Seting Up a Business as a General Partnership or as a Limited Liability Company - Assignment Example

Report Name Class Unit 1. Advise three friends what they should take into consideration when making up their minds if they should set up their business as a general partnership (unincorporated) or as a limited liability company (incorporated). Introduction Under the English law, partnership is defined as a relation in which persons carry out a business with a common view of making profit. In England, wales and North Island, the partnership is not viewed as a legal entity separate from its owners. Despite this, partnership is viewed as a person for the purposes of the Taxes Act. In Scotland, a partnership has a legal entity distinct from the partners. In Scotland, this can only be overridden for the purposes of CG. Limited partnership comes into existence through the Limited Partnership Act of 1907. This is where at least one of the partners comes with a restriction on the amount of liability or debts responsibility to the firm instead of having unlimited liability. Limited liability partnerships are formed under the Limited Liability partnership Act 2000 (Adams, 2013). The partnership is able to combine the flexibility of general partnership with the benefits of limited liability. This report gives advice to three friends what they should consider when starting their business as a general partnership or limited liability company. Analysis of the topic Rules for partnership Before venturing into any form of partnership, the first thing to consider is the existing rules. These rules determine the existence of a partnership. Partnership is formed through joint venture. Despite having joint tenancy, property, ownership, the partnership must be sharing the profits made by the venture. There must be more than sharing gross returns since the partners must be having a common right or interest on the property where the returns are obtained from. The prima facie evidence of partnership is the receipt of share of the profits (GOV.UK, 2015). This is only if the person receiving the share is not a widow of a deceased partner, not owed by the business, is an agent or servant being paid through contract of remuneration from profits or receipt of annuity through goodwill (GOV.UK, 2015). General partnership A general partnership has no legal existence which is distinct from the partners in UK. Thus, if a partner dies or resigns, this form of partnership must be dissolved. Under the English law, ordinary partnership is registered under the HMRC for the purposes of tax (GOV.UK, 2015). The partnership uses a nominated partner who does this through the self-assessment partnership. If a general partnership is in debts, all partners are jointly liable. The partner’s assets can be claimed by the creditors in case they default to pay a debt. This makes the partners unprotected in case their business fails (Monaghan, 2015). Limited liability Company Limited liability company (LLC) under the English law has own legal entity. LLC can also sell shares to public and companies to gain more revenue. They can also buy shares. Unlike the ordinary partnership, members of a limited liability partnership enjoy limited liability. Under the English law, limited liability implies the amount of money that each of the partner have invested in the business and any other personal guarantee. Members in a LLC take equal share of profits unless specified otherwise. Under the law, each member of an LLC is expected to be registered by the HMRC. LLC and every individual member must make self-assessment returns annually. The non-corporate members in a LLC are expected to pay income tax and contribute to the national insurance based on their profit share (De Lacy, 2013). Under the law, it is mandatory for the LLC to register and file accounts at the Companies House (GOV.UK, 2015). Advantages of general partnership Capital-In partnership, members can be able to put more capital into the business. The partners collaborate in funding the business giving it a higher potential for growth than sole business. Flexibility- in partnership, there is high level of flexibility. Partnerships are easy to manage and run since they are less regulated. Partners make the decision more easily than a company since they do not have shareholders to consult (GOV.UK, 2015). Shared responsibility- running of the business is shared by the partners. Partners may split their responsibilities based on skills and abilities. This makes them to make the best use of their abilities (GOV.UK, 2015). Decision making- in partnership, decision making is easy. Through partnership, organisations are able to work and achieve more than they can on their own. Disadvantages Disagreements- there are always a danger of disagreements among the partners. This can lead to disputes and dissolution of partnership. Agreement- in a partnership, every decision has to be agreed on. This implies that there is less freedom in management compared to sole-traders and companies which are run by directors. Liability-ordinary partnerships have their members subjected to unlimited liability. All members shares financial risks and liability of the partnership. The members do not have a legal identity separate from the partnership (GOV.UK, 2015). Taxation- this is a major disadvantage of partnership. The partners are expected to pay tax as sole traders and also submit a self-assessment tax annually. This may lead to higher taxation if partners bring more than a given level (GOV.UK, 2015). Advantages Limited liability Company LLC have all advantages of ordinary partnership but combines them with limited liability. The business has a separate legal entity from the owners. The owners have an advantage over ordinary partnership since they are not liable to business debts and liabilities (Riches & Allen, 2013). LLC have low risks and high tax efficiency. LLC can easily form strategic alliances LLC can access financial services easily Can sell