Advantages of Running a Private Limited Company in Comparison to Other Forms of Business Units - Coursework Example

Student Number Module Name Module Number Word count: 1980 March 23, 2015 COURSEWORK QUESTION: Steve, a friend of yours, is a sole trader who currently runs a well-established domestic carpet fitting business. Ramesh and Trevor, who are also sole traders, ask Steve if he would be interested in setting up in business with them. Ramesh currently runs a business fitting floor and wall tiles, whilst Trevor runs a business laying laminate floors. Ramesh and Trevor suggest that if they all work together they can offer a comprehensive service, fitting all three types of floor coverings in the domestic and commercial markets. They will also be able to work together and help each other out when needed. Steve likes this idea and is considering their suggestion. Steve has the most business experience and also has £15,000 he is prepared to invest in their new business. Ramesh has some good commercial contacts and £10000 he could invest. Trevor has the least experience and would only be able to invest £5,000. Ramesh and Trevor have indicated to Steve that they want an equal say in managing and running the business. As Steve is prepared to invest the greatest amount of capital in the business he is very concerned about the financial aspects of their business plans and wants to know how he could protect his finances if their business venture should fail. He is also concerned about the potential management structure if they all have an equal say in running the business. In particular as he has the most business experience and is investing the most capital he thinks he should have a greater say in how the business should be run. In deciding whether or not he should set up in business with Ramesh and Trevor, Steve has asked you to prepare a report explaining the following matters to him. Advantages of a limited liability company A limited liability company refers to an enterprise with limited liability. In other words, a limited company makes a provision for the owner of the business (entrepreneur) to keep their personal finances and assets completely separate from those of the enterprise itself. In a limited company, the shareholders can only suffer loss equivalent to the amount of money that have invested in the company in case the company goes under. It is usually a separate entity from the owners and one that can undertake legal functions such as suing and being a director for other companies. The Companies Act of 2006 establishes that a private limited company can be incorporated with one member and that it cannot sell shares to the public. Based on these specifications, Steve, Ramesh and Trevor should set up a private limited company (Easterbrook and Fischel, 2010). By changing from a sole trader to a limited company, an entrepreneur enjoys a number of advantages. First, the entrepreneur enjoys the limited liability protection. A public limited company is a separate legal entity entirely distinct from the directors. The implication from this is that in the event that the business is sued for defaulting debt payment, the personal assets of the directors such as houses and cars are cushioned from seizure, to repay the debt. However, the individual assets of a director can be seized in case the director has provided a creditor of the company a personal guarantee. On the other hand, the business of a sole trader is the same legal entity as the owner. The personal property of the owner can be seized to pay debts incurred by the enterprise (Easterbrook and Fischel, 2010). A private limited liability company being a separate legal entity from the owners means that the life of the business is not determined by the life of the owners. In the event one of the owners dies; the remaining members continue to manage the company through drawing new agreements as stipulated by law. There is, therefore, security for other members and employees. All other forms of business do not enjoy this advantage. Another advantage of operating a private limited company as opposed to a sole trader business is that it allows the members to make savings on taxation. Limited companies only pay tax on profits at 21% which keeps the directors from paying the higher personal taxes as in the case of sole traders who can pay as much as 40% in tax. Members of the limited liability company can save on taxes through paying themselves at the minimum wage levels of £ 6,475. Paying themselves at this level would mean that they do not pay income tax which typically is charged at 20% on earnings up to £ 37,400 and at 40% on profits above £ 37,400. In addition to the minimum wage strategy, the members can still utilize a strategy of paying themselves in dividends as opposed to paying a packet. Dividends are taxed at 10% and do not attract National Insurance (NI) charges. Paying in dividends is beneficial even to the company because they instill an incentive to work harder in the members in order to make more profit. Dividends are paid on money over the profit of the enterprise (Morse and Worthington, 2009). Also, registering the business name forms part of the registration process of a limited company. The name gives the company an identity in the marketplace and separates it from others in the market. Company name gives the business a very fundamental platform to sell and establish itself in the market. Furthermore, in a private limited company the principal shareholders of the company are usually the directors. The implication of this is that they retain the ownership and the control of the company just in a sole traders business. Decision-making is still in their hands (Easterbrook and Fischel, 2010). Running a private limited company as opposed to a sole proprietorship provides better avenues to raise additional capital and to venture into markets. The synergy that comes with the formation of a private limited company results in diverse ways of obtaining additional investment. Also, the shareholders coming together to form the private limited company carry with them into the business their previous markets. The advantage is greater in the case where the products of the shareholders complement one another. Steve, Ramesh, and Trevor will realize this benefit. The procedure for opening a private limited company To register a company in the UK a promoter must first of all choose a business name. The name must be chosen thoughtfully involving all members since the name forms the essential selling point for the company to prospective clients. The company name must be approved by Company House. The promoter can check for the authenticity of a proposed company name online on Company House website to ascertain that it does not match a name of another company. After choosing the name the individual ought to gather all the necessary details required in the registration process. These details include the business name, office address which must be registered, company director and shareholders details- the telephone number, National Insurance number, maiden names for both father and mother, eye colour and passport number (Gov.uk, 2015). Once these details are ready, the members will have to draw the constitution of the company. The constitution includes the Memorandum and Articles of Association. The Memorandum