1. Legal forms of business entityLegal forms of business entity
OTHER (CIC, TRUST, IPS, EEIG, etc.)
LIMITED LIABILITY
PARTNERSHIPLEGAL
FORM
PRIVATE LTD CO.
(LTD)
PUBLIC LTD. CO
(PLC)
LIMITED
COMPANY
SOLE
TRADER
PARTNERSHI
P
PERSONA
L
ENTITIES
IMPERSONAL
(CORPORATE
)
ENTITIES
2. Personal versus impersonal businessesPersonal versus impersonal businesses
In both of these forms, the people
are the business. All assets are
owned by them and all debts are
owed by them in person
A company is a business in its own
right. It sells, buys, accumulates wealth,
incurs debts and employs people. If you
form a limited company, you must
clarify your relationship with it, e.g. as a
shareholder, director or employee.
Sole trader Partnership
Limited
company
Sales revenue
Profits
Debts etc.
Sales revenue
Profits
Debts etc.
Sales revenue
Profits
Debts etc.
3. • The business is owned by one individual only - but they may employ
others. Some sole trader businesses are substantial organisations
• In the eyes of the government and the law, the owner is the business
• The owner has rights to all of the business’s income and assets
• The owner is liable for all of the business’s debts
• The business ceases to exist with the owner's death or retirement
• Profit from the business is treated by the government as personal
income and taxed accordingly
The sole traderThe sole trader
4. SOLE TRADER: ADVANTAGES &
DISADVANTAGES
SOLE TRADER: ADVANTAGES &
DISADVANTAGES
Advantages:
Minimum of Formalities
Independence and control
Flexibility to market changes
Profit goes to the proprietor
Good customer relations
Disadvantages:
Financially limited
Unlimited liability (ie family house as a
security)
Lack of Finance
Problems in taking illness or holiday
leaves
Limited expertise
Sole trader
5. • A partnership is a voluntary association of two or more people
for the purpose of operating a business
• A partnership is in concept a collective of sole traders, and
most of the same logic applies to their legal and taxation
status
• However, each partner is responsible for all of the debts of the
partnership under the concept of ‘joint and several liability’
• A genuine ‘sleeping partner’, who provides capital but plays
no part in management would have liability limited to their
investment
The partnershipThe partnership
6. PARTNERSHIP: ADVANTAGES &
DISADVANTAGES
PARTNERSHIP: ADVANTAGES &
DISADVANTAGES
Advantages:
Small limited company, flexible,
closed to “grass roots”
Simple financial/legal
procedures
Mutual confidence between
partners
Not too complex system control
Degree of interchangeability
More assets to use as security
for loans
Disadvantages:
Partners have limited liability
Withdrawal or death may dissolve the firm
Agreements of partners
Problems in taking illness or holiday
leaves
Shared control by the partners that they
have human feelings
7. The limited
company
The limited
company
• an impersonal legal and taxation entity, independent from its
owners and managers
• is able to trade, employ people and take on debts as that entity
• can raise capital by selling shares
• has sole responsibility for its debts
• must submit annual audited accounts - penalties for late
submission
• minimum of two shareholders and one director (Ltd) - but no
maxima
• company directors have certain legal responsibilities
The Companies Act 1985 differentiated between limited companies
8. ADVANTAGE
S: • Small limited company, flexible, closed to “grass roots”
• Not too bureaucratic
• Simple financial/legal procedures
• Degree of interchangeability
• Trust and mutual confidence between partners
• Shares are mechanism for raising external capital
• Partners can share the the cost of premises, staff, services
• Limited liability - but not if you sign personal guarantees!
• Possible enhancement of credibility - esp. Plc status
Limited company status: advantages and disadvantagesLimited company status: advantages and disadvantages
9. DISADVANTAGE
S:
Limited company status: advantages and disadvantagesLimited company status: advantages and disadvantages
• Higher costs and complexity of formation
• General partners have unlimited liability
• Any partners can enter to an agreement
• Decision -making may be difficult
• Are not as stable as sole trader firms (partners
personality)
• More difficult to close
10. • Shares in private companies can be traded with the
agreement of the shareholders
• Shares in public companies can be offered to the general
public
• A private company MUST have at least TWO
shareholders and a public company MUST have at least
SEVEN.
• A private company MUST have at least ONE director and
a public company MUST have at least TWO.
Differences between private limited companies
and plcs
Differences between private limited companies
and plcs
11. Minimum Requirements - private limited company UK
(Ltd.)
