Different Types of Business Structures
(WS2 and W16)
Outcomes
1) Advise on the procedural aspects of converting an unincorporated business into a
business run through the medium of a private limited company.
2) Explain the difference between a LP and a LLP.
3) Identify the main features of a general partnership and a LLP and explain how these
differ from and are similar to the features of a company.
Incorporated and Unincorporated Business (1.2, page 4)
Unincorporated businesses – few/no administrative steps to be taken to be formed by
law. No separate legal status – business is treated the same as its owners. E.g. Sole
Trader and Partnership.
Incorporated businesses – have to go through normal registration proceed before they
can legally exist. Such businesses are legal entities + their existence is separate from
their owners (separate legal personality). E.g. Private Limited Company, Public Limited
Company and Limited Liability Partnership.
Sole Trader (1.3, page 4 to 5)
Sole Practitioner or Sole Proprietors
One person owns business (keeps earnings and profits to themselves) and runs business
as self-employed person but can have people employed i.e. working for them.
Sole trader = any trade or profession. E.g. electrician, dog walker, hairdresser or lawyer.
No formal steps but must register with HM Revenue and Customs for tax purposes (e.g.
income tax).
Largest group in UK – approx. 3.5m sole traders.
Sole trader is personally liable for all the debts of business. As business has no legal
status of its own, the sole trader’s business assets and personal assets are treated as
one and the same. E.g. florist fails – business assets such as shop, delivery van +
personal assets such as savings, house and car will be taken/sold to repay debts. If
cannot pay debt using business and personal assets, then will be bankrupt = unlimited
liability.
When sole trader dies / retired – business ceases but business or individual assets can
be sold if buyer/s can be found.
General Partnership (1.4, page 5 to 6)
Two or more persons run and owns business together. Partnership run on basis of
contract (written/oral).
Carry out any trade or profession e.g. dentistry, architecture, plumbing etc.
Slaughter and May is a partnership - 115 partners and 1,164 employees.
Governed by Partnership Act 1980 (PA 1890). S1 – partnership is legally formed when
two or more persons carry out a business with view of making profit. Once this definition
is established = partnership exists.
No formalities such as registration with public body – info can be confidential.
No separate legal status = partners have unlimited liability for debts of partnership –
creditors can pursue business and personal assets. Liability is joint and several among
partners = creditors can choose to seek full amount of debt from any one individual
partners or from all partners together. If one partner cannot pay, then money will be
sought from another partner.
Each partner must register with HMRC for tax purposes. Partners taxed separately as
self-employed individuals and pay income tax on their share of profits of the partnership.
Profits and losses are divided between partners.
Limited Partnership (LP)(1.5, page 6 to 7)
Unincorporated business established under the Limited Partnership Act 1907. An LP =
partnership where there must be at least one general partner who has unlimited liability
for all debts of partnership and can have partners who have limited partners whose
, liability is limited to the amount he initially invested in the business (but if you have limited
liability then you cannot control or manage the LP; not have power to make binding
decisions on the LP and cannot remove contribution as long as LP exists – if do not follow
these rules then can lose protection of limited liability and be treated as general partner
with unlimited liability).
Must be registered with the Registrar of Companies at Companies House in
accordance with S8 of the LPA 1907 before starting trading. LP5 application form (can
find form on Company’s House website) as set out in S8 of the LPA 1907 (include info
such as full name of partners, nature of business, address, terms which LP is to be
entered to, amount contributed by each partner)– completed and signed by all partners
and sent to Registrar with applicable fee -£20 for paper application or same day
registration = £100. Once successfully registered, certificate of registration will be issued
and sent to general partner/partners. LP comes into existence on date of registration of
certificate.
Contractual Co-operation (1.6, page 7)
Can be known as Joint ventures
Two or more parties can run a business together on basis of co-operation agreement
(agreement can be to share costs and resources between the parties) / for a particular
project. This is less formal then partnership and other forms of business.
Used: explore/develop oil and gas fields, property development and to conduct research
and development with view to develop new products.
