Forms of business in the united kingdom

ADVANTAGES AND DISADVANTAGES

As the United Kingdom is a country where market economy was established centuries ago, it would be interesting to look at British forms of business organization. The UK economy is mixed, that means that there exist both private and public sectors, the former being by far larger than the latter. Four major types of business represent the private sector: sole trader (sole proprietor, partnership, limited company and unlimited company. Limited companies in turn can be private limited and public limited. The public sector consists of nationalized companies. Let us review all of these forms in greater detail to identify their main features, advantages and disadvantages. The classification of business forms is illustrated by the following scheme:

Private Sector

Public Sector

Sole trader (proprietor)

Partnership

Limited company

Unlimited company

Nationalized company

Private limited company

Public limited company

Company limited by shares

Company limited by guarantee

Sole trader (sole proprietor)

The proprietor is the sole owner of a business and has full control of it. He is personally liable for all business debts, i.e. he carries an unlimited liability. This means that if his business fails, not only business assets are to be sold to cover outstanding debt, but also the owner's personal property. It is easy to start a sole trader's business at any time, as there are no legal formalities to complete before commencing trade. For