Business types
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  • 1. Business Types
  • 2. Learning ObjectivesBusiness ownership Individuals Partnerships Companies (corporations)Comparison of Ownership Types 2
  • 3. IntroductionThere are three general ways of owning andoperating a business as an individual as a partnership as a limited company 3
  • 4. IndividualsThe situation with an individual is fairlystraightforward as only one person isinvolvedThat person is the businessThat person is often called a sole traderS/he enters contracts in his/her own name inorder to do business 4
  • 5. PartnershipIt defines a partnership as “the relationwhich subsists between two or morepersons carrying on a business in commonwith a view to profit” 5
  • 6. Definition of PartnershipThere must be at least 2 people on apartnership and not more than 20 (except inlaw, medicine and accountancy)A limited company cannot be a partnership,although it can be one partner in apartnershipThe relationship between partners is basedon the contract ie the terms of their partnership agreement 6
  • 7. Definition of Partnership (cont.)To qualify as a partnership, the people mustbe carrying on a businessBusiness means any trade, profession oroccupationHowever, simply sharing in the profits of abusiness does not make you a partner in thatbusiness 7
  • 8. Definition of Partnership (cont.)The business must be carried out incommonA partnership does not have a separate legalpersonality from the people who run thebusinessA partnership is simply a group of peoplewho carry on a business together 8
  • 9. Definition of Partnership (cont.)Partnerships are not only for carrying onbusiness over a period of time, it is possibleto create a partnership for a single event orbusiness ventureThe business must be run with the aim ofmaking a profitHowever, simply sharing in the gross profitsof a business does not make you a partner 9
  • 10. Legal Status of a PartnershipThe partnership does not have a separatelegal identity from the partners (ie theowners)As you will see, a limited company doeshave a separate legal identity from itsownersBecause there is no separate legal identity,partners care self-employed and notemployees 10
  • 11. Formation of a PartnershipThere are no special legal rules for forminga partnershipIt is an agreement between individualsIt may be made orally, in writing, or impliedfrom the behaviour of the individuals 11
  • 12. Formation of a Partnership (cont)However, it is common to have a writtenpartnership agreement which sets out the name of the firm the nature of its business the method for sharing profits the amount of capital to be contributed by each partner the reasons and method for ending the partnershipThis helps to avoid arguments later 12
  • 13. Liability of PartnersEach partner is liable for the full amount ofthe firm’s debts and other liabilitiesA third party can sue the firm or thepartners individuallyWhere the third party receives paymentfrom one partner, then the other partnersmust contribute equally to the amount paidby him (indemnify that partner) 13
  • 14. Liability of Partners (cont.)In order for a firm to be liable in tort, thewrongful act must have been done by apartner in the course of the firm’s businessor with the approval of the other partners 14
  • 15. What is a Company?A company is a body corporate orcorporation 15
  • 16. Separate Legal PersonalityAs companies are a kind of corporation,they have their own separate identityIn law, they are regarded as a personAlthough a company is not a natural person(like you or me) the law treats it in the sameway in many areas 16
  • 17. Perpetual SuccessionChanges in the membership of a companyhave no effect on the continuation of thatcompanyUnlike a partnership, the death orbankruptcy of a member does not end thecompanyIn public limited companies, members arefree to sell their shares on the stockexchange 17
  • 18. Business PropertyBusiness property is owned by the companyand not its shareholdersThat means a creditor cannot take actionagainst company assets in respect of a debtdue by a member of that company 18
  • 19. Court ActionsA company can sue and be sued in its ownnameIt can also enter contracts in its own nameThe company’s liability for contractualdebts is unlimited It is only the members’ liability which is limited 19
  • 20. Liability in Tort and CrimeCompanies are vicariously liable for the torts oftheir employeesCompanies can be guilty of crimes which do notrequire a mental element (eg intention orrecklessness)However, it has been more difficult to prosecutecompanies where the crime has such an element asit has to be shown that one of the directors of thecompany had the required mental elementThis can be very difficult in a large companywhere the directors are not involved in the day today operation of the business 20
