Business Law Assignment

A business can either be private owned, state-owned or not-for-profit organization where goods and/or services are exchanged for one another or for monetary value. When planning to operate any type of business, great care should be taken and professional should be sought. This is because the chosen business type have implications on requirements, taxes, controls, paperwork, and other aspects related to running a business.

Sole Trader: As the name suggests, a sole trader is a one who runs his/her business on his/her own. He/she is the one who is responsible for decision making. Such businesses areusually kept under personal name e.g., Charlie or Charlie Enterprises (There is no need for registering the name of business, but the trader must display name and/or business name on business documents). Being a sole trader, the individual works for multiple clients, owns/operates a small business with unlimited personal liability. He/she is responsible for all investment, sales and expenses, makes all trade contracts under trader’s own name, and retains profit after taxes.He/she owns any business losses such as the trader can be sued for their business and will bear all debts due to minimal support.

A sole trader must register with HMRC as self-employed.

A general partnership: As explained in The Partnership Act 1890, a general partnership is the relation which subsists between persons carrying on a business in common with a view of making profit (UK Government, 2018).

This type of partnership gives a pretty straightforward simple way for individuals to own and manage a business. It is very similar to sole trader, except in general partnership there are more than one owner who contribute capital, his or her time, skills and services to the day to day business activities. Subjected to the terms of partnership agreement (if any) and unlike sole trader, the business property will be owned jointly and all contracts will be made with the partners even (if the partnership has not adopted a trading name). In addition to that all, business debt, obligation and liabilities rest with the partners as individuals but creditors can claim a partner’s personal assets in the event of a claim (Forbes Solicitors, 2018).

Partner’s personal liability is a matter of concern as in a partnership, as previously discussed each of the partner is severally and jointly accountable for debts. In an unfortunate instance of a partner leaving, the other partner(s) would be responsible for the whole debt even if the debts were initially acquired by others(Korchak, 2017).

Members of general partnership must also register with HMRC as self-employed.

Limited Liability Partnership: A limited liability partnership (“LLP”) is a type of partnership which adds another person to a business whilst processing profits and losses through one income tax return.This type of partnership however, provides greater internal flexibility to a structure of a private company as partner liabilities are limited/individual.

This partnership structure (i.e., LLP)is owned by its members as a separate legal entity to operate/make business contracts, and staff employment.It sues and can be sued, much like a private company. The members/partners will be charged income tax on their earnings (similar to the tax procedure of a general partnership).

Members of Limited Liability Partnership must also register with HMRC as self-employed.

CA2006, chapter 46, part 4 states that,

1. A private company is any company ’that is not a public company’, and
2. A public company is a company limited by shares or limited by guarantee and having a share capital
   1. whose certificate of incorporation states that it is a public company, and
   2. In relation to which the requirements of this Act, or the former Companies Acts, as to registration or re-registration as a public company have been complied with on or after the relevant date. (UK Government, 2006)

Shareholders own both private and public companies. Limited type of companies is more advantageous for Individuals who wishes to operate their business in comparison to operating as sole trader or a partnership. One of the advantage for limited business is that shareholders liability is limited and their personal assets are secured.

Most common businesses registered in the UK are Private limited. Quiet often companies start their businesses as private, which can become public limited at a later stage. For re-registration as a public limited company, a private limited company can pass special resolution and deliver form RR01 to Companies House. This procedure work both ways and a public company can be re-registered as private company by special resolution and submitting form RR02 to Companies House.

Following are five differences between private and a public limited company;

1. Companies House and HMRC compliance: to comply with Companies House and HMRC, private companies are required to add Ltd after the company’s name such as ‘Mahmood Consultancy Ltd’. Requirements for public companies is to display ‘PLC’ after their name such as ‘National Grid PLC’.

A company can also adapt a trading or business name, which is different to their registered name. A trading name must not use PLC or LTD after the name.

2. Trading time: Private companies can start trading immediately upon incorporation, whereas a Public company must have a trading certificate before it can start trading.
3. Share capital: No minimum share capital is required for private companies whereas public companies need minimum of £50,000 (€57,100) to operate.
4. Public Share offering: Private companies are not allowed to offer shares to public on the other hand, public companies can offer shares for sale.
5. Accounts after the accounting year ends: Private companies have 9 months time period to submit their accounts after the accounting year ends, whereas public companies have to submit their accounts within  6 months

As discussed, a private limited company is any company that is not a public limited company. To help entrepreneurs, the UK government have made it very simple and super friendly to set up a private limited company.