shares to gain finances Disadvantages Same as ordinary partnership apart from the fact those members of LLC have limited liability. Discussion Looking at both general partnership and LLC under the English law, it is evident that LLC are better than ordinary partnership. Under the LLC, there is high tax efficiency. This is due to fact that members in a LLC are able to receive income through salary and dividends as opposed to general partnership (Adams, 2013). The risks are also reduced as company to ordinary partnership. Members in a LLC have their liabilities which are separate from the business. The business is a legal entity which is separate from that of the owners. This reduces risks in case the business goes wrong. Looking at both LLC and ordinary partnership, it is evident that LLC have a better professional image for the business. They are thus able to easily access finances than ordinary partnership (Adams, 2013). LLC are also more flexible than ordinary companies. Due to the fact that equity can be sold, limited companies become more flexible when looking for investment and funding. LLC provides a lot of freedom for the members. Under the ordinary partnership, there is unlimited liability for all members. The partners share the financial risks and liability of the venture. This makes the ordinary partnership more risky and discouraging for most entrepreneurs. The main advantage of LLC is taxation. Under the English law, partners get salary and dividends from shares. They are at a better position that partnerships (Kershaw, 2012). This is due to fact that in cases where the partnership is having more returns, the partners and business will be made to pay more taxes than a limited company would (Monaghan, 2015). Recommendations and conclusion The three friends should consider forming a limited liability partnership. This is due to the advantages it offers compared to ordinary partnership. The members should register the LLC at the company house and be ready to send annual return as well as file their accounts with the Companies house. The process is simple since HMRC helps in setting the tax records hence eliminating the need to register them. Through forming a LLC, the partner’s liability will be determined by the amount that they have invested in the business as well as personal guarantees (GOV.UK, 2015). Through forming an LLC, there will be increased freedom for the three partners. This is due to ease of making decisions and distributing the profits. LLC provides a viable alternative to limited partnership and ordinary partnership. This is especially due to the flexibility which members enjoy. They also combine the benefits of ordinary partnerships with those of the limited partnership. Through forming an LLC, it will act as a stand-alone venture which can engage in a strategic alliance. It is also easy for an LLC to contract any property in its own right. Analysis of both forms of partnership points out that the three friends should engage in a LLC as it will be more beneficial. References Adams, A., (2013) Law for Business Students. 7th ed. Pearson Education. De Lacy, J. (Ed.). 2013. Reform of UK Company Law. Routledge. GOV.UK, 2015, Running a business partnership, Retrieved 7th August 2015 from, https://www.gov.uk/set-up-business-partnership GOV.UK, 2015, Companies House, Retrieved 7th August 2015 from, https://www.gov.uk/government/organisations/companies-house GOV.UK, 2015, Choose a legal structure for your business, Retrieved 7th August 2015 from, https://www.gov.uk/business-legal-structures Kershaw, D. 2012. Company law in context: Text and materials. Oxford University Press. Monaghan, C., 2015, Beginning Business Law. Oxford Routledge. Riches, S. & Allen, V., 2013, Kennan and Riches’ Business Law, 11th, ed., Harlow, Pearson Education 1. A business associate, who has taken on a new role as Operations Manager of a small business, has asked you to help her to explain the difference between an employee and an independent contractor to her Managing Director. Introduction In United Kingdom, a worker can either be an employee or an independent contractor. The levels of protection differ for an independent contractor and an employee in the UK based on the English law (Lockton, 2011). Under the English law, there are three types of employment. The types of employment are; self-employed, independent contractors and employees (Kelly, Hammer & Hendy, 2014). Each of the categories has their employment and protection rights. This report explains to an Operation manager of a small business to understand the difference between an independent contractor and an employee under the English law (GOV.UK, 2015). Independent contractors Under the English law, an independent contractor is on business based on their own account (Lockton, 2011). They are responsible for making their own business decisions on way to perform the job. The employer of an independent contractor is fee from a lot of statutory of employee protection legislation. The individual working as an independent contractor is also put in a favourable tax position. To distinguish an independent contractor from an employee is very important. This is due to fact that it helps in determining the liability that a person should pay as tax, social security and health insurance. An independent contractor should be someone who is in business for themselves. An independent contractor can exist as a sole proprietorship, partnership, limited liability or corporation. The contractor earns living on own and does not depend on the employers. As an independent contractor, one is responsible for their health insurance and submits their tax returns(Kelly & Slapper, 2013). Employees An employee’s performs services for the employer and is fully controlled by the employer. The employer determines what to be done and how it will be done. Employee can thus be defined as someone who carries out duties through being dictated by others usually the employer. The employee in most cases has to