Lecture 3 - Business

General partnership advantages

Easy to set up with few formalities Shared managerial responsibility Privacy Low set up costs (usually) Little ongoing regulation

Disadvantages

Partners jointly and severally liable Partners potentially unlimited personal liability Difficulties in raising capital for third parties Partnership Act 1890 may impose unwanted results - need to draft a comprehensive partnership agreement

Companies

Public limited company (PLC) or Private limited company (Limited) •Banks •Shops •Utilities •Garages •Builders

Business types

Sole traders Partnerships >Partnerships >Limited partnerships >Limited liability partnerships Companies >Limited companies >PLCs

General partnership

Two or more people carrying on a business in common with a view of profit

General partnership dissolution

•Agreed mechanism, express (e.g. fixed term) or implied (e.g. single venture, concluded) •Notice •Death or Bankruptcy (insolvency): •Court order

General partnership creation

•By written agreement (better) or •By conduct (2 or more persons carrying on business with a view to make a profit)

Setting up a partnership

•Formation - relationship created oral or written •Very little regulation •No central registration •Notify HMRC •Register for VAT if turnover exceeds £85,000 •Keep partnership accounts for tax purposes •No min or max age of a partner •No max number of partners (historically was 20) •Start up capital can be drawn from all the partners

Limited liability partnership

•Hybrid between a partnership and a limited company •Popular as the business type used by professional firms •Solicitors •Accountants •Professionals

Sole Trader

•Is an UNINCORPORATED business •Natural person •In business on own account using own name or a business name •Self employed - makes the decisions on the management of the business and its future plans •No legal distinction between person and business •Personally takes all profit •Personally carries all risk •No formalities for setting up/ disbanding

General partnerships

•Is an UNINCORPORATED business •Two or more people running a business together with a view to make a PROFIT •The partnership may carry on any trade - can be very informal •No formal registration •According to recent BEIS figures there are 436,000 partnerships in the UK •Recommended to have Partnership Agreement to regulate activities/management

Sole trader - regulation

•Light regulation regime and no registration requirements •(other than trade/business specific and all legislation/registrations relating to employees, health and safety, human rights etc.) •Personal liability for the business' debts and obligations/risk of bankruptcy •Pay income tax on the profits of the trade •Register for VAT of above the £85,000 threshold

General partnership formalities

•No max number •Any person capable of being a partner •Share the decision making •Share the ownership of partnership assets •Each partner pays income tax on his/her share of the profits •If partners do not expressly specify otherwise, the Partnership Act 1890 provides default provisions •So it is better to have a written partnership agreement (name, responsibilities, capital investment, profit share, etc.)

Sole trader egs.

•Plumber •Electrician •Barrister •Shop owner •Painter and decorator •Artist

GP

•Relations with each other - fiduciary •Full disclosure •Declare personal financial benefit •Not to compete without consent of the other partners •Relations with others - each partner is an agent of the firm •Acts of each partner bind the firm if in usual course of business unless no authority and outsider knew partner had no authority s. 5 Partnership Act (1890)

Partnerships

•Solicitors •Doctors •Accountants •Bands

LLP

•The name of the partnership must end with LLP •Members of LLP •Designated members •Members are agents of the firm in similar fashion to s5 partnership Act •Liability for acts of members and employees •Treated as partnership for tax purposes •Partners taxed as in common law partnership - individual members must register with HMRC as self-employed •Informal and flexible Can be formed by two or more members carrying on a lawful business with a view to profit - so cannot be set up by an individual or by non-profit organisations

General partnership - liability of the partners

•The partnership is not a separate legal entity from its partners (unincorporated) •Unlimited/personal liability of the partners and ultimately the risk of bankruptcy •Joint and several liability of the partners •Joint - debt shared e.g. Two partners and the partnership is liable to pay £100,000. Each liable for £50,000 •Several: each liable for the whole debt- e.g. Either could be sued for £100,000 (and would then claim against partner not sued)

Types of "Business Media/Forms" (the legal structure of the business) there are two broad categories

•incorporated - (companies and LLPs) •has a separate legal identity form its owners which brings limited liability for the owners/participants •can own property, sue, be sued, incur debts and liabilities •unincorporated (sole traders and general partnerships) •no separate identity from its members •as a result members/owners have unlimited liability for the debts of the business

Sole trader advantages

•informal •privacy •control

Sole trader disadvantages

•unlimited personal liability •less options to raise finance •harder to share the burden of management