In the UK, Companies House is responsible for their registration. There are multiple ways to form a company, (1) directly (electronically or by completing form IN01) (2) third party services (formation agent or accountant) or (3) third party software (UK Government, 2018).

The skeleton process is as follows:

• Set up a limited company
• Complete the incorporation process
• Legal requirements/responsibilities

Detailed process to set up a company or formally known as ‘incorporation’ is as follows;

1. Name: A company’s name must be unique but must not be similar or offensive. Permission must be sought from relevant authority if a company’s name contains sensitive word such as ‘European’ or ‘Accredited’.

   A company can adapt a trading or a business name, which is different to their registered name. Similar rules as company name applies here except, a business name must not include ‘Ltd’ and company should consider registering trade mark to stop unauthorised use of their business name (UK Government, 2018).

2. Address: You must have a physical address in the UK where official correspondence can be delivered. This information is publicly available online(UK Government, 2018).

1. Officials: Private companies must have one director, who must not have been disqualified from being a director and their minimum age must be 16 years and older to ensure that the company’s accounts and reports are filed on time. Private limited companies aren’t required to have a company secretary but a company secretary can be a director. From 2016, a business is required to keep record of individuals who owns 25% or more shares/voting rights, such individuals are called ‘People of Significant control’ (UK Government, 2018).

1. Share Structure& Shareholders: A private limited company must have minimum one shareholder and there is no maximum number of shareholders. It is best to discuss share structure with a professional to avoid complications. Upon incorporation a business is required to issue a minimum of 1 share(UK Government, 2018).

1. Memorandum and articles of association: Articles of Association act as a rule book to govern a business such as decision -making, dividends etc. on the other hand, Memorandum acts as an agreement that confirms intentions of people of significant control and details of shareholders(UK Government, 2018).

1. SIC Code: Standard Industry Classification identifies business activity. A business can have up to 4 SIC codes to identify their business. Full list of codes are available at (UK Government, 2018).
2. Corporation Tax: Once incorporated, a business has a maximum time period of 3 months to register for Corporation tax(UK Government, 2018).

1. Further considerations: A business should also consider VAT registration and registration with HMRC as an employer. Usually, these tasks are taken care by accountants on their behalf.

Options available to a private limited company in the event that the business is not doing well

1. Company Voluntary Arrangement

The UK insolvency law provides the limited company a benefit to enter into a company voluntary arrangement. The CVA’s procedures help the company             in dealing with its debt problems. If the company is insolvent the CVA procedures can be used to pay off its debts over a fixed period of time. The company can also continue trading if the creditors have no objection.

The benefit of CVA is that the company is not required to tell about its insolvency to its customers. It remains as a private matter between the company and its creditors. It is a legal obligation for all the creditors to accept the terms of the CVA. It is an act of recovery and is good for the companies working under burden of debts. It consolidates the debt payments into one single payment (Begbies-Traynorgroup, 2018).

2. Negotiations

Negotiation with creditors can help in controlling debt by lowering the due amount. Successful negotiation with the creditors can help in avoiding garnishment and bankruptcy. It can also be defined as debt settlement or debt negotiation.

3. Pre pack administration

Pre pack administration can be defined as a procedure of selling company’s assets to buyers or to its existing directors to solve the problem of insolvency.  Pre pack helps in continued trading by smooth and quick transfer of a business. Pre pack sale would help in preventing the risk of value diminution. It helps in reducing costs also as the control of business; risk and cost associated to it are transferred to its buyer. The main aim of administrators is to get the best price for company’s assets so that the preferred creditors can be paid (Company Rescue, 2018).

4. Receivership

It is the process of legally apointing a receiver or custodian of the compay’s assets. The receiver has the fianal decision making power to decide how to manage the company’s assets. The receivership helps in continue trading of the business if the company’s assets are able to pay off the debts. The main aim of receiver is to determine the value of floating charge holder. The receiver will work to bring the comapny in period of recovery by restructuring the company, managing its assets and obligations. It can also liquidate the assets to meet the debt (Realbusinessrescue, 2018).

