Business Structures

Business Structures

- The first decision to make when running a business is how the business should be structured 

- There are four common types of business structure: 

1. Sole proprietorship 

2. Ordinary partnership 

3. Limited liability partnership 

4. The company

- A limited liability partnership and the company are called 'bodies corporate' as they are formed via a process called incoporation

Sole Proprietorship 

- A sole proprietorship is a business that is run by one natural person, although they are free to take on employees. The majority of sole proprietors in reality do not choose to take on any employees

- It is the most common business structure - there are currently 3.6 million sole proprietorships in the UK

- Sole proprietorship comes in two forms: 

1. Sole practitioner (a professional running a business) 

2. Sole trader

-  Commencing a business as a sole proprietor is much more straightforward than running a limited liability partnership or company. All the sole proprietor must do is register themselves with HM Revenue and Customs. As the sole proprietor is self-employed, they must submit their own tax returns. The proprietor should therefore keep a stringent record of the transactions they undertake 

- A sole proprietor may struggle to get finance for their endeavour. This is because a sole proprietorship does not have share capital, and so they cannot raise funds in this way. Moreover, banks are cautious when lending to individual proprietors, and so this is usually not possible. A sole proprietor will normally have to invest their own capital into the business for this reason

- The main disadvantage of operating as a sole proprietor is that liability is personal and unlimited. All of the assets belonging to the proprietor are therefore available for possession/ sale if the business goes into liquidation

Partnership

- Two or more people wishing to run a business together can do so as partners

- Section 1(1) of the Partnership Act 1980 defines a partnership as: 'the relationship that subsists between persons carrying on a business with a view to make a profit' 

- Most partnerships will have a clear partnership agreement that sets out the rights and obligations of each of the partners. However, where such an agreement does not exist, section 24 and 25 of the PA 1980 implies rights into a partnership. In fact, these terms will apply even where there is a partnership agreement, unless the agreed terms are incompatible with the implied terms. Some examples include: 

1. A duty to share profits equally between partners

2. No new partners to be admitted to the partnership without the consent of existing partners

3. The partnership agreement cannot be varied unless each of the existing partners gives their express agreement 

- Sections 5 - 18 of the Partnership Act regulates the relationships between partners. This includes the extent to which the partners can contractually bind the firm and the…