Advaced Business Structures - Essay Example

Advanced Business Structures Introduction and Types of Businesses There are various types of businesses an entrepreneur can choose from. From the following, we can study the types of Business Structures available to an Entrepreneur to establish a business: Sole Proprietorship: An unincorporated business owned by an individual which is not treated as a separate legal entity from its owner is called sole proprietorship. The proprietor and his business are "one" legally. The individual receives all profits and losses and is liable to the obligations of the businesses in most countries. They are typically they are the smallest in size. Most cities and many countries require businesses - even tiny home-based sole proprietorships to register with them and pay at least a minimum tax. And if you do business under a name different from your own, such as a custom coding, you usually must register that name - known as a "fictitious business name" with your country. Advantages of Sole Proprietorship 1. Cheap Setup Cost - There are no legal complications in setting up a sole proprietorship. There are no minimum or maximum limits for capital thus even qualifying small business units with less capital as a Sole Proprietorship. The business is flexible in its operations as it can engage in any other operations without any restrictions as it may be in the case of Limited Companies. 2. Reduced Operating Costs - Sole proprietorships are easy to setup and to maintain. Much of the running of the business is done by the owner, saving on labour costs as there is no requirement to hire professional help. Also since this type of business is run by the Proprietor, prompt decision making is possible thus enabling the proprietor to capture business opportunities as they arise. 3. Avoidance of Corporation Tax - At the time of paying income tax, a sole proprietor simply reports all business income or losses on his or her individual income tax return. The business itself is not taxed. Sole proprietor is not required to pay Corporation Tax because it is not a separate legal entity from its owner, so the business will not be taxed separately. Personal tax is slightly lower than corporation tax. 4. Reduced risk - An advantage of running a small business is that they don't face much of a risk of racking up large debts. For instance, if you're engaged in a low-risk enterprise such as freelance editing, landscaping or running a small band that plays weddings and social evens, your risks of facing massive debt or a huge lawsuit is pretty small. 5. Subject to Governmental Regulations - As stated above, there is no regulation on minimum or maximum capital, the sole proprietorship is not required to file its accounts with the registrar of companies, there is no need to produce memorandum or article of association. There is also no compulsary audit as it is the case with Limited Companies. Disadvantages of Sole Proprietorship 1. Failure to raise funds - Many financial institutions consider sole proprietorship as risky ventures and are not willing to extend finance to these entities. Sole proprietor may not be able to raise capital on his own unlike in partnership where they are able to share the financial burden of raising funds. 2. The Proprietor has unlimited liability - The liability of the sole proprietorship is bound to the proprietor since this type of business is one with its owner. Therefore the liability of the business is ultimately the liability of the proprietor. Since there is no law binding the owner regarding limited liability, this can prove to be fateful if the owner takes a huge loan and cannot repay. 3. Lack of Business Skills - The proprietor does not avail the services of any professional, hence conducting the day-to-day business on his own. In many businesses, the lack of the proprietor's experience would be detrimental to the health of the business unlike a Public Limited Company, where professionals are hired to conduct the day-to-day business. Partnerships : A partnership is a relationship that subsists between two or more persons carrying on business with a common view of sharing profits of the business. The partners share profits or losses according to the agreed upon formula. It is established by signing a partnership agreement, the shares of profits (or losses) are ascertained alongwith details like responsibility, termination etc. Generally, any partner can bind the partnership to another party and if necessary the personal resources of each partner can be called on to pay obligations of the partnership. Therefore the partners are joint and severally responsible for the debts incurred by the business. The various types of Partnerships are General Partnership and Limited Liability Partnership (LLP). General Partnerships : Usually when you hear the term "Partnership" it means general partnership. General partners are personally liable for all business debts or as specified / mentioned in the partnership agreement. Limited Liability Partnership (LLP) : An LLP is a body corporate and is formed by incorporation under the Limited Liability Partnerships Act. It exists as a legal person distinct from its members. A limited liability partnership has the legal capacity to anything that a natural person can do. It can own UK real estate, enter into contracts, trade, develop and invest, enter into deeds, sue and be sued, enter into funding and financing agreements and grant security over its assets in its own name. It has rights, liabilities and obligations separate to and independent of its members. The liability of individual members in this type of a business is limited thus they can enjoy the benefit of a sole proprietorship. This advantage can be contrasted with the liabilities of partners in general partnership who are jointly and severally liable for the debts and obligations of the firm. The personal assets of a member of LLP will not be at risks for acts of the LLP or other members. The LLP (and not its members) will be liable to third parties. There is no requirement for a minimum capital commitment from members or for a guarantee from members of the obligations of the LLP. A limited partnership requires at least one general partner and one limited partner. The general