5. Liquidation

It is the most common insolvency procedure. Liquidate means to turn goods into liquid assets. To liquidate is to sell off its assets to pay off the debts to its creditors. In urgency the creditors can force the business for a compulsory liquidation. Or the company’s members can begin the liquidation through voting known as voluntary liquidation.

Compulsory liquidation is when court order has been made to wind up the company. The legal process involves the company’s removal from companies house register. The liquidation proceedings can be stopped on genuine application of liquidator or creditor. After the stopped proceedings the directors regains control over business operations of the company.

6. Increasing assets

The greatest amount in assets should be realised to distribute to creditors if the company has gone for insolvency procedures. It alters the law of consideration and limited liability. If the director fails in insolvency procedures, he is liable for company’s debts.

(Pennythots, 2018).

7. Voidable transactions

Voidable transactions involve the law that makes the liquidator able to ask the creditor to pay back the payment received by the company. A transaction can be defined as an undervalue when the company receives insufficient consideration and became unable to pay off its debts. These transactions makes the creditors receive less amount of debt as compared to liquidation. These are referred as granting of securities over the assets. The transactions entered by the bankrupt are also considered as voidable transactions. The transaction can be set aside if the borrower at the time of making it was insolvent or became insolvent as a result

(Nortonrose Fulbright, 2014).

8. Trading at a loss

Trading at a loss means the company continues its business operations despite of being insolvent. In such case the directors are required to make going concern statement. In going concern statement the directors defines the reason of trading while the company is insolvent. And it also includes the strategies of trading during insolvency. In such case if the directors are ought to know that the company has no prospect of recovery may personally be made liable to contribute to the company’s debts. It is not an offence the directors should work for minimising loss for creditors and should go for creditor’s voluntary liquidation or company administration.

9. Dissolution

It is an informal insolvency procedure. It is a method of dissolution if the company is not able to appoint an administrator. If the company is going through liquidation it cannot apply for strike off. It is a compromise agreement between the company and its creditors.

It is a process of dissolving or winding up the company. The creditors can apply for restoring and registration of the company if it’s dissolved. To strike off the company is required to stop trading and inform the creditors about it. And they should be informed that company does not have sufficient funds to enter into formal insolvency procedures. The creditors may also require winding up the company at their own expense.

10. Dealing with the debts of a limited company

The company is to analyze that whether it can trade with its financial difficulties. The budget sheet of company with its income and expenses should be prepared. If the average income of the company is positive then analyze the offers for all the creditors of the company (Adviceni, 2015).

Advise Charlie and Bravo as to which form of business is more suitable to them, by critically comparing and contrasting the advantages and disadvantages of a general partnership and a limited company, with particular references to the aspects of liability, taxation, borrowing power and statutory obligations.

General partnership is a most common form of business in UK. More than hundred partnerships are currently running in UK.  Formation of partnership business makes it more attractive for the people to start their business.

Below are some advantages and disadvantages of general partnership.

• Less Formal with fewer legal obligations

One of the important features of partnership is that it requires less formality as compared to that involved in a limited company. The formation of partnership is also comparatively simple. The accounting process of partnership firm is also simple as compared to limited company. It does not require filling the corporate tax return. There is only a need to keep record of earnings and expenses. In partnership, each partner is required to file their own tax return including the details of earning from the partnership. Unlike a limited company, partnership does not require to maintain a set of statutory books (Korchak, 2017).

Unlike the limited company, partnership does not require registration. It can be started without any legal procedure or expenses. Its formation is economical and simple.

It provides the benefit of companionship and mutual support. In partnership, each partner is entitled to bear the risk.

• Access to knowledge, skills and experience

Each partner will bring his knowledge, skills, experience and contacts for the betterment of a business.

Better decision making

It is well managed by all the partners and unique perspective of each partner will help in better decision-making for an organization.

With more number of partners, more money will be available to invest in the business.

There is no double taxation; the owners get the earnings directly. The profit is shared between the partners. While in limited company, the profit is retained by the company and paid out after the approval from shareholders (Accounting Tools, 2017).

