Legal Structures - Unit 1

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Sole Trader

Sole traders run a business on their own, they trade under a suitable trading name

They are self employed for example shopkeepers or hairdressers

They have full responsibility and control for the costs, capital requirements and debts (unlimited liability)

There are minimal legal formalites, unless they trade under a different name and then they will need to register the company name under the business names act (1985)

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Partnerships

A partnership is a group of indviduals working together

The law allows for between two and twenty partners, although exceptions can be made

They can trade under a suitable trading name or their own names

Partnerships need rules (deed of partnership) which is set out by a solicitor and includes:

  • The capital contribution per partner
  • The procedure in the case of a partnership dispute
  • How the profit will be shared between partners
  • Partners voting rights
  • The procedure for bringing in new partners and old partners retiring

Sleeping partners

  • Have limited liability, but have no say in the running of the business
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Unlimited Liability

The business and owner are seen as one under the law (sole traders or partnership)

The business debts are personal debts of the owner/s

Sole traders/partners can be forced to sell personal assets (property etc) to pay the debts

It is a HUGE finacial risk

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Limited liability

The business and the owner are seen separately under the law

The owner is not responsible for the business debts

All shareholders have unlimited liability

The most any shareholder can lose is their investment into the business

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Private limited companies (LTD)

  • Limited liability
  • Owner by shareholders and run by directors
  • The capital value, is divided into shares which can be bought or sold
  • Require at least two shareholders - no max
  • Can't sell shares to the public
  • Are not quoted on the stock exchange
  • May not be able to sell stocks unless agreed by all shareholders
  • Often small family businesses
  • No min share capital
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Public limited companies (PLC)

  • Limited liability
  • Owner by shareholders and run by directors
  • The capital value, is divided into shares which can be bought or sold
  • Require at least two shareholders - no max
  • Can issue and prospectus to sell shares to the public
  • Are quoted on the stock exchange
  • Freely transferable, can be bought and sold in many places
  • Usually start as private, and then turn public
  • They need over £50,000 share capital, 25% must be avaliable if they go on the stock exchange
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Companies act (1985)

Memorandum of Association

  • States the company's name, whether it is public or private and the address
  • Objectives of the company
  • Details of the company's capital
  • States clearly that the shareholders have limited liability

Articles of Association

  • Interal rules of the company
  • Names the directors, how they are appointed and the power they have
  • Shareholders voting rights
  • Times of shareholders meetings (monthly etc)
  • How the profits will be shared

Both of these documents must be sent to companies house, the registrar of companies issues a certificate of incorporation. Once trading has started annual reports of finacial activities must be published.

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