Different Types of Legal Structures

Different Types of Legal Structures

Sole Traders - they usually have little finance for expansion and are heavily reliant on the owner for business success. If the business is a failure, then the sole trader could lose everyhting including their personal possessions as they have unlimited liability. E.g. Independent retailers, self employed plumber, electrician, builder and mobile hair dresser. 

Partnership - they have unlimited liability because there is a high degree of trust many partnerships operate in the professions e.g. solicitors and vets. The different partners can specialise in (e.g. in a legal practice, the different partners could specialise in the main areas of law - criminal, civil, bankruptcy, family and consumer law). Partnerships allow business responsibility to be shared and this type of business gives the owners more personal freedom to take time off. There are no legal formalities but many will draw up a Deed of Partnership

  • How much capital each partner will contribute
  • How profits and losses will be shared amongst the partners
  • The procedure for ending the partnership 
  • How much control each partner has
  • Rules for taking on new partners

E.g. Accountants, Vets practice, Doctors surgery and Solicitors 

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Different Types of Legal Structures

Private Limited Company (Ltd) - usually smaller businesses and their business name ends in Ltd or Limited. Shares can only be sold 'privately' and all shareholders must agree on the transfer. They can't be advertised for general sale.The directors of these businesses tend to be shareholders and are involved in the running of the business. They also have limited liability. E.g. Littlewoods Ltd, Reebok Ltd

Public Limited Company (PLC) - in this type of business shares can be sold on the open market to anyone. Shareholders also have limited liability i.e. they can only lose their initial investment.

E.g. Supermarkets: Tesco, Sainsbury's, Asda

       Football club: Manchester United PLC

       Oil producing companies: Shell, Esso, BP 

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Setting up

Setting up a Sole Trader 

No specific rules apply to setting up a sole trader. By displaying the owner's name and checking that the Business Names Act has been complied with, a sole trader can get going immediately. 

Setting up a Partnership

Partners can start trading with no more preparation than a sole trader.They will then be governed by the rules laid down in the Partnership Act 1890. For example under the Act, if a partner dies or leaves, the partnership has to be dissolved. It is wiser to draw up a partnership deed that will form the basis of a legally binding contract. A clause in the deed would ensure that the partnership can continue to operate. The deed can also set out the percentage of profits each partner is to receive, perhaps in proportion to the amount each has invested. 

Setting up a Private Limited Company

The main statute governing companies is the Companies Act 1985. They have to submit: 

  • A Memorandum of Association
  • Articles of Association 
  • A declaration of compliance with the Companies Act 
  • The names of the company's directors and company secretary 
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