Write an essay that guides the reader to analyse the various forms of business structures that operates in United Kingdom’s that is, Company, Partnership and Limited Liability Partnership (LLP).
The present essay is an important piece which guides the reader to analyse the various forms of business structures that operates in United Kingdom’s that is, Company, Partnership and Limited Liability Partnership (LLP).As per the facts, there are several issues that are raisedAll the issues are evaluated in the essay by analysing the essential of all business structures. After analysing, one business structure is selected and advice is given to Michael for his prospective business.Thus, one of the methods of establishing a business in United Kingdom is by setting the business in the form of a company. In Salomon & Salomon & Co Ltd (1897), it was submit that, when a company is incorporated, it is considered as a separate legal entity in the eyes of law and is regarded as distinct from its members and officers. A company once formed is capable to sue and get sued, acquire property, limit its liability, have perpetual succession, etc. Considering from the shareholders view, they are company owners but the managements and working is carried out by company directors, whereas, the stakeholders are only eligible for returns. (SJDA, 2015)A company must be registered with the Companies House and upon incorporation must comply with the provisions of the Companies Act 2006. Every limited company does not require a Company Secretary but must have at least one director. Also, the professional accountant must comply with the guidelines of ICAEW. The law governs the working of the accountants and any deviation imposes penalties upon them. (GovUK, 2016)When a company is formed, then there are several advantages that can be associated with a company. Such as, Firstly, the word ‘limited’ gives weight and more esteem to a company. The name gives an image of supreme and thus attracts both the consumers and the investors; Secondly, the investors are more inclined to invest in a company in comparison with a partnership as their investment is more secured and protected. Normally, the shareholders are liable to the debts only to the extent of their investment and thus limit their liability. The feature of limited liability is one of the greatest advantages of an incorporated company; thirdly, Banks are also interested to provide overdrafts and credits. This is because when banks grants debts, then, they create a floating charge on the assets of the company and in case of violation, the banks are secured to claim their dues from such assets; fourthly, it is easy to transfer shares in a company; fifthly, a company has power to buy property in its own name without imposing any kind of liability on the members; sixthly, when a company declares dividends then there is no compulsion to make any National Insurance. Also, the tax that is charged on the dividend income is much less when compared with the self employment income; seventhly, when some of the profit is retained in the business for re-investment then it ultimately results in the reduction of tax rate; eighthly, any legal action will be initiated against the company and not the directors or members unless the acts requires lifting of the corporate veil; ninthly, contracts that are entered by a company are valid and binding on the company (Peater v Federal Commissioner of Taxation (1964)). (HM Williams, 2012)
Further, there are few disadvantages to a company. Firstly, though the basic feature of a company is limited liability but most of the times the directors are liable to gave personal securities to the banks while taking loans; secondly, it is obligatory to file statutory documents to Company House and any the non-compliance may result to penalties; thirdly, most of the accounts are public records, thus, it is very easy to access the information of the company, hence, the confidentiality meter is not very high; fourthly, any withdraw from the company will impose tax imposition on the directors and the shareholders; fifthly, the reporting requirements are very high, thus, the accountancy fees are also high when compared with a partnership. (ICAEW, 2015)Thus, these are the main legal provisions that guide a company in United Kingdom.
A partnership is yet another form of business structure that is normally operated in United Kingdom. The Partnership Act 1890, is the enactment that is formed for the working of partnership firms. Section 1 of the Act specifically submits that a partnership is a “the relation which subsists between persons carrying on a business in common with a view of profit”. The partnership establishes principle of agency wherein all the partners are mutually and severally liable to each other and the firm. And any violation will bind all the partners and the firms towards each other (Mair v Wood (1948). (Inbrief, 2016)
The main benefits of a partnership are that, firstly, a partnership is a very easy business to structure as it does not require much of the formalities. A partnership can be created merely by oral or written or impliedly; secondly, in partnership, there is presence of confidentiality as no documents are public documents; thirdly, whenever the partners desire to establish a business for small enterprises then it is better to set up the business in the form of partnership; fourthly, a partnership is better where flexibility is desired and is normally established when the relationship between the partners are friendly; fifthly, since all the partners are active participants in the business, thus, it helps in better prosperity of the business which is not present in a company (Boardman v Phipps (1967). (Thompson Hall, 2015)
Likewise, the main disadvantages are, firstly, there is no concept of separate legal personality in partnership and thus all the partners are personally liable for all the debts of the partnership and the liability is not limited; secondly, there is no perpetual succession. Thus, mere disagreement may dissolve a partnership (Millar v Strathclyde Regional Council (1988); thirdly, as per section 28-30 of the Partnership Act 1890, it is necessary that all the partners must share profits and losses that arise while carrying out the business of the partnership. Normally when nothing is specified, then, the shares are divided equally. But disadvantage is caused to those partners who have invested more when compared with others; fourthly, the decision in a partnership is with the consent of the partners. Since all partners have say in the decision making process, then the same may at times result in disputes; fifthly, in partnership, any legal action is initiated against the partners personally. (Knightaccounts, 2011)
However, the various disadvantages of a partnership resulted in the establishment of another concept called LLP. With the help of LLP, the limited liability concept and flexibility of a partnership are achieved. In order to form a company two or more people must register their partnership as LLP in the Companies House. However, few important points that must be analysed in regard to an LLP are, firstly, it is necessary that annual financial statements of an LLP must be filed at the Company’s House. But, the confidentiality is maintained as the documents are much abbreviated and thus very little is known about the business to the general public; secondly, the liability of the partners is limited to the extent of their shares. Thus, an LLP acquires the limited liability feature of a company (Miguel Pereira, 2012); thirdly, the tax rules of an LLP are similar to that of a partnership. It is necessary that an annual tax return of the partnership must be filed. However every partner must file his individual tax return for their profits. The partners are liable to pay income tax and national insurance (class 4) on their profits; fourthly, in LLP, an agreement can be formulated in order to decide the allocation of shares amid the partners. Income and capital profits can be allocated differently and thus different percentage of profits can be allocated to different partners. (Gannons, 2016)
After having a brief overview on the structuring of company with that of a partnership and limited liability partnership, It is now important to compare the two form of business structures. (Complete formations, 2016)
In company the liability of the shareholders are limited to the extent of their unpaid share amount, but, in partnership the liability of partners is unlimited and are liable for all the debts of the partnership unless the partnership is in the form of an LLP. In LLP the liability of the partners are also limited and thus comes at par with a company.
