Legalities in Establishing Small-Scale Businesses - Essay Example

Legalities in establishing small-scale businesses Introduction Choosing to start a business might seem an easy task to any person that has never indulged in business related ventures. In starting a business one has to make considerations of basic things such as the capital, the location of the business premises, the means by which he acquires resources and the target market (Soundarapandian, 2002, 3). Aside to these requirements, there are the legal considerations that are just as important in the processes of starting and running a business. There are several legal implications that a businessperson is required to understand since the failure to do so might end up harming his business at the initial stages dooming it to an inevitable downfall. Legalities of initializing a business are also dependant on what type of business is to be established, and persons that are to run the business. Failure to observe these basic legal considerations might render one’s business infringing against law and subject to certain legal implications. The first major implication that any entrepreneur faces is the decision of the legal format of the business. There are various forms of business formats ranging from a limited company, sole trader to a partnership. In certain situations, it is a possibility for the establishment of limited liability companies. Each of the above stated business formats vary implicatively on the benefits and liabilities that are eminent to the entrepreneur who chooses to venture in any of them. Limited company A limited company is a company formed under such principles that the members of the company are only liable to the company as much as how much they choose to invest in the company. The provisions for establishing a limited company are stipulated under the (Company Act 2006) and the (Corporation Tax Act 2009). The limitations of the partners in a company are by guarantee of the shares they have in the company as an entity. In a limited company situation whereby the members are limited by shares in the company, are categorized as private limited and public limited companies. In private companies, there are restrictions of who may become the member of a private limited company; this is by law and the established company rules. When choosing to start a limited company, one should put certain things under keen consideration. These are the ownership of the company, the legal responsibilities and the implications of starting a legal company. Under the implications, the entrepreneur should understand that the a limited company is responsible for all rights since it is a separate entity from the stakeholders, the finances it makes are separate from the stakeholders personal finances. Thus, the company owns the profit made by the company after the paying corporation tax. In a limited company, the outstanding feature is that the directors of the company cannot be held liable for the debts of the company as long as the directors of the company break no law. In an established case law of Salomon Vs A Salomon & Co ltd [1897] AC 22, the doctrine of corporate personality was upheld firmly, this was stipulated according to the Companies act 1862. To the effect of the established Act, the Lords held that the creditors of an insolvent company could not sue the shareholders of the insolvent company to pay the outstanding debts. At first, the case was entitled Broderip Vs Salomon, the court then held that the company had the right to indemnify against Salomon. Partnership A partnership is a business formation whereby two or more people who share the ownership and business interest (Cage, 2004, 5). In a partnership formation, all the partners share in the contribution to all aspects of the business. This contribution may be in the form of money, labor, skill and property to run the business ventures. It is a requirement that since a partnership business involves more than one person, there should be agreements with proper terms in regards of the business (Miller & Gentz, 2012, 56). In the decision making process, the partners should ensure they put a wide variety of issues that may arise in the legal partnership and incorporate them in the terms of the agreement formulated. The terms of the partnership business should entail such issues as how the future businesses will be made, this including how many partners the business is limited to, how the profits are to be shared and most importantly resolving the disputes that may arise as the partnership subsists( (Clifford 7 Warner, 2012, 13). In the initial stages of starting a partnership, the terms of the agreement should be able to incorporate the probability of the company expansion or if the business goes wrong or flops the means by which to dissolve it. Being that all of these aspects in a partnership are important in running a business, the agreements are not legally required. Despite this, it would be risky for a partnership company to be operational without an agreement. In establishing a partnership, there are further categories that can be put under consideration by a person looking to start a business. There are the limited partnerships, the general partnerships and the joint ventures. All these type of partnership have some features