• One director. two shareholders
• Minimum share capital: £2
Minimum Requirements - public limited company UK
(Plc)• Two directors
• Minimum authorised share capital: £50,000
Forming a limited companyForming a limited company
Company formation
• The main documents are the Memorandum of Association (capital,
name, borrowing powers)
• Articles of Association (transferring shares, meetings, rules,
powers of directors)
In the UK, companies (and LLPs) must be registered with Companies
House (www.companieshouse.gov.uk)
12. Minimum Min. % Min. no.
Corporation
Capital capital share-
tax
(Euro) paid up holders
rate
UK 3 none 2 25-33%
France 7,600 100% 1 34%
Germany 26,000 50% 1 45%
Italy 10,200 100% 2 52%
Spain 3,100 100% 2 35%
Sweden 11,000 100% 1 28%
Greece 10,000 100% 2 40%
Limited companies: comparative legal requirementsLimited companies: comparative legal requirements
13. FINANCEFINANCE
• Ordinary shares: received by the Board of Directors according to
the size of the profits.
• Preference shares received a fixed rate of dividend.
• Debentures: Stocks, not shares that present a loan to the company.
Debenture holders are creditors of the business that receive a fixed
rate of interest. They take no part in running company.
14. GENERAL STRUCTURE OF A LIMITED COMPANYGENERAL STRUCTURE OF A LIMITED COMPANY
SHAREHOLDERS
Own the assets of the firm. Have a limited
liability
BOARD OF DIRECTORS Run the
business, formulate policy, shareholders, interests
Preference shares
Fixed divided paid before ordinary
share dividends
Ordinary shares
Voting rights to elect directors
CHAIRPERSON
Chairs board meetings and delivers Annual Report
MANAGING DIRECTOR
Responsible for running of the firm
DEPARTMENT MANAGERS
E.G. PRODUCTION, MARKETING,
PERSONNEL,ACCOUNTS, ADMINISTRATION,
RESEARCH
15. • Enjoys the legal status of incorporation even in a case
of death
• Continuity of succession
• Who invest in limited companies have limited
liability/limited risk.
• Companies have a separate legal entity.
• Large amount of capital can be raised from a large
number of investors.
• Stocks and shares can easily be transferred so the
investors can recover their capital
• Possible to employ specialist managers.
• Control of a company is obtain by owning the 51%
Advantages & Disadvantages plcAdvantages & Disadvantages plc
16. • The procedures for setting up the company are costly and
complicated.
• Detailed annual accounts have to be prepared, audited,
annual report, register and shareholdings.
• Shareholders have little control in practice.
• Difficult to get credit for the new companies.
• Managers do not put in as much effort as the sole traders or
partners.
• Professional managers require high salaries and expenses
not always fully justified by the performance.
• Companies may become large and bureaucratic.
• Public companies are vulnerable to take over bids.
Advantages & Disadvantages plcAdvantages & Disadvantages plc
17. Sole trader or partnership status might be appropriate if:
• you want to get into business quickly and easily,
• you want direct control of the business
• you don’t expect to need substantial external funding
• you have a particularly strong concern for privacy or aversion to regulation
Some suggested decision rules for deciding on a legal formSome suggested decision rules for deciding on a legal form
(But there will many exceptions and other considerations!)
Limited company status might be appropriate if:
• you are concerned about the total liabilities of the business and the
exposure of yourself and your family to financial risk
• you have a clear view of sale as an exit route
• you have very high growth aspirations
• it is likely that you will need additional external equity funding
18. It is important to remember that the various legal forms are defined by law and that
there are specific forms of language associated with each. You should try to ensure
that you use these correctly, as incorrect use could disproportionately undermine
your credibility with a professional audience.
Here are some common examples of incorrect usage:
• Saying that you will be selling shares in a partnership (this is only possible in a
limited company).
• Describing yourselves as directors if your business is a partnership (‘director’ is
a specific role associated with a limited company).
• Describing yourselves as partners if you are really directors of a limited company
(‘partner’ is a term associated with a partnership).
• Paying yourself a dividend if you are trading as a sole trader or partnership
(dividends are paid against share capital in a limited company).
• Paying yourself drawings if you are a limited company (the term ‘drawings’ refers
to the withdrawal of one’s own money from a partnership or sole trader
business).
Hot Tip! Watch your language!Hot Tip! Watch your language!