In a company, the profits of the company are taxed (21%). Further the directors of the company are also taxed on the remuneration that is received by them (40%). But, no tax is imposed on the partnership as a whole but the individual partners of are taxed on the profits that are received by them (40%).
In partnership the main management of the business is undertaken by the partners themselves, though, the responsibilities can be delegated o the employees. Whereas in company, not all the responsibilities are undertake by the members themselves, rather, the company is run under the guidance of the directors. (Business Law, 2008)
In company, the tax imposition is dual, that is, in the form of corporation tax on profits and individual tax on dividends. Whereas, in LLP, partners are only subject to individual tax and Class 2 and 4 NICs. When compared to employee’s hen the tax is much less in LLP. Thus, if bulk is generated then LLP is better than a company for taxation purposes. But, if reinvestment is done by the company and no dividends are paid then the only tax is the corporation tax. And the corporate tax is less as compared with other taxes. (Gannons, 2016)
Thus, after comparing all the provisions of the business structures, it is now important to advice Michael.
Conclusion
After analysing the relevant law that supports the establishment of various business structures, it is advice to Michael that the best business structure that must be opted by them for their marketing consultancy must be neither in the form of a company nor in the form of a partnership, rather, the best business structure will be in the form of an LIMITED LIABILITY PARTNERSHIP (LLP).
The various reasons that support the same are:
The business is required to be established by all the four friends. The intention is to operate a small business. Thus, a partnership is a better option. But, all the friends live in their own house and thus do not want any risk on their personal assets. In such scenario, a company is a better choice as a company has a feature of limited liability. In such scenario, it is better to operate a LLP which brings flexibility along with the feature of limited liability.
Since the friends have children, thus, that might involve operational difficulties. In partnership, every partner is involved in the working of the company, whereas, in company, the directors are person who manage the affairs o the company. Thus, it is better to operate by way of LLP where an agreement can be formed which lay down the working hours and responsibilities of the friends.
The slogan of the perspective business is ‘THINK BIG’, thus, considering the slogan, it is better to operate as a company in place of partnership. But, mere slogan must not be the choice of selecting a business structure.
Since the business is into marketing consultancy, thus, there are very chances that legal actions can be initiated. In order to protect from any legal hassles it is better to operate by way of company as a company can sue and be sued in its own name.
Since the friend’s intent to withdraw from the business, thus, it is better to operate by way of LLP because only a single tax is imposed on the partners. But if company is formed then double taxation is imposed, that is, tax on dividends and profits. Thus, it is best to operate as a LLP.
Also, there is no consent that is made in regard to profit distribution. In such circumstances, since the capital contribution is different by all the friends, it is better to operate as a LLP where an agreement can be formed and profits can be allocated differently among partners.
An LLP has limited liability, thus, if bank debts are not paid then the partners are liable only to the extent of their capital contribution (like in company). Thus, LLP is a better choice.
The business intent to employ more staff, thus, it is better to form an LLP where responsibilities can be delegated to employees by still retaining the control over the business.
Thus, considering all the above arguments, it is better to operate as a LLP instead of a company or a partnership. Forming LLP will not bring any unnecessary burden and can easily be formed long with fulfilling all the expectations of Michael.
Reference List
Business Law (2008) Partnership -v- Limited Company (online). Available at:
https://www.business-lawfirm.co.uk/Articles/Company/Partnership-v-Limited-Company.aspx. Accessed on 9th February 2016.
Boardman v Phipps (1967)
Complete formation (2016) The Difference Between a Partnership and a Limited Company (online). Available at: https://www.completeformations.co.uk/companyfaqs/business_entities/partnership_vs_company.html Accessed on 9th February 2016.
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