partner has the same role as that in a general partnership, where he conducts day to day business of the partnership organization and is personally liable for business debts. The limited partner, contributes financially to the business (invests capital into the business) but has minimal control over business decisions. In return for giving up management power, a limited partner gets the benefit of protection from personal liability. This means that a limited partner can't be forced to pay off business debts or claims with personal assets, but can lose an investment in the business. The only exception is when a creditor can prove that the limited partner took acts that led the creditor to believe that he or she was a general partner, the limited partner can be held fully responsible and liable for the creditors claims. While starting a Partnership Company, the following documents are required, 1. Name of the partnership and partnership business 2. Date of partnership creation. 3. Purpose of partnership 4. Contributions (cash, property and work) of each partner to the partnership. 5. Each partners share of profits and losses. 6. Provisions for taking profits out of the Company (often called Partners Draws). 7. Each partners management power and duties. 8. How the partnership will handle departure of a partner, including buy-out terms. 9. Provisions for adding or expelling a partner. 10. Dispute resolution procedures. Advantages of Partnership Cheap Setup Cost - There are no legal complications in setting up just as in sole proprietorship. There are no minimum or maximum limits for capital as in Public Limited Companies. The business is flexible in its operations as it can engage in any other operations without any restrictions. Capital Raised - The amount of capital raised by the Partnership business is more than that of a Sole Proprietorship though not as much as at Public Limited Company, giving it more privileges than a Sole Proprietorship. Reduced Tax Liability - Just as in sole proprietorship, the partnership is not required to pay Corporation Tax. Each Partner is assessed on an individual basis, the basis being profits allocated from the partnership business. Since Individual Tax is lower than Corporation Tax, there is availability of benefit for the partners. Private Limited Company : It is defined as a company which is not public. The features of a Private Limited Company are: 1. A Private Limited Company requires at least two members and the maximum number of members is restricted to fifty. 2. The word "Private Limited" is to be attached at the end of the name of the Company. 3. A Private Limited Company is not allowed to offer its shares for subscription to the public. Public Limited Company (PLC, Plc, plc): Unlike a sole trader or a partnership concern, the Limited Company is legally a separate entity. The term "limited" derives from the fact that the company's finances are distinct from the personal finances of their owners (unlike the sole trader arrangement). The main advantage is that the liabilities (debts) of the company are completely separated from its directors and owners. When forming a PLC, there must be at least 50,000 worth of share capital for which 25% must have been paid for. There is a need for at least 2 shareholders and 2 directors, one of whom can be Company Secretary and there is no restriction to the maximum number of members. When a limited company is created, it has an authorising shareholding which defines the limit of the shareholding liability. Its Memorandum of Association must state that it is a Public Company and has registered as such with the Registrar of Companies. A PLC needs a certificate of Entitlement (the Trading Certificate) to do business and borrow capital. The directors and shareholders have limited liability in the business. Advantages of a Public Limited Company Limited Liability of Members - There is no requirement for members to make a contribution out of personal property for the debts of the business as the liability of the members is restricted only an amount of unpaid shares for the company. Ability to raise more capital - Inviting venture capitalists or other potential shareholders is relatively easy for limited companies than in other forms of businesses thus giving Public Companies an advantage of obtaining long term finances from institutions. Business Continuity - As it is easy to transfer ownership through share transfers, it is also easy to pass ownership of a company from generation to generation. The limited. The companies also attract and maintain quality employees, resulting in efficient operation in the business. Disadvantages of a Public Limited Company Tax Burden - A Limited Company is subject to high tax rates and the shareholders are subjected to double taxation. The company's profit is subjected to tax and when shareholders receive dividends they are also taxed. High Setting and Operation Costs - A Limited Company has to go through rigorous stages in order to be registered. The company is required to file its accounts with registrar of companies and tax authorities annually. Conclusion Allthough there are many differences among the various types of business organiations, most business owners choose an operating structure based on one important legal issue - the personal liability of owners for business debts. Since we are considering forming a Tax Consultancy Agency, with two retired civil industry employees, it will be prudent to choose a Limited Liability Partnership (LLP). The investment that the partners bring in can be utilized towards setting up and running of the business. Also since the services that will be offered are professional, most professionals prefer to keep a separate personal liability from their business, which the LLP allows. The partners can also avoid Corporate Tax and avail of Tax Benefits as provided to Limited Liability Partnerships. Thus based on the study, I would like to conclude that the Limited Liability Partnership (LLP) is the best suited option for the Tax Consultancy Agency. References http://www.ukincorp.co.uk http://www.cbdd.wsu.edu/kewlcontent/cdoutput/TOM055/page30.htm Spadaccini Micheal, Business Structures : Forming a Corporation, LLC, Partnership, Sole Proprietorship. Read More