Advantage = lack of formality – agreement can be confidential
Disadvantage = lack of identity, lack of organisational structure and danger of business
becoming a partnership by fulfilling criteria under S1 of PA 1980.
Company (1.7, page 7 to 8)
Companies perform wide range of economic activities e.g. manufacturing cars, online
dating services, banking and insurance services, selling food, developing apps for
smartphones or running retirement homes for elderly. Solicitors were not allowed to
operate their business as company but under provision of Legal Services Act 2002
known as “Tesco Law” – law firms can become companies (e.g. Gateley).
Largest company in UK is joint British-Dutch oil company Royal Dutch Shell = £148b.
Company has separate legal personality i.e. has legal entity separate from both owners
and people who run company on day-to-day basis. Company = legal person.
Shareholders and directors make decisions for the company. Directors = run company
daily whereas shareholders (also known as members) = owners of company who get
involved only in the more important decisions affecting company. Shareholders get share
in profits made by company.
Constitution of company states out rules which govern how the company should be run.
Formed by registering certain documents with public official, Registrar of Companies at
Companies House and pay fee (£40 if docs submitted in paper form or £12 online or £10
using Companies House Software or £100 paper or £30 for same day registration) in
accordance with requirements of Companies Act 2006 (this can take time for company
to start running – disadvantage). Once registered = Registrar will issue a certificate of
incorporation. Company legally exists on date of incorporation of certificate.
o Companies house aims to process paper applications within 5 days and electronic
ones within 24 hours.
No income tax but corporation tax – need to register with HMRC once company formed +
as employer for PAYE and NI purposes.
Unlimited Company (1.8, page 8 to 9)
Defined in s 3(4) of the CA 2006 as a company which does not have any limit on the
liability of its members.
Members i.e. shareholders are companies’ owners and if they want to un business
through an unlimited company then they will be required to use not only company’s
assets but if necessary their own personal assets to pay off company’s debts.
Unlimited companies = rare
Advantage of such company = companies’ finances do not have to be made public.
(WS2 and W16)
Outcomes
1) Advise on the procedural aspects of converting an unincorporated business into a
business run through the medium of a private limited company.
2) Explain the difference between a LP and a LLP.
3) Identify the main features of a general partnership and a LLP and explain how these
differ from and are similar to the features of a company.
Incorporated and Unincorporated Business (1.2, page 4)
Unincorporated businesses – few/no administrative steps to be taken to be formed by
law. No separate legal status – business is treated the same as its owners. E.g. Sole
Trader and Partnership.
Incorporated businesses – have to go through normal registration proceed before they
can legally exist. Such businesses are legal entities + their existence is separate from
their owners (separate legal personality). E.g. Private Limited Company, Public Limited
Company and Limited Liability Partnership.
Sole Trader (1.3, page 4 to 5)
Sole Practitioner or Sole Proprietors
One person owns business (keeps earnings and profits to themselves) and runs business
as self-employed person but can have people employed i.e. working for them.
Sole trader = any trade or profession. E.g. electrician, dog walker, hairdresser or lawyer.
No formal steps but must register with HM Revenue and Customs for tax purposes (e.g.
income tax).
Largest group in UK – approx. 3.5m sole traders.
Sole trader is personally liable for all the debts of business. As business has no legal
status of its own, the sole trader’s business assets and personal assets are treated as
one and the same. E.g. florist fails – business assets such as shop, delivery van +
personal assets such as savings, house and car will be taken/sold to repay debts. If
cannot pay debt using business and personal assets, then will be bankrupt = unlimited
liability.
When sole trader dies / retired – business ceases but business or individual assets can
be sold if buyer/s can be found.
General Partnership (1.4, page 5 to 6)
Two or more persons run and owns business together. Partnership run on basis of
contract (written/oral).
Carry out any trade or profession e.g. dentistry, architecture, plumbing etc.
Slaughter and May is a partnership - 115 partners and 1,164 employees.
Governed by Partnership Act 1980 (PA 1890). S1 – partnership is legally formed when
two or more persons carry out a business with view of making profit. Once this definition
is established = partnership exists.
No formalities such as registration with public body – info can be confidential.
No separate legal status = partners have unlimited liability for debts of partnership –
creditors can pursue business and personal assets. Liability is joint and several among
partners = creditors can choose to seek full amount of debt from any one individual
partners or from all partners together. If one partner cannot pay, then money will be
sought from another partner.
Each partner must register with HMRC for tax purposes. Partners taxed separately as
self-employed individuals and pay income tax on their share of profits of the partnership.
Profits and losses are divided between partners.
Limited Partnership (LP)(1.5, page 6 to 7)
Unincorporated business established under the Limited Partnership Act 1907. An LP =
partnership where there must be at least one general partner who has unlimited liability
for all debts of partnership and can have partners who have limited partners whose
, liability is limited to the amount he initially invested in the business (but if you have limited
liability then you cannot control or manage the LP; not have power to make binding
decisions on the LP and cannot remove contribution as long as LP exists – if do not follow
these rules then can lose protection of limited liability and be treated as general partner
with unlimited liability).
Must be registered with the Registrar of Companies at Companies House in
accordance with S8 of the LPA 1907 before starting trading. LP5 application form (can
find form on Company’s House website) as set out in S8 of the LPA 1907 (include info
such as full name of partners, nature of business, address, terms which LP is to be
entered to, amount contributed by each partner)– completed and signed by all partners
and sent to Registrar with applicable fee -£20 for paper application or same day
registration = £100. Once successfully registered, certificate of registration will be issued
and sent to general partner/partners. LP comes into existence on date of registration of
certificate.
Contractual Co-operation (1.6, page 7)
Can be known as Joint ventures
Two or more parties can run a business together on basis of co-operation agreement
(agreement can be to share costs and resources between the parties) / for a particular
project. This is less formal then partnership and other forms of business.
Used: explore/develop oil and gas fields, property development and to conduct research
and development with view to develop new products.
Advantage = lack of formality – agreement can be confidential
Disadvantage = lack of identity, lack of organisational structure and danger of business
becoming a partnership by fulfilling criteria under S1 of PA 1980.
Company (1.7, page 7 to 8)
Companies perform wide range of economic activities e.g. manufacturing cars, online
dating services, banking and insurance services, selling food, developing apps for
smartphones or running retirement homes for elderly. Solicitors were not allowed to
operate their business as company but under provision of Legal Services Act 2002
known as “Tesco Law” – law firms can become companies (e.g. Gateley).
Largest company in UK is joint British-Dutch oil company Royal Dutch Shell = £148b.
Company has separate legal personality i.e. has legal entity separate from both owners
and people who run company on day-to-day basis. Company = legal person.
Shareholders and directors make decisions for the company. Directors = run company
daily whereas shareholders (also known as members) = owners of company who get
involved only in the more important decisions affecting company. Shareholders get share
in profits made by company.
Constitution of company states out rules which govern how the company should be run.
Formed by registering certain documents with public official, Registrar of Companies at
Companies House and pay fee (£40 if docs submitted in paper form or £12 online or £10
using Companies House Software or £100 paper or £30 for same day registration) in
accordance with requirements of Companies Act 2006 (this can take time for company
to start running – disadvantage). Once registered = Registrar will issue a certificate of
incorporation. Company legally exists on date of incorporation of certificate.
o Companies house aims to process paper applications within 5 days and electronic
ones within 24 hours.
No income tax but corporation tax – need to register with HMRC once company formed +
as employer for PAYE and NI purposes.
Unlimited Company (1.8, page 8 to 9)
Defined in s 3(4) of the CA 2006 as a company which does not have any limit on the
liability of its members.
Members i.e. shareholders are companies’ owners and if they want to un business
through an unlimited company then they will be required to use not only company’s
assets but if necessary their own personal assets to pay off company’s debts.
Unlimited companies = rare
Advantage of such company = companies’ finances do not have to be made public.