  • 21. Types of CompanyCompanies can be classified in several ways Limited and Unlimited Limited by Shares or by Guarantee Public and Private 21
  • 22. Limited and Unlimited CompaniesCompanies are usually formed because ofthe limited liability for their membersHowever, it is possible to create a companywithout limited liabilitySuch companies do not have disclose theiraccounts as limited companies do 22
  • 23. Limited by Shares or GuaranteeThe most common kind of limited companyis one limited by sharesOnce the shareholder has paid the full valueon his shares then he has no further liabilityThis is true even if the company does nothave enough money to pay its debts 23
  • 24. Limited by Shares or Guarantee(cont)A company limited by guarantee is usuallycreated for charitable, educational orprofessional purposes ie it is not a trading companyThe liability of members is to pay an agreedamount if the company is wound upUsually, the amounts are small, so the riskis low 24
  • 25. Public and Private CompaniesThe main difference between public andprivate companies is that the shares in apublic company may be bought and sold ona stock exchangePublic companies must have at least twodirectors, whereas a private company canhave one 25
  • 26. Public and Private Companies(cont.)Private companies may purchase their ownshares out of capital, whereas publiccompanies cannot 26
  • 27. Comparison of OwnershipIt is useful to compare the advantages anddisadvantages of the three forms of business Sole trader Partnership Company 27
  • 28. Sole Trader - AdvantagesNo legal filing requirements or fees and noprofessional advice is needed to set it up.You just literally go into business on yourown.Simplicity – one person does not need acomplex organisational structure. 28
  • 29. Sole Trader - DisadvantagesThe disadvantages are that it is not a particularlyuseful business form for raising capital (money).For most sole traders the capital will be providedby personal savings or a bank loan.Unlimited liability – the most important point tonote in terms of comparing this form to thecompany in that there is no difference between thesole trading business and the sole trader himself.The profits of the business belong to the soletrader but so do the losses.As a result he has personal liability for all the 29debts of the business.
  • 30. Partnership - AdvantagesNo formal legal filing requirement involvedin becoming a partnership beyond theminimum requirement that there be twomembers of the partnership.Easier to obtain capital as there can be up to20 members of the partnership, all of whomcould pool their investment within thepartnership. 30
  • 31. Partnership – Advantages (cont.)If you are aware of the problems the PartnershipAct can cause (see disadvantages) then you candraft a partnership agreement to vary these termsof the ActThe partnership agreement can therefore be usedto provide a very flexible organisational structurealthough this usually involves having to pay forlegal advice. 31
  • 32. Partnership - DisadvantagesA partnership will end on the death of apartner.The partners are jointly and severally liablefor the debts of the partnership.This means that each partner can be suedfor the total debts of the partnership 32
  • 33. Company - AdvantagesCompanies are designed as to make it easy to raisecapital.Companies have the ability to subdivide theircapital into small amounts, allowing them to drawin huge numbers of investors who also benefitfrom the sub-division by being able to sell onsmall parts of their investment.Limited liability also minimises the risk forinvestors and is said to encourage investment. 33
  • 34. Company – Advantages (cont.)It is also said to allow managers to takegreater risk in the knowledge that theshareholders will not lose everything.The constitution of the company provides aclear organisational structure which isessential in a business venture where youhave large numbers of participants. 34
  • 35. Company - DisadvantagesForming a company and complying withcompany law is expensive and timeconsuming.It also appears to be an very complexorganisational form for smallbusinesses, where the Board ofDirectors and the shareholders areoften the same people 35
  • 36. Summary (cont.)Most companies nowadays are formed under theCompanies Act 1985The law regards a company as a legal personIt has a separate identity from its owners (ie itsshareholders)A company is liable for its own debtsIts shareholders are not liable for its debts. Theyare only liable to pay for their shares 36