The partners are liable for all kinds of debts and loans incurred by a business. The personal property of the partners is also at risk in case of any trouble.

The ordinary income of each partner is subject to self-employment tax.

Each partner should have the skills of being flexible and compassionate. There may arise conflict between the partners in handling business issues, levels of investment and the strategic direction for the business (Careerride, 2018).

• Difficult decision making

Decision- making in partnership is tough and time taking as the matter has to be discussed with each of the partner.

The business in partnerships cannot own property and borrow on its own right that makes it difficult for the growth of a business.

The profits of the business should be shared among the partners. According to partnership act 1890, profits are equally shared among the partners.

• Limited access to capital

The banks prefer the limited company as it provides high accounting transparency, separate legal entity and performance as compared to partnership.

Any partner cannot transfer his interest in the business without the consent of the other partners.

Partnership can be dissolved if one partner withdraws from the business or dies.

Each partner works as an agent of the business and is liable for the deeds of the other partners also.

• The business has no independent legal status

The business has no legal existence. This leads to insecurity and instability in a business (Tasmanian Government, 2017).

Below are some of the advantages and disadvantages of the limited company:

Advantages of Limited Company

Such company provides the benefit of raising capital by selling shares to its shareholders or issuance of debentures.

Financial liability of the shareholders of a private limited company is limited to their shares. In case of any financial trouble in the company, the personal assets of the shareholders are secure(Craig, 2015).

Debentures can be issued to borrow funds. Banks are also more favourable to provide finance to private limited companies than other forms of businesses.

• Growth and expansion opportunities

By having more finance opportunities to be employed in the business. The business can pursue new projects, products and markets. The company with high capital can make acquisitions and invest in research and development.

A limited company is a separate entity distinct from its owners. The business continues even after change in members. The private companies are incorporated and become a separate legal entity.

The company can be registered under a unique name, protected by law. This provides a unique identity to the business.

• Restricted trade of shares

In limited company, the shares cannot be sold to outside buyers by the shareholders.

Private limited companies pay corporate tax on taxable profits only and not on higher personal income tax rates. (Bytestart, 2018).

The term‘limited’ used bythe private limited companies gives respect, status, and professionalism to the business. This will help in attracting new customers, expanding into new areas and creating a trusted brand.

(Korchak, 2015).

Disadvantages of limited company

The formation of private limited company is complex and expensive as it requires a lot of paperwork to be completed. The formation of a private limited company will cost higher including the expense of a digital signature. The fulfilment of government regulations also incurs high cost than incorporation. Annual compliance also incurs high cost.

• Load of procedural formalities

The formalities like annual returns filling, meetings, record of meetings and tax fillings etc are included in private limited company. Avoiding any legal procedures may lead to high penalties for the directors.

The company is wholly liable of debt, profit or loss.

Two shareholders should be there for the formation of a company. Both the shareholders are required to be involved in the decision- making of the company.

The cost incurred in dissolving a private limited company is also high and time consuming. It is also a complicated process.

(Nixon Williams, 2018).

• Restrictions regarding company name

Certain rules and regulations are required to be followed in naming a private limited company. The name should adhere with the law (Zkjadoon, 2016).

Accounting period of a private limited company starts on day of its incorporation. It is required to maintain accurate books, accounts and financial statements.

After incorporation of the company, a range of compliance activities are required. Auditing of accounts, filing of annual return, compliance with tax and labour laws and maintaining statutory registers are the activities required to be undertaken by the company (Riley, 2009).

Charlie and Bravo should start the business as a private limited company. The Private Limited Company provides the benefits of both partnership and public limited business structure. They fulfil all the requirements needed to start a private limited company.  The minimum of two shareholders are required in opening a Private Limited Company. They two can start their business as a private limited company. As they both have good mutual understanding and also the skills and knowledge required for drivinggrowth of business, they must plan to opt to open up private limited company. Also, they have the arrangement of warehouse for marinating the inventory of a company. Bravo also has good contacts as friends and relatives to lend them money as initial capital for the business.  They can also borrow loans on book debts and inventories. They also have to hire employees for the undertaking business operations. A formation of limited company would be easy for them. The cost required for the formation of a limited company is available to them and they are aware of the market opportunities present before being a private limited company.

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