Making the Right Choice of Legal Structure for Business

HideShow resource information

Sole Traders

A sole trader is an individual who is the owner of a business. Sole traders work for themselves and aren't employed by any other business. Therefore, any sole trader can be referred to as self-employed. 

Sole traders engage in numerous business activities and do have capacity to have large turn-over regardless.

From beauticians, to make-up artists, models and plumbers, sole traders are all over the United Kingdom.It's estimated that there are over three million sole traders in the United Kingdom.

A sole trader can have numerous employees in the business.

Sole traders are very opportunistic in outlook. When they see a potential business and market, they're prepared to be involved in the market.

To commence any business, there's the need of business capital to finance the business. 

This capital covers the business overhead and running costs. 

The different resources and equipment for the business are bought. The rent of the business office and base will be tkaen care of as well.

1 of 13

Liability and Legal issues affecting Sole Traders

Sole traders are completely liable for every aspect of their business. There is legally no distinction between the funds of the sole trader business and the personal funds of the proprietor. This is known as unlimited liability.

Unlimited liability is a feature of unincorporated businesses where the owners are personally liable for all debts incurred by a business. All sole traders and most partnerships have unlimited liability.

In the event that a sole trader business takes out a loan which it's unable to repay, then it will be totally liable and would have to use personal savings, investments and assets to repay the loan.

By law, a sole trader must keep accurate accounting records for the business. This enables it to supply a tax return to the Inland Revenue which determines the tax payable by the business on its profits.

Consumer protection is another legal issue that affects sole traders. 

The business needs to provide the best standards for every consumer. Regardless of any costs incurred the business has to be responsible in every way and where necessary will need to utilise personal assets when it becomes necessary. 

2 of 13


Partnerships are between individuals who choose to own a business on a joint ownership business.

The number of partners requires has to be between two and twenty.

Most partnerships have unlimited liability and every partner has a responsibility in running of the business.

Ordinary partnerships are the most common type of partnerships which businesses engage in. Since all parties involved are partners, there's an equal sharing of profit. Capital is mostly equally shared and the roles which are played each partner are of equal importance to the business.

Partnerships are beneficial when it comes to borrowing money from banks. This is because banks can draw on the assets of all the partners, if there's ever a problem with the repayment. 

Sole traders can enter into a partnership because of the shared liability and borrowing privileges which as sole traders, they can't benefit from.

Skills, expertise, and knowledge of the partners can help the business in immense ways. With more ideas and scope for creativity, the partnerships can be a profitable venture.

3 of 13

Deed of Partnership - Contract

A deed od partnership is a contract which states the details involved in the partnership and the role of each partner.

It includes the following information:

  • Names of partners
  • Purpose of forming a partnership
  • Capital invested by each partner
  • Profit and loss sharing
  • Number of votes by partners in meetings
  • Details of how a partnership can be terminated or wound up
  • Withdrawal of share of profits by partners
  • Process for exiting into the partnership for new and existing partners.
4 of 13

Liability and Legal issues of Partnerships

Partnerships can have more than twenty partners and limited partnerships. This type of partnership has sleeping partners who do not actively participate in the running of the business. Such partners have limited liabilities. Nevertheless, one of the partners must have unlimited liability.Partners can also be limited liability which is a feature of incorporated businesses such as private and public limited companies, which means that the owners liability is limited to the amount they have invested in the business.

The legal issues that surround partnerships are similar to the sole proprietorship. A few legal documents are required to establish partnership. It needs only two people to set up. With the ordinary partnerships, there is no need for accountants and solicitors, however, in practice, partnerships are drawn up by a solicitor. Also, accountants are used to sort out issues pertaining to tax.

In the case of limited liabilities, it's quite complicated like limited companies. There's the need for auditors to regularly check the accounts which are sent off to the Registrar of Companies. It's also easier to borrow money form financial institutions than with sole trader business. The limited liability company can also engage investors to invest in the partnership.When a partner exists a partnership, it should automatically come to an end and a new partnership should be formed by the remaining partners in the business. It's quite difficult to exit a partnership. There are issues relating to how to retrieve the capital invested in the business. The partners can't transfer their shares without the consent of the other partners. The deed of partnership should also clearly define the responsibilities of the partners in the business.

5 of 13

Private Limited Companies

A private limited company is a business that doesn't have its shared traded on the stock exchange.

It's a limited liability company and these vary in size with large sales revenue, number of employees, and profit.

Private limited companies can be very large and some can be small or medium sized.

6 of 13

Liability and Legal issues of a Private Limited Co

A private limited company can raise finances easily because of its limited liability status. Investors tend to be more confident in this type of business because of the liability for the company is limited.The company and its affairs are separate from the owners of the company. In the event of financial difficulties, only the company is held liable.There are shareholders in this type of company. Each shareholder owns a portion of the company which is equivalent to the amount of shared which they purchase. With the limited liability status, the shareholders are not held responsible for any of the debts which they company incurs. Instead, shareholders will only lose the value of their investment which they have in the company.

