility of control;
  5. Potentially greater capital and wider expertise being available.

 

Disadvantages


The disadvantages are:

  1. Partners have unlimited liability;
  2. Problems can occur if disagreement between partners.

Limited Liability Partnerships (LLP)

Limited liability partnerships are, in essence, half way between a partnership and a limited company. LLPs combine the flexibility of partnerships, with the protection afforded to limited liability companies.

Two or more people can form an LLP by registering it at Companies House. There must always be at least two partners and usually the maximum number of members is 20.

LLPs must file abbreviated financial statements at Companies House. They do not pay corporation tax but pay taxes on income. An LLP shares many of the features of a normal partnership but it offers reduced personal responsibility for business debts. Unlike members of ordinary partnerships, the LLP itself is responsible for any debts that it runs up, not the individual partners.


The Limited Company

When a limited liability company is formed, shareholders provide the funds to start the business. They do this by purchasing shares, issued by the company and they effectively become the owners of the business.

The shareholder’s liability for the debts of the business is limited to the amount they have spent on shares. The shareholders have no liability for the businesses debts because the company is treated as a separate legal person, differing from the shareholders who have created it.

When a limited company is brought into existence it can enter into legal contracts, own property and be sued for breaches of civil law.

 

Advantages

Creating a limited liability company has several advantages. These include:

  1. Limitation of shareholder liability;
  2. Tax advantages over a sole trader;
  3. Greater access to capital invested by outside sources;
  4. Choice of company names is restricted meaning and no-one else can use it. The only protection for sole traders and partnerships is trademark legislation;
  5. The company can out live its directors and shareholders, meaning that, with a family business say, it can easily be passed on to future generations;
  6. Added credibility: which can make it easier to borrow money, raise capital and achieve financing without personal risk.

 

Disadvantages

  1. Formal registration process;
  2. Requires memorandum and articles;
  3. Prescribed roles and obligations for directors;
  4. Information about the company’s finances is accessible to the public;
  5. Must hold annual meetings and the shareholder and directors have specific formalities to observe;
  6. Must pay annual fees and have periodic filing obligations;
  7. Owners have less personal control over the company compared to sole traders, due to compliance issues.
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