It is essential to find the right partner(s) (just like marriage!) - That is, people with compatible and complementary personalities, skills, attitudes and goals.
Partnership - accountants, solicitors, architects, estate agents, general practitioners, pub owners and restauranteurs;
Partnership
As for sole trader plus:
Advantages:
i) can spread the risk;
ii) can involve spouse or other member of family or close friend;
iii) potentially more finance available;
iv) can take on additional partners, i.e. bring in extra/complementary skills.
Disadvantages:
i) could be responsible for all debtors of partner(s);
ii) need to draw up a partnership agreement;
iii) could fall out with partner(s).
Limited Company
- Limited Company - video producers, jobbing engineers, printing works, advertising agency, farms, garment manufacturers and garden centres;
In a limited company, the personal liability of the owners for the debts of the company is limited to the nominal value of their shareholding i.e. other personal assets are not liable. A limited company is characterised by the following:
- The company is a separate legal entity and therefore, can sue and be sued just like a person;
- You are not "self-employed" in a limited company, but employed by the company as a director;
- The directors as employees, therefore, pay tax under PAYE and National Insurance deducted from their earnings;
- The company pays corporation tax on its profits;
- There must be at least two shareholders (director and company secretary/second director);
- The term limited or Ltd must be included in the company name as a warning to creditors that they may not get paid if the business fails;
- You have to draw up company rules called "Memorandum and Articles of Association" which are registered with the Companies Registration Office. The articles define the powers of the directors and voting rights, while the memorandum includes company name, address, objectives, nominal capital, limitation of liability, names of members and their share of the equity;
- You have to pay to have your accounts audited annually and must register them with the Companies Registration Office. Failure to keep the company's public records up to date can lead to disqualification of directors;
- You need to obtain a certificate of incorporation when you register the company before you start trading;
- Companies can be bought off-the-shelf, i.e. already "formed" in the legal sense via a solicitor.
- A Public Limited Company (PLC) is a limited company with at least £50,000 in share capital, which has decided to call itself PLC. N.B. it does not need to be quoted on stock market;
- A company limited by guarantee has no shares; instead each member guarantees to pay up to a pre-set amount (usually £1.00) in the event of the company ceasing to trade. As there are no shares, profits cannot be disputed except by payment to employees. This structure is best suited to non-profit organisations such as clubs and associations;
- A limited partnership allows partners to admit one more "limited partners" who are liable only up to the amount of capital which they subscribe but cannot take part in the management of the business. Very rare because it does not offer many advantages over a limited company;
- An unlimited company is one in which a shareholder may be required to meet the liabilities of the company on liquidation. The only advantage is that the company does not have to publish annual accounts. Again this structure is very rarely used.
Limited Company
Advantages:
i) shareholders have limited liability;
ii) may give a more professional image, and more credibility with creditors, lenders and investors;
iii) "perpetual succession" i.e. changes in shareholders do not affect continuity of company;
iv) increased borrowing power;
v) ownership can be made separate from management i.e. can employ managers;
vi) company can sell shares to raise capital;
vii) discounts are often more easily obtained;
viii) possibility of company pension scheme with more benefits e.g. can be used as capital;
ix) lower rates of corporation tax extend to £300,000 profit ;
x) sales of business is uncomplicated.
Disadvantages:
i) costs up to £200 to incorporate;
ii) annual auditing required;
iii) annual accounts must be submitted to Companies House;
iv) shareholders cannot apply assets to personal use, nor can they withdraw funds at will;
v) companies generally prohibited from making loans to directors;
vi) tax payable under PAYE and corporation tax;
vii) higher National Insurance contributions;
viii) annual meeting of members is compulsory;
ix) directors' meetings must be formally minuted though this could be an advantage in improving communication;
x) tax losses cannot be set against personal income;
Formation of a Private Limited Company
Can raise money for expansion by selling shares to people. A share is a piece of paper that states that the person who has bought has a piece of ownership of the company. The value printed on the share is its face value.
The people who buy these are called shareholders and the profit they are paid out on a share is known as the dividend.
A Private Limited Company:
- Min. of 2 shareholders.
- Shareholders own the business
- Shareholders have limited liability
- Shareholders share the profits
- Shares are sold privately
- Companies must publish accounts and hold AGMs
- Directors are elected to run the company
- Original Company Name
- Forms from Companies Office
- Memorandum of Association: containing information on the name and objectives of the company, a statement verifying that the company has limited liability, two signatures which are witnessed verifying the formation of the company, and the location of the registered legal office where all the legal documents are sent.
- Articles of Association: containing the list of internal rules and regulations connected with the company such as voting rights, powers and duties of directors, and procedures regarding meetings.
- A formal declaration of compliance with the Companies Acts
- A statement denoting the amount of Authorised or Nominal Share Capital of the company.
- When the documents are verified, the Registrar issues a ‘Certificate of Incorporation’, the birth certificate of a limited company.
- The company can now commence business with the protection of limited liability and can place Ltd after its company name.
Note: Limited liability indicates that the company is a legal entity separate from the owners. Regarding debts of the company, the company is sued, not the owners.
Formation of a Public Limited Company
Public limited Companies are among the largest and most successful firms.
- Min. of 2 shareholders.
- Shareholders own the business
- Share can be sold on the Stock Market
- Shareholders have limited liability
- Shareholders share any profits
- Companies must publish accounts and hold AGMs
- Directors are elected to run the company
1. The company wishing to become public must satisfy the following conditions:
- Have a stated minimum authorised capital where at least a quarter of it must be offered to the public.
- Have a minimum market value.
- Have a minimum number of shareholders.
- Have a healthy track record — positive working capital.
- Have a minimum profit level.
- Accept full disclosure on its operations — salaries, profits and strategies. This is the reason why some businesses are reluctant to go public.
2. The legal documents that must be lodged with the Registrar are:
- Memorandum of Association as well as the other contents of the memo mentioned previously.
- Articles of Association — contents mentioned previously.
- A formal declaration of compliance with the Companies Acts.
- A statement denoting the amount of authorised or nominal share capital of the company.
- A list of agreed directors.
- Directors’ written consent to become directors.
3. Company makes application to Stock Exchange through a stockbroker where shares are quoted.
4. The company employs a merchant banker, and the stockbroker and the merchant banker together inspect the books of the company:
- To verify that the books meet the Stock Exchange Council’s requirements regarding the financial state of the company.
- To verify the healthy future prospects of the company.
5. When the Stock Exchange accepts the company’s application to trade on the Stock Exchange, the Registrar of Companies issues the company with a trading certificate.
6. Before shares are quoted on the Stock Exchange, the company must produce a prospectus after receiving the trading certificate (the birth cert. of the public limited company).
7. Once the Trading Certificate has been received and the Prospectus has been organised, the company can now commence trading on the Stock Exchange, quoting the shares of the company, and can place plc after its trade name.