of Association acts as the confirmation that the members have agreed to start the company. The Articles of Association serves as the rule book for the company. The two documents must be filed with Company House on registration. The process can be undertaken electronically (Gov.uk, 2015). The next step is the actual registration of the company. The promoter can choose from three available options at this point: online registration, Companies House’s online portal and paper filing the 1N01 form at a standard fee of £13, £15 and £40 respectively. The business cannot, however, start operations before its formation is approved. Once the registration is done, the Companies House undertakes checks of the information provided. The process usually does not take long. Where the online registration option was used, the process could take as less as 6 minutes. The form 1N01 option typically takes the longest time process. However, it is the most secure (Gov.uk, 2015). Once the approval has been made, the next step should be scheduling a meeting for members in case of a limited company. It is advisable to hold the meeting within the first few weeks after incorporation. The meeting should cover most of the formalities arising from the registration process. These formalities include decision-making responsibilities, business promoter duties among others (Morse and Worthington, 2009). After incorporation, the law requires the company to set up and maintain company registers. These registers include the register of directors, register of directors’ residential addresses, register of members and register of mortgages and charges for a private limited company. There are options for registers available to the company. The company can either choose to maintain manual registers or to use online registers provided by products such as Inform Direct. The latter is preferable since the registers automatically update in case of any changes in the company officers or members (Morse and Worthington, 2009). The director(s) of the private company, with the indulgence of members, should set up a bank account for the company. In addition, the company must be registered with HMRC for VAT and other duties. Employees’ PAYE must be setup and registered. It is advisable to set up the company website which acts as a valuable online tool to reach and connect with customers. The Companies Act of 2006 requires that every private limited company must have at least one director who is a person and not another company. However, the company must not have a company secretary as was the case before April 2008. The Act further stipulated that a director must be of at least 16 years of age. At the registration of the company, there must be at least one shareholder to whom subscriber shares are issued. The shares are then transferred to the other members by the directors by filling Form SH01- Return of Allotment of Shares. The Article of Association stipulates the restrictions to be applied to the transfer of the shares. Under these arrangements stipulated by the law, there are normally no financial risks for the promoter (Arden, n.d.). Protection of the capital investment of the highest contributor In order to ensure that the capital investment of the largest contributor is protected, the private company should issue shares to the members. The company can issue shares of any number each with a given nominal value. For instance, the company can issue shares with a nominal value of £ 1 each. A member (shareholder) who wishes to invest £15,000 will be issued with 15, 000 shares. Each member’s decision-making power is then pegged on the number of shares they own. In other words, each share represents decision-making power. Doing so ensures that the highest contributor retains the highest decision-making power which guarantees him that his capital investment is protected (Kershaw, 2012). Another way of ensuring that the capital investment of the highest contributor is protected is by issuing dividends based on share capital invested. By default, the highest contributor gets the highest amount of dividends. By so doing, his initial investment in share capital gives him higher returns relative to other shareholders.In case the company suffers losses, the loss he undergoes is mitigated by the returns already received from the investment. In addition, while drawing the Article of Association, the highest contributor should take up the role of the company director, entitled to a director’s salary (Kershaw, 2012). Structure of management for a private limited company Pegging decision making on share capital also invested ensures that all members are involved in managing the company. It ensures that members participate in decision making without the greatest contributor being outvoted by the other members. For example, a member who contributes £15,000 has higher power in decision making than a member who invests £10,000. However, the greater contributor cannot make decisions exclusively without involving the lesser contributor (Kershaw, 2012). In addition, making the greatest contributor the director of the company bestows him with more decision-making power. He makes the day to day decisions in the running of the business. However, he must involve the other shareholders in making major decisions such as issuing of dividends. Reflection The paper used resources from a variety of sources ranging from books to online resources such as websites. The Companies House website provided detailed information on the process of registering a private company in the UK. It was very useful since the information was easy to understand and was outlined in steps. The website was also helpful in providing information about the taxation responsibilities of private limited companies. The Companies Act of 2006 forms the basis of all legal considerations of a private limited company in the UK. The two guides to the act used: Companies Act 2006 (UK): A New Approach to Directors’ Duties’ and Palmer’s company law: annotated guide to the Companies Act 2006 - provided adequate information on the requirements of the UK law concerning the formation and running of private limited companies. The guides explain the implications of the act of drawing of the Articles and Memorandum of Association. They were, therefore, very helpful. Limited liability and the corporation source book provided the advantages of running a private limited company in comparison to other forms of business units. The information from this source was supplemented with that from Company law in the context: Text and materials. The former also provided cases and examples in company law relevant to the question. The information contained in these two sources was very easy to understand. Bibliography Arden, J.M.H., n.d. Companies Act 2006 (UK): A New Approach to Directors’ Duties’(2007). Aust. Law J. 81, 162–167. Easterbrook, F.H., Fischel, D.R., 2010. Limited liability and the corporation. Univ. Chic. Law Rev. 89–117. Gov.uk, (2015). Companies House - GOV.UK. [online] Available at: https://www.gov.uk/government/organisations/companies-house [Accessed 23 Mar. 2015]. Kershaw, D., 2012. Company law in context: Text and materials. Oxford University Press. Morse, G., Worthington, S., 2009. Palmer’s company law: annotated guide to the Companies Act 2006. Sweet & Maxwell. Read More