that the person looking to start the business might need to verify in order to establish which type of business is suitable for the type of venture he is looking to start. General partnership In the formation of a general partnership, the assumption normally established is that the profits and the liabilities in the partnership are divisible in an equal range for all the partners involved. If a partner or partners in the formation might opt for unequal distribution of the elements of partnership, it required to be recorded under the partnership agreement. Limited partnership Limited partnership can also be referred to as a partnership with limited liability. Compared to the general partnership, limited partnership has more complexity in context of its formation and how its run by the partners. By the principles established in Ederer v Gusky [2007], the limits of this type of a company are majored on the contribution of each partner in the company. Because of such elements, most short-term investors prefer this type of a partnership to venture into for investment purposes. Joint ventures In the joint venture, the principles are those similar to the general partnerships, joint ventured are formed with short-term intentions as a single project subsists. The partners in this type of a business formation can be recognized as partners if they choose to continue the venture. This being so, they must indicate so in an agreement. In the formation of partnership, the company should be registered through the secretary of state’s office. It is requisite that the partner registers the business under a name that is mutual or the partners’ last names. After registering the partnership name, the partners acquires the working permits and licenses for running the business. It is required that the partnership has to file annual information return that includes the income, loses and deductions, which is the passed to the partners. The taxes that the partnership is required to pay being in a business are inclusive of such taxes as annual return income, employment taxes and excise taxes. The partners as different entities also are required to pay income taxes, self-employment taxes and estimated taxes. Partnership ventures tend to have advantages and disadvantages. The advantages of partnerships are such as partnerships are easy to run and inexpensive with the major issue being the formation of the partnership agreement. In partnerships, there are shared commitments between the partners who at many times, some have the complementary skills of running the partnership. Partnerships as entities have the tendency to attract highly motivated and qualified employees. The disadvantages of partnership are such as the individual liability that the partners may face in the partnership ventures. In some situations there may arise disagreements without proper means of solving them. Another disadvantage is that the profits retained from the partnership, are shared between the partners. Sole- traders In establishing, a business as a sole trader one also considers himself self employed. As a sole trader, it is requisite that one registers with the HM Revenue and Customs (HMRC) and follow certain rules pertaining the running and registration of the business name (Needle, 2010, 20). Being that in this type of business format the businessperson can then keep all of the business profit after being taxed. A sole trader can establish the business by choosing to involve the staff; this is because being a sole trader does not mean necessarily working alone but that the trader is responsible for the business (Shum, 1991, 6). Being a sole trader there are certain responsibilities that the business owner is responsible for and should consider. The business owner is responsible for the business debts and caters for all the bills for anything bought for the business like the stock and the equipments used in the business. The businessperson then has the responsibility of keeping the company record of both the expenses and the sales, aside to this he has to send a self-assessment tax return yearly and make sure he pays the income tax. When it comes to naming a business, as a sole trader various considerations should ensue. One cannot use such initials as plc and ltd incorporated in the business name. There are limitations on using sensitive words in the business name unless one has the permission to do so. The use of any name similar to one that already exists is considerably illegal and to do so one might face certain liabilities. Just like the other business formats, sole trader has its advantages and disadvantages as well. The advantages in this type of business are that it is the easiest way to set up a business compared to the other form of small businesses. In this type of business, one can set the expenses against the overall income and all the decision in the business is made by the sole trader. The disadvantages are that in the sole trader type of business, there are no separation between the sole - trader’s finances and those of the business. Therefore, if the business were to incur a heavy loss the owner himself would be liable since he is the sole owner. Leases Once the entrepreneur has chosen the format of business best suitable, there are further legal implications that should yet