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Business Legal Structures

All businesses have certain legal obligations that they must undertake in order to operate in the UK. The specific obligations that each are liable for will depend on the type of business and why it is in operation. In the UK there are several types of business that can be set up including:

  • Sole traders
  • Partnerships
  • Private Limited Company (Ltd)
  • Franchises

Each of these company types have different legal obligations that they must undertake. Failure to comply with UK business laws can have strict penalties and may even result in a company going into liquidation.

Types of business structures

Sole traders

Sole traders are very common in the UK and are easy to set up. A single person usually owns the entire business (although others can be employed to work for the company) and this person has sole responsibility for the company. This set-up is common with tradesmen, web designers, shop owners or other small businesses which are often run by one person or a small team.

The benefits of sole traders are that the company will be easy to set up and the person in charge has full control of decisions and profits. Rather than having to split the profits to directors, every penny that is earned will stay with the company owner. There are also drawbacks of starting as a sole trader. The main one is that the company has unlimited liability which means that, in the eyes of the law, the owner’s assets can be seized if the business fails. So a sole trader who runs into trouble can risk losing their home, car or any other personal possessions which have value in order to pay their business debts. Working on your own can be exhausting and sole traders often work long hours with nobody to share the workload with. This means that sole traders can struggle with certain jobs, such as accounts, as there isn’t anyone they can share tasks with. Therefore the business is not likely to have a diverse workforce,  meaning that the individual’s weaknesses will reflect in the business.

Advantages

  • Only person responsible for making decisions
  • Small amount of money needed to start
  • Easy to set up
  • All profits are taken by the individual and do not have to be shared.

Disadvantages

  • Unlimited liability – if the business has troubles the owner can lose personal assets
  • No diversification in the workforce.
Sole trader business

Partnerships

A partnership is created when two or more people go into business together. This is typical of professionals such as dentists, solicitors or doctors who can share each other’s expertise and operating costs. The main advantage of this is having someone else to consult with on decisions and share a workload with. Having someone who has slightly different expertise from yourself is very beneficial as this will enable you to share information and play to your strengths within the partnership.

Some of the main disadvantages are that disputes can arise on how best to run the company. Since there are multiple people involved, unlike with a sole trader, there can be complications that arise in partnerships. As well as this, partners still have unlimited liability so their personal possessions can be seized if the business runs into trouble.

Advantages

  • Shared expertise
  • Fairly easy to set up and maintain
  • Diversification is possible.

Disadvantages

  • Unlimited liability – if the business has troubles the owners can lose personal assets
  • Disputes can arise on how to run the business.
legal partnership LLP

Limited companies

In the eyes of the law, limited companies have a special status in that they are incorporated. This means that they have a separate legal identity and can therefore own assets and make claims against others. The ownership of a limited company is divided into shares, which are held by shareholders. Because the business is seen as a separate entity, shareholders are not liable for the costs of the business and therefore they have limited liability. This means that, should the company fail, shareholders cannot lose their personal assets.

Unlike partnerships and sole traders, the owners of a limited company are not always involved in the everyday running of the company. This is usually done by the board of directors, who are responsible for the everyday performance of the company and its employees.

There are actually two different types of limited companies: private limited companies and public limited companies. The difference between these two types of business is that a private limited company (ltd) is often a small business and their shares are not available for the public to buy, wheras a public limited company (plc) sells their shares on the stock market so that anyone can purchase a part of the business for the current share price. Public limited companies are often very large and well known, and the rules which dictate how shares are sold on the stock exchange can be incredibly complex.

Advantages

  • Limited liability
  • Easy to raise capital by selling shares.

Disadvantages

  • Shares usually split between multiple people so majority control is lost
  • In the case of a PLC, you have no say in who owns the company.
Board meeting in limited company structured business

Franchises

New business owners have two options – set up a company from scratch or invest in a franchise. This is an investment into an already established company that will enable you to offer products or services. A franchise is a joint venture between the franchisee, the person who buys the right to open a business, and the franchisor, the person who sells the right to a business idea.

Many well-known franchises are fast food companies including McDonald’s, Pizza Hut and Subway. Franchises are usually less risky than setting up a company from scratch as you will already have brand recognition and a range of products and services at your disposal. This can take a long time for new companies to build and franchisees can earn a lot of money quickly since they will already have a company that is recognised by customers. The franchisee is investing in a proven business model therefore these ventures can be very lucrative. Because of this, franchises can be very expensive to start and competition to set up new branches can be fierce.

Advantages

  • Brand recognition immediately
  • Less risky and a proven business model
  • Immediate range of products and services.

Disadvantages

  • Expensive to set up
  • Usually have strict guidelines on what is required
  • Can be competitive to get hold of.
Franchise business legal structure
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