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Natalie Hopkins

Business Legal Structures and Classifications

The classification of companies in the context of legal structures refers to categorising businesses based on the legal framework under which they operate. The legal structure chosen by a company has implications for various aspects, including ownership, management, liability, and taxation, so it is important to choose the right one. The classification helps define the rights and responsibilities of the company and its owners. Common classifications of companies can be found on the following slides.

Legal Structures

incorporated

Unincorporated

Sole Trader

Partnership

Limited Partnership (LP)

Unincorporated business legal structures are simple to set up with a low administrative burden and provide full control over decision making. However, there is personal liability for debts accrued and the owners are taxed on personal income. Click on each type of business format to find out more:

Unincorporated Legal Structures

SECTION 1

Private Limited Companies (Ltd.)

Public Limited Companies (PLC)

Limited Liability Partnerships (LLP)

Incorporated business legal structures have formal administrative requirements and are separate legal entities. There is limited liability for owners and are taxed separately from personal imcome. These companies are distinct legal entities which means that they can enter into contracts, own property, and sue or be sued in their own name.Incorporated Legal Structures are made up of limited companies which have to be registered before they can start to operate. The owners of limited companies are shareholders and have a say in how the business is run through the AGM. They elect directors to represent their interests. Click on each type of business format to find out more:

Incorporated Legal Structures

SECTION 2

  1. Analyze the advantages and disadvantages of Samantha's choice to operate as a sole trader.
  2. Discuss the implications of personal liability in the context of the client's legal threat.
  3. Brainstorm alternative legal structures that Samantha could consider to mitigate personal liability while maintaining some level of simplicity.

Samantha runs a successful freelance graphic design business. She started the business three years ago and has been operating as a sole trader. Samantha enjoys the flexibility and simplicity of being a sole trader, but recently, she faced a situation where a client was dissatisfied with a project and threatened legal action. Samantha is concerned about her personal assets being at risk.

Read the case study and answer the folowing discussion points

Activity 1

  1. Explore the advantages and disadvantages of operating a Limited Company in the context of John and Emily's tech startup.
  2. Discuss the concept of limited liability and how it protects John and Emily's personal assets.
  3. Identify the administrative responsibilities and tax considerations that come with running a Limited Company.
  4. Consider whether the benefits of a Limited Company align with the growth goals of their tech startup.

John and Emily have been friends for years and decided to start a tech startup together. They established a Limited Company for their venture. The company has recently secured a substantial investment, and they are looking to expand their operations. However, they are unsure about the administrative requirements and tax implications of running a Limited Company.

Read the case study and answer the folowing discussion points

Activity 2

Sole Trader

  • This is the smallest type of business ownership, owned by one person but can have many workers.​
  • It is the most common type of business and is found in a wide range of activities (for example window cleaning, plumbing, electrical work).
  • The owner is also known as a sole trader.​
  • They will be responsible for all aspects of the business (including any debts).​
  • However, the sole trader gets to make all of the decisions and the workers are required to follow their instructions.​
  • The sole trader also gets to keep the profits.

Partnerships

  • A prtnership is usually formed by signing a Deed of Partnership (which sets out how profits will be shared and the different responsibilities and payments to partners) with the paperwork being supervised by a solicitor.
  • Partnerships are typically found in professional in professional work, for example a medical or dental practice, or a group of accountants or solicitors.
  • Partners can share knowledge, skills and workload.
  • Easier than a Sole Trader to raise capital.
  • But there can be disagreements and decision making can be more difficult.​
  • Just like sole traders, they are also responsible for any debts of the business.

Limited Partnerships

  • A Limited Partnership (LP) combines elements of both incorporated and unincorporated forms, but it is technically categorised as unincorporated.
  • In an LP, there are two types of partners: general partners and limited partners. General partners typically have unlimited personal liability for the debts and obligations of the partnership, while limited partners have limited liability, meaning their liability is generally restricted to the amount of their investment in the partnership.
  • While an LP has some characteristics that are similar to a corporation (such as the ability to have limited liability for certain partners), it lacks the full separate legal entity status that a corporation possesses. Unlike a corporation, which is a distinct legal entity, an LP is more of a contractual arrangement between its partners.
  • The general partners are typically responsible for the management and operation of the business, while limited partners are more passive and do not participate in day-to-day management to maintain their limited liability status.
  • To form a Limited Partnership in the UK, a formal registration process is required. This involves submitting the necessary documentation to Companies House, which is the UK government's official register of companies.

Private Limited Company (Ltd.)

  • A private limited company can raise more money than partnerships and sole traders as they just have to sell shares (with the perission of the Board of Directors), but they can't sell their shares on the stock market (so they tend to be family run businesses).
  • Examples include medium-sized factories.​
  • Unlike partnerships and sole trader businesses, the owners in a LTD are not personally responsible for the debts of the business. This is known as limited liability.​

Public Limited Companies (PLC)

  • Public limited company is the largest type of business ownership.​
  • There are numerous shareholders in a PLC as it can sell shares on the stock market, so it can be advertised to many more future investors.​ - however, to have shares quoted on the stock exchange can be costly.
  • PLCs can raise more money than LTDs, partnerships and sole traders.​
  • Control of the business can be lost if large quantities of purchased as part of a 'takeover bid'.
  • Much like LTD companies, the owners are not responsible for the debts of the business. This is known as limited liability.
  • PLCs are managed by a group of directors who are employed by the shareholders to make sure the business achieves its aims and objectives.​

Limited Liability Partnerships (LLP)

  • An LLP is a legal entity that provides limited liability to its partners while retaining certain characteristics of a partnership.
  • The partners in an LLP have limited personal liability for the debts and obligations of the business.
  • An LLP has a perpetual existence, meaning that its existence is not affected by changes in the partners. The death, withdrawal, or addition of partners does not necessarily lead to the dissolution of the LLP.
  • The partners in an LLP can actively participate in the management of the business.​