Advantages And Disadvantages Of Different Business Structures

. Essay, Research Paper

Introduction

There are many types of organisational structure a business may decide to adopt. This assignment will examine the four main different business structures and present the advantages and disadvantages of each one. The business structures that I will be examining are as follows:

The Sole Trader

The partnership

The Private Limited Company (LTD)

The Public Limited Company (PLC)

Sole trader

A sole trader is an organisation, which is owned by one person. The assets and liabilities of the owner and those of the business are the same. There are no legal or tax distinctions between the owner and business.

This type of business is straightforward to set up and dissolve. It requires the minimal legal requirements and costs. The owner can make all the decisions and can retain all the profits. He owns all the assets of the business.

The owner can draw or invest funds into or out of the business, as he deems necessary.

Business losses can be offset against other income, including claw back of past pay as you earn (PAYE). As the sole trader is self-employed, he is able to defer Income Tax and reduce his National Insurance contributions. The owner s personal assets can be transferred to a spouse (or any other relative). However, the assets may be required to be returned by the court if it is satisfied that they were transferred to defeat creditors that were owed money.

There is no legal requirement to have the accounts and records audited. No public disclosure of accounts and records is necessary, unless the business is registered for Value Added Tax (VAT). There is no requirement to register for VAT unless the taxable supplies to customers is equal to, or exceeds, the registration level. The registration level is currently 50,000 for a twelve-month period).

The main disadvantage for being a sole trader is the unlimited liability factor. The sole trader is putting at risk his entire personal fortune including his house, car and any other personal assets in his possession that are outside the business. This is because there is no distinction between the individual (the owner) and the business. The law does not recognise the business as an artificial person (unlike a company,) and the business therefore, does not receive the benefits that would be attached if it were. If the business does become bankrupt, the owner may loose his personal fortune to pay the debts of the business. It is also true that if the sole trader becomes bankrupt, the business cannot legally continue. There are no additional funds available from equity investment by persons outside the business (third parties). This therefore, limits the businesses growth potential. The transfer of ownership is not very flexible and the owner can only sell assets. All of the profits from the business are taxes as personal income, whether they have been retained within the business or taken out. Although self-employment reduces the National Insurance contributions payable, it also reduces the benefits of the National Insurance entitlements. The tax relief on pension contributions is restricted. If any property is transferred to the spouse it is lost to the sole trader if the marriage breaks and the spouse refuses to give it up. If the owner dies, the business comes to an end and the executives in charge of his affairs either sell it as a going concern or sell the assets individually.

Partnership

This is easy to set up and dissolve. There are no legal requirements to audit the accounts. No public access to the accounts ensures confidentiality. Any business losses can be offset against other income. Can be converted to a limited company at a later stage. Benefits of self-employment for income tax and National Insurance. Can attract more capital by admitting new partners, however, each partner has the right to veto the introduction of the new partner. Can get credit easily because supplies are not at risk as it is the partners who are taking the risks. A partnership can sue (and be sued) in its own name even though it is not an artificial person. Can change s19 of the Partnership Act 1890, but all partners must agree (s24 of the Partnership Act 1890). Can change provision of the 1890 Act e.g. s24 profit and losses shared equally, but partners may provide for a different share (e.g. +: + profit liability) in their agreement. If no evidence of split, their split will be equal. Every partner has legal access to inspect and copy firms books s24 (9) Partnerships Act 1890. Differing salaries may be given to partners before surplus profit is split. No doctrine of ultra vires and partnership may engage in any lawful activity as the partners see fit. Able to access knowledge and experience of the partners.

Limited to maximum of 20 people by Companies Act 1985, some professions are exempt and can have partnerships of unlimited size (e.g. solicitors, accountants, estate agents, stock brokers). Partnerships are jointly and severally liable for debts. Liability extends to private assets/personal fortune. Bankruptcy of partnership equals bankruptcy of all partners (excluding limited partners under the Limited Partners Act 1907). If a partner dies, his estate may still be liable for the businesses debts. Unless specific continuation provisions are made in the agreement, death, bankru