Legal structure of businesses

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Legal structure of businesses

  1. 1. MODULE 1 <ul><li>CLASSIFICATION OF BUSINESS </li></ul>Legal Structure
  2. 2. Introduction <ul><li>Ownership </li></ul><ul><li>Control </li></ul><ul><li>Way finance is raised </li></ul><ul><li>Distribution of profits </li></ul><ul><ul><li>Main types of business in private sector differ in terms of: </li></ul></ul>
  3. 3. Sole Trader <ul><li>Owned / run by one person. </li></ul><ul><li>Rarely employ large no. of people. </li></ul><ul><li>Owner complete responsibility. </li></ul><ul><li>Main source of finance – personal savings, bank loans. </li></ul><ul><li>Simplest / most common structure. </li></ul><ul><li>Common in tertiary sector eg local butcher. </li></ul>
  4. 4. Sole Trader <ul><li>Trading Licence for certain goods eg alcohol. </li></ul><ul><li>VAT registration over a certain amount. </li></ul>Legal Requirements on Formation
  5. 5. Sole Trader <ul><li>Easy to set up. </li></ul><ul><li>Small amount of capital. </li></ul><ul><li>Personal control, independence, freedom. </li></ul><ul><li>No formal set of accounts. </li></ul>Relative Advantages
  6. 6. Sole Trader <ul><li>Keep profits (after tax). </li></ul><ul><li>Speedy decisions. </li></ul><ul><li>Direct contact with customers – feedback. </li></ul><ul><li>Closer working relationship - management / employees. </li></ul>Relative Advantages
  7. 7. Sole Trader <ul><li>Owner responsible for debts. </li></ul><ul><li>Unlimited liability – personal assets at risk. </li></ul><ul><li>Difficult to raise capital – growth limited. </li></ul><ul><li>Long hours, difficult to cover holidays / illness. </li></ul>Relative Disadvantages
  8. 8. Sole Trader Relative Disadvantages <ul><li>Business worries not shared. </li></ul><ul><li>Division of labour / specialisation difficult. </li></ul><ul><li>Owner - non specialist – expertise thinly spread. </li></ul><ul><li>Lack of continuity. </li></ul>
  9. 9. Partnership <ul><li>Two or more owners - Partnership Act 1890. </li></ul><ul><li>Ordinary – all partners unlimited liability. </li></ul><ul><li>Limited – at least one partner has unlimited liability. </li></ul><ul><li>Professions – dentistry, solicitors, accountants. </li></ul>
  10. 10. Partnership <ul><li>Minimum 2, maximum 20. Exceptions. </li></ul><ul><li>Share in capital, profits / losses - Deed of Partnership. </li></ul><ul><li>Disputes usually settled by majority. </li></ul><ul><li>Comply with concept of ‘utmost good faith’. </li></ul>Legal Requirements on Formation
  11. 11. <ul><li>Easily formed. </li></ul><ul><li>More finance available – expansion easier. </li></ul><ul><li>Management / risks shared. </li></ul><ul><li>Financial affairs private. </li></ul><ul><li>Greater continuity. </li></ul>Relative Advantages Partnership
  12. 12. <ul><li>Unlimited liability. </li></ul><ul><li>Slower decision making. </li></ul><ul><li>Possible conflict. </li></ul><ul><li>Profits shared. </li></ul><ul><li>Membership limited </li></ul>Relative Disadvantages Partnership
  13. 13. <ul><ul><ul><li>Some partnerships allowed more than 20 partners. </li></ul></ul></ul><ul><ul><ul><li>Banks - no more than 10. </li></ul></ul></ul>Partnership NB
  14. 14. Limited Companies <ul><li>Separate legal identity to owners. </li></ul><ul><li>Incorporated businesses / registered companies. </li></ul><ul><li>Private (Ltd’s) & Public (PLC’s). </li></ul><ul><li>Shareholders elect directors to run the business. Directors appoint: Chairman, MD, Company Secretary. </li></ul>
  15. 15. Limited Companies <ul><li>One or more owner / shareholder. </li></ul><ul><li>Directors – family or friends </li></ul><ul><li>Generally smaller – common in UK. </li></ul>Private Limited Companies
  16. 16. Limited Companies Private Limited Companies <ul><li>Transfer of shares – restricted. </li></ul><ul><li>Owner of family firm can enjoy greater capital, continuity and limited liability without giving up too much control. </li></ul>
  17. 17. Limited Companies Public Limited Companies <ul><li>Two or more owners / shareholders. </li></ul><ul><li>Can sell shares to general public. </li></ul><ul><li>Larger than Ltd’s - greater capital - ease of share transfer . </li></ul>
  18. 18. <ul><li>Limited Liability. </li></ul><ul><li>Greater capital. </li></ul><ul><li>Greater continuity. </li></ul>Relative Advantages Limited Companies
  19. 19. <ul><li>Opportunities for specialisation / economies of scale. </li></ul><ul><li>Status. </li></ul><ul><li>Ltd. – protected from take-overs (share transfer restricted). </li></ul>Relative Advantages Limited Companies
  20. 20. <ul><li>Expensive to set up / run (particularly PLC). </li></ul><ul><li>Less flexible – restricted to M of A and A of A. </li></ul><ul><li>Accounts audited – costly. </li></ul>Relative Disadvantages Limited Companies
  21. 21. <ul><li>Personal guarantee may still be required for loans. </li></ul><ul><li>Ltd – shares not offered for public sale. </li></ul><ul><li>PLC – lack of privacy. </li></ul>Relative Disadvantages Limited Companies
  22. 22. <ul><li>PLC – threat of take-over. </li></ul><ul><li>PLC – divorce of ownership / control. </li></ul><ul><li>PLC – shareholder interest – short-term profits. </li></ul><ul><li>PLC – many procedures – slower to react to change. </li></ul>Relative Disadvantages Limited Companies
  23. 23. Limited Companies Legal Requirements PRIVATE PUBLIC Must submit to the REGISTRAR OF COMPANIES (at Companies House, Cardiff): FORM 10 & FORM 12 Director & Secretary Details + Registered Office. Director(s) signature(s) witnessed by legal person. MEMORANDUM OF ASSOCIATION Authorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders. ARTICLES OF ASSOCIATION Internal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s) Issued a CERTIFICATE OF INCOPORATION Can START TRADING Must produce a PROSPECTUS (history, prospects, invitation to buy shares) Must issue SHARES to the value of at least £50,000 (of which a quarter must be paid) Must then receive a TRADING CERTIFICATE from Registrar of Companies before it can start trading
  24. 24. - END - <ul><li>CLASSIFICATION OF BUSINESS </li></ul>Legal Structure

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