Several legal issues are to be carefully considered before deciding on a private limited company. These include election of the board of directors at an Annual General Meeting by the shareholders, setting up of the company this is known as incorporation of the company, fining by the law for breaking any of its legal obligations, registration of the company with the Companies House this enables it to operate as a separate legal entity.

When a company becomes incorporated, it will have a memorandum of association and the articles of association. This memorandum includes the name of the company, the registered office, statement indication the limited liability status of the shareholders, activities of the company, authorised capital of the company which is the type of share issues by the company and the amount of each type which it can issue.

The articles of association include how profits will be shared, numbers of directors, their rights and duties to the company, frequency and procedure of Annual General Meetings and voting rights of shareholders.

7 of 13

Public Limited Companies

Public limited company has limited liability. In order to set up this type of company, the business should have a minimum of 50,000. There are only two people that need to sign the memorandum of association and a minimum of seven shareholders. The share of public limited companies are traded on the Stock Exchange. It has annual general meetings which are attended by the shareholders. In these meetings, the directors present the accounts and annual reports of the company to the shareholders of the company. It's at this meeting that the shareholders elect new directors for the company. The information on the accounts and annual reports of the company are sent to the Companies House and this information is accessible by anyone with an interest in the company.

Small to medium sized public limited companies are listed on the Alternative Investment Market (AIM). It attracts investors to such companies which aren't established as the major companies listed on the Stock Exchange. Hence the AIM market lists smaller companies with 50,000 investment capital and more. On the London Stock Exchange, the companies listed are multi million and multi billion pound companies. Hence the criteria is higher and smaller to medium companies are encouraged to list on the AIM market. Shareholders are not involved in the daily running of the business. The executive and non executive directors of the company are the decision makers. Non executive directors (NEDS) are specifically employed for their expertise and tend to work on part time basis. In the event that unfavourable decisions are taken by the directors, the most common ways of exercising the rights as a shareholder to disagree with decisions is to sell the shares in that company. Otherwise the shareholders can vote directors off at an Emergency General Meeting, or wait for the Annual.

8 of 13

Liability and Legal issues of a Public Limited Com

The amount of liability of an individual shareholder of a company is limited and only monies invested in shared of the company can be lost if the company is in financial difficult. It will not affect the private assets of the shareholder because only the business assts are liable. 

Both managers and shareholders alike are not liable personally for the business.

The legal issues are similar those of the private limited company.

The name of the company must be included on all its stationery and clearly displayed outside its offices and places where it operates business. It must display its registration details on all stationery including registration number, place of registration and registered office.

The company must contact the HM revenue and Customs for tax and VAT purposes.

Lastly, the registrar of Companies must receive the duly completed and signed documents which are needed for registration. 

Every legal structure has their benefits and setbacks. 

It's important that any business must understand the legal implication which they choose.

9 of 13

Not-for-Profit Business

Not-for-profit business involves charities and voluntary organisations which are not set up with the main intention of making profit. They are generally philanthropic, social and charitable in outlook.

They are independent and don't form part of any statutory body or government department. Any form of profit of surplus which is generates is used for the organisation and its notable causes.

These organisations can have any of the following legal structures, they have different governing bodies:

Unincorporated Associations- have a constitution of rules and members of the governing body are trustees. Charitable organisations normally operate this way.

Trusts- a deed or declaration of trust will be the governing document. The members of the board will be the trustees.

Companies limited by guarantee- will have a Memorandum of Association and governing body consisting of directors of the company. Any charitable organisation which is also a company will have directors and trustees as the voting members.

10 of 13


Charities need to have well defined purposes that would enable it to be legally classified as charitable. 

These include relieving suffering and hardship, making a positive impact in the community, Religious advancement and education development.

Registered charities don't have political motivations and objectives of any kind and aren't encouraged to incline in such directions.

It's important to note that charities are established primarily for charitable reasons, they are independent, they aren't set up to make profit. 

11 of 13


Societies are established for non-commercial purposes without personal gain, charitable reasons and participation in sports events and cultural activities.

Cooperative societies have limited liability and are incorporated organisations. They have shares which members can buy in order to support the business.

These shares are not sold on the stock exchange. 

When a member leaves a cooperative society, the amount of shares which they have, need to be sold back to the society.

Every member of a cooperative is entitled to one vote at the meetings regardless of the amount of shares which they possess. 

Any profit generated by the society is shared as dividends to the members.

Regional societies are formed from the merger of different consumer cooperatives and have noble objectives which strive to improve the trading condition and encourage honest, fair pricing.

Insurance societies and bank also form cooperatives.

12 of 13

Pressure Groups

Pressure groups are established with the major objective of influencing political decisions. 

They are involved in research, political lobbying of the government, seek to influence decision-makers and enhancing public awareness of political issues.

These work outside of the government and are not political parties.

Due to their political interaction they also try to influence the businesses, make an environmental impact and try to enhance corporate responsibility to the community and environment.

These groups also interact with consumers to secure better value for money from the businesses.

13 of 13


No comments have yet been made

Similar Business resources:

See all Business resources »See all resources »