Basic Business Types Explained
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What would the advantages and disadvantages of remaining as a privately owned family business with me as a sole trader?
Your family have been in the greetings card business for 35 years now, amassing a great deal of experience in this field; consequently there are certain advantages for keeping the business Ðfamily run, advantages that you dont often find in other enterprises:
Loyalty: A family has strong personal bonds; through times of hardship a family run business is more likely to stick together.
Lower Costs: When there are shortages in cash flow, family members may be more willing to make personal sacrifices, such as accept a reduced salary or even deferring their wages altogether.
Stability: The goal of building the business for the future family generations provokes long term planning, needed for growth and profitability.
The Principle advantage of such a business model is that as sole owner of the business, all profits go to you.
Remaining as a sole trader, you would maintain direct control over the business; so all decisions relating to the day to day running of the business along with its future development are made by you. You dont have to seek anyone elses approval before taking any course of action.
There is no registration process and no public information available; so unlike a limited company your annual accounts are not available to your competitors.
The administrative costs of running as a sole trader are relatively small, you will still need to keep records for Inland Revenue (and also for VAT if you are VAT registered?), but there are no other legal requirements. Although your accounts must of course be accurate, you do not need to have them audited.
On the disadvantage side; from a legal standpoint you are personally liable for any debts that the business may incur. If the business requires any extra capital it will be up to you to raise the money out of your own assets and/or through bank loans. In the case of bankruptcy, the money owed to the business can be claimed (subject to restrictions in law) from your personal goods and income.
When it comes to taxation, there is no real clear cut answer here, as it is reliant on a number of different financial factors regarding the operation of the business. What I will say though, is if you pay the higher rate of tax (at present 41%), you would pay less as a limited company, but your accountant will be able to better advise you on this
In terms of credibility, sole traders often feel at a disadvantage when negotiating with large corporations. “Ðpeople expect a one man band and dont expect to pay top prices for your services.” (Williams, [online] ). Consequently many people feel that trading as a limited company gives them extra credibility and a more professional image.
What would be the advantages and disadvantages of forming a partnership with a fairly rich friend of mine who is interested in joining the business? How should we go about legally forming a partnership?
A partnership in many ways can be considered similar to the sole trader structure; you are (put simply) sharing the ownership, responsibility and liability of the business with one or more person(s).
The first obvious main advantage is that your friend is going to be bringing with them a fair amount of extra capital to invest in the business, which you otherwise would have to raise yourself.
Two heads are better than one; especially if this is your first time running a company of this size, a partner can help and advise you, bring new ideas and a new perspective on things. Perhaps also bring additional contacts into the business. Partners can cover each other during times of absence, e.g. holidays or illness. You will be able to share the workload, with the potential for both of you to specialise in different areas of the business.
On the tax front, each partner pays tax on his or her share of the profits as if he or she were a sole trader.
Disadvantage wise, you are still personally liable should the business fall into financial difficulties, whether they were incurred buy you or not. Should your partner die or go missing, you are also legally obligated to pay their share of their debts. On the death of a partner the partnership is terminated and therefore the process of forming a new partnership has to be taken.
You would be sharing control of the business; so all decisions and actions made should be agreed by both partners, you would no longer have direct control as with the sole trader model. Decisions may take time to reach if you are both in disagreement. You will also be sharing your profits with your partner.
For the business to be considered a legal partnership there has to be at least two owners, there are a two types of partnerships:
A Full Partnership: Is the most common type of partnership, I have already outlined this above, it is subject to The Partnership Act, 1890 for more information see (Inland Revenue, [online] ).
A Limited Partnership: Is formed when one or more of the partners invest capital into the business but do not participate in running and managing the business. These partners therefore have limited liability as they can only lose the amount of money that they initially invested into the business. The law states that there must be at least one partner that has limited liability and at least one partner that has unlimited liability. This is subject to The Limited Partnership Act, 1907 for more information see (Inland Revenue, [online] ).
From a legal standpoint, under the Companies Act 1985, only limited companies need to be registered with Companies House. “If you are a sole trader or private partnership you do not need to register, but people running these businesses should notify the Inland Revenue and National Insurance Contributions Agency about their change in employment status so that the relevant contributions can be made. ” (Microsoft bCentral, [online] )
It is however necessary to have a partnership agreement, although this need not be written. The aim of the agreement is to provide a structural breakdown of the business, with respect to each partners responsibility, rights, profit/liability sharing, and also how the partnership can be terminated. It would be in your best interest to involve a solicitor in the creation of the agreement