considered (Dillman, 2006, 8). When one chooses which commercial business he chooses to conduct his business under, there is the lease of the premises that one has to ensure he has enough protection against bad covenants as a tenant. This protection includes having a favorable early break so that the entrepreneur has a way out of the lease without facing major liabilities (Carter, 1996, 39). The entrepreneur should ensure that he reads all the clauses in the lease agreement before signing and being binded in the contract. Under contract law, a breach in contract can result to a course of action that the liable part will be prompted to pay the damages or undertake a specific performance. A case law that establishes the terms of a contract and their enforceability is Carlill Vs carbolic smoke ball Co [1892], which held that the terms that were stipulated in an advertisement contract were binding and the defendant. Under consideration of the terms stipulated in a leasing contract one should consider and understand the unconscionable conduct provisions contained in the (Competition and Consumer Act 2010). The government has designed laws that protect retail lease tenants, these laws have some minor differences that the businessperson should ensure that he understands the relevant laws and how they relate to the kind of business involved. Loans for capital When one chooses to start up a business there may be legal implication in the process of acquiring the capital to set up the business and have it running (Agar, 2005, 12). The provision on the fringes by which banking is operational is contained in the (Banking Act 2009). An entrepreneur may choose to fetch his capital from the bank by acquiring a bank loan. The businessperson should ensure proper legalities in the negotiation of the terms of the loan with the bank. This will be effective as to avoid any harm the business may face under the strict terms of the loan repayment. The acquisition of loans from banks to commence a business is dependent on which bank one chooses. This is majorly because of the different terms imposed by different banks. When venturing into the business world, one might choose to acquire a standard commercial loan, which might be intermediate or long-term loans as bankers term them. The upside of acquiring a term loan is that, term loans are the best options for established businesses and can be taken by an entrepreneur who has laid proper plans to start his business. The loan could them be used to acquire machinery or the materials needed to set up the business and get it running. Staff recruitment When one looks to start a company and incorporate staff members, there are legal implications that are also important for one to consider (Halbert & Ingulli, 2009, 2). The legal implications lie on choosing the staff members in a standard method and the decision on the qualification of a person to work as a member in the company. As an employer, one should put to close consideration the European convention of human rights charter. The charter contains the provision on any discrimination to any person regarding gender, race or religious belief. There are further considerations of the provisions contained in the (Employment Rights Act 1996). This act touches and stipulates the provisions of how employees are to be treated; the rights they have as members of the company. Considerably, the starting point of a business one should ensure that he understands the legal implications as a business owner. Understanding this legal provision might be helpful to understand what legalities to engage and hoe to avoid liabilities in an established company. All of the type of enterprises for small-scale businesses then should be prioritized at an early stage. Bibliography HALBERT, T., & INGULLI, E. (2009). Law & ethics in the business environment. Mason, OH, South-Western Cengage Learning. AGAR, C. (2005). Capital investment & financing a practical guide to financial evaluation. Oxford, Elsevier Butterworth-Heinemann. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=130284 DILLMAN, R. J. (2006). The lease manual: a practical guide to negotiating office, retail, and industrial leases. Chicago, Ill, Section of Real Property, Probate and Trust Law, ABA. CARTER, L. W. (1996). Leasing in emerging markets. Washington, DC, World Bank. GAGE, D. (2004). The partnership charter how to start out right with your new business partnership (or fix the one youre in). New York, Basic Books. http://www.books24x7.com/marc.asp?bookid=17536. MILLER, R. L., & JENTZ, G. A. (2012). Fundamentals of business law. Mason, Ohio, South-Western. CLIFFORD, D., & WARNER, R. E. (2012). Form a partnership: the complete legal guide. Berkeley, CA, Nolo. NEEDLE, D. (2010). Business in context: an introduction to business and its environment. Andover, South-Western Cengage Learning. SHUM, C. (1991). Business associations: an introduction to agency, partnership and company law. Hong Kong, Hong Kong University Press. SOUNDARAPANDIAN, M. (2002). Small scale industries. New Delhi, Concept Publ. Acts of law Employment Act 1996 Corporation Tax Act 2009 Company Act 2006 Competition and consumer Act 2010 Precedents Carlill Vs carbolic smoke ball Co [1892],ALL ER Broderip Vs Salomon. ALL ER Salomon Vs A Salomon & Co ltd [1897. ALL ER Read More