undergo training for the job and in most cases works for a single employer. The employer has the sole right to terminate the employee. The employee uses tools and place of work which is provided by the employer (Zander, 2007). Determining employee and independent contractor Courts have been able to help in determining whether one is an employee or an independent contractor. The main categories that have been used in courts are; bahavorial control, type of relationship and financial control (GOV.UK, 2015). Through bahavorial control, the court looks how the business is able to control the work done through giving instructions and training. Based on this, o the employee is told when and where to work, where to buy the supplies and the specific tasks to perform. There is also need to understand that an employee is offered training in order to perform the services (Kelly & Slapper, 2013). The second factor to look at is financial control. This looks at the ability of a given business to control the financial aspect of workers. This involves looking at the how the worker is reimbursed on expenses, workers investment and the payment made to the worker. Lastly, work relationship looks at the ways in which both parties’ looks at the relationship. This involves the written contracts which define the relationship (Painter & Holmes, 2012). Based on the Employment Standards Act, an employee is defined as (Painter & Holmes, 2012): A person whether a live or deceased who is entitled to a wage for the work done. A person who works for an employer to carry out tasks performed by employee. Anyone who have a right of recall Someone trained by an employer for an employer business Anyone on an employer leave The act considers an independent contractor as self-employed. According to the Act, an independent contractor has to be in business for themselves. Test To make it easy to differentiate between the two, a simple test can be applied as follows: Control- the higher the degree of control, the more likely that someone is an employee.to determine control, one has to look whether the person is acting under the direction and control of another person. There is need to look whether the person is hired, controlled or under instructions. While looking at control, one has to determine whether the person is working for themselves or someone else (Zander, 2007). Ownership of tools- an independent contractor owns their tools, space, supplies and equipment. It the tools, space and supplies are owned by another person, this becomes an employment relation. Despite this, some of the employers have provision for employees to have their own tools and equipment (Painter & Holmes, 2012). Chance of profit-this involves looking at the chance of profit a person have. If the income is a difference between the cost of the service and the price, the person is likely to be an independent contractor (Kelly & Holmes, 2011). Risk of loss- independent contractors is at higher risk of loss. They can lose money if the cost of doing a task is higher than the charged price. Payment- for an employee, they are paid a regular amount at given intervals. They are also paid regardless of the customer satisfaction unlike the independent contractors (Painter & Holmes, 2012). Independent contractor agreement It would also be advisable to have explicit independent contractor agreement. This will help in making a clear distinction between an employee and an independent contractor. The agreement must sate clearly the existing relationship and the specific deliverables. The agreement is also not expected to show any type of control. Under the agreement, the employer does not have any control on how the work is done and should not provide any instructions, training or any other services to the contractor (Monaghan, 2015). Through drafting the agreement, the business and contractor are prevented from any task issue that may arise which can lead to an investigation. Legal consequences The above criteria will help in determining whether a worker is an employee or an independent contractor. There are dire legal consequences if an employee is treated as a contractor. Most of the liabilities are based on the statutes that impose obligations for the employers to employees and the expected remuneration for the employees (Zander, 2007). If an individual previously labelled as an independent contractor is an employee, the employer can be held liable of withholding tax. An employer is supposed to remit tax from employees’ salary. An employer who has failed to remit employee tax is liable to penalties and pays all the taxes. The employer will also be required to pay health insurance deductions, penalties and interest. The employer may also be forced to pay employee vacation, leave and overtime wages among other as provided by the employment law. This makes it vital for carrying out a comprehensive determination on whether an individual is an employee or an independent contractor in a business (Kelly & Slapper, 2013). Conclusion The relationship that exists between an employee and employer is very different from that which exists between an independent contractor and employer. Employees are treated differently from the independent contractors on taxes and their penalties vary. By using the set test, it is possible to determine whether one is an employee or an independent contractor. References GOV.UK., Employment status, Retrieved 7th August 2015 from, https://www.gov.uk/employment-status Kelly, D., Hammer, R., & Hendy, J. 2014, Business Law. Pages 444-453 Kelly ,D., Holmes, A. 2011, Business Law. 6th Ed. Cavendish Kelly, D., Slapper, G. 2013, The English Legal System. 14th ed. Taylor & francis. Lockton, D.J., 2011, Employment Law. 8th Ed. Palgrave Macmillan. Monaghan, C., 2015, Beginning Business Law. Oxford Routledge. Painter, R., & Holmes, A. 2012, Cases and materials on employment law. Oxford University Press. Zander, M. 2007, Cases & Material on the English Legal System. 10th ed. Butterworths. Read More