TYPES OF BUSSINESS AND PLANING

Types of Business And Planing

Explanation

So you have a good business idea and you like the idea of being your own boss, but what sort of business should you start? The legal structure of the business is quite important as different types of business are subject to very different regulations and the wrong choice now could have significant repercussions in the future. In this section we look at the main types of legal structure for a business.

Unincorporated firms

An unincorporated firm is one that is not registered with Companies House as a business and there are two main types - sole trader and partnership.

Sole trader

A sole trader is the simplest form of business organisation. There are no legal requirements - you simply set up and get on with trading. Any income or profit that you earn is yours and yours alone and you pay income tax on that income. There are few legal constraints and you have what is called unlimited liability. This means that any debts are your debts and so if you stop trading with large debts, you will be personally responsible for these debts. Creditors will have a claim on your house, yacht or any other personal assets you may have.

Partnership

This is, in essence, like a sole trader but with the ownership shared between partners. However, a partnership should have a partnership agreement (a legal document) drawn up to show the rights and responsibilities of all the partners. There may also be 'sleeping partners' who own a share of the business but are not involved in the day-to-day running of the business. A partnership also has unlimited liability. Partnerships are common in the professions such as accountancy and law.
N.B. Since April 2001 there has been a new form of partnership called a limited liability partnership (llp). This is like a cross between a partnership and a limited company as it has limited liability (like a limited company), but has to be owned by at least two members - being a partnership!

Incorporated firms

The next step up in terms of legal structure is to form an incorporated firm. That is a firm that is a registered firm at Companies House (who are the government registrar of companies). There are two main types - a private limited firm and a public limited firm.

Private limited company
A private limited company is one where the liability is limited. Unlike a sole trader where the liability is unlimited, with a limited company the liability is limited to the value of the shares issued. This means that any debts are debts of the company and not of the owners. To form a limited company it must be registered at Companies House and the firm must have various legal documents including a Memorandum and Articles of Association. There need only be one director and they have to prepare annual accounts and submit them to Companies House. Private limited companies can range significantly in size. They may consist of a small family based business or they could be the Virgin group (which is a private limited company majority owned by Richard Branson).

Public limited company
Like a private limited company, a plc has shares, but the key difference is that these shares can be bought by anyone freely on a stock exchange. Ownership is therefore open to anyone who wants to buy shares. PLCs have legal requirements in that they have to produce annual reports and accounts and file them with Companies House. There are various other requirements including:
1.You must have at least two directors.
2.You have a fully qualified Company Secretary.