A Guide to Company Structures
Sole trader There are several ways you can structure your business, which one is best for you depends on many matters i.e. the size and profitability of your company, how many owners there are, and the risks involved. There are several options, which are briefly and simply explained below. Sole traderIf you are starting a company on your own, and no employees you are probably best off trading as a sole proprietorship. This is the simplest way to get started in business. Once you have informed the government agencies of your intentions to go self-employed, you can start trading right away (subject to any specific licenses you might require in your line of work). You are, however, personally liable for the business debts and liabilities. Also, sole proprietorships should only be used if your business is owned by one person. For tax purposes, your sole proprietorship is no different than you – you file your business taxes on your personal tax form. The advantages of being a sole trader include:
The disadvantages include:
PartnershipA partnership has no independent legal status, such as a Limited Company does; it is merely a vehicle linking two or more self-employed people in a simple business structure Each partner is taxed on the partnership’s profits – so there is no need to file separate returns for your business, each partner will need to inform the Inland Revenue that they are now self employed. You will need a Partnership Agreement, which should outline each partner’s share in the profits, losses, funding obligations, together with a specific framework for how certain aspects of the partnership are to operate and it should detail what happens to the business should one of the partners die or wishes to move on. Each Partner is fully liable for the debts and obligations of the partnership. Advantages of being in a partnership include:
The disadvantages include:
Limited liability CompanyMost small businesses set up as a Limited Company. The term ‘limited’ derives from the fact that the company’s finances are separate from the personal finances of their owners (unlike the sole trader & partnership arrangements). Directors run a limited company on a day to day basis. The ownership of a limited company rests with shareholders. Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails. Private limited companies can have one or more members, e.g. shareholders. They cannot offer shares to the public. Public limited companies (plc’s) must have at least two shareholders and can offer shares to the public. A plc must have issued shares to a value of at least £50,000 before it can trade. Limited Liability companies are obliged by law to maintain records of their affairs at Companies House. It is advisable where there are two or more shareholders whose investment in the limited company may not be equal to draw up a shareholders agreement. Advantages of having a Limited Company:
The disadvantages include:
Limited liability partnership (LLP)A limited liability partnership (LLP) is similar to an ordinary partnership - in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business. The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble. As with a limited company and a partnership it is advisable to have an agreement regulating how aspects of the LLP operate. Advantages of having a Limited Liability Partnership:
The disadvantages include:
FranchiseA franchise is a way of taking advantage of the success of an established business and it can take different legal forms – Franchisee’s are mostly sole traders, partnerships or limited companies. Whatever the structure, the franchisee's freedom to manage the business is limited by the terms of the franchise agreement The major advantage of a franchise is that it takes advantage of the success of a proven and established business and support network, a big name can lead to big success – Working under a well-known brand name such as McDonalds, Starbucks, Subway and Pizza Hut etc, this will also save time and expense when it comes to generating publicity to raise the awareness of your business. Customers will know what to expect from a big chain. Its disadvantage is that there will be initial and continuing fees to the franchisor. The Franchisor will charge new franchisees a lump sum to startup a business using their brand, and then charge a share of their turnover, which brings down overall profits. There are also obligations imposed by the Franchisor upon the franchisee which can be onerous and if not fulfilled may lead to the franchise being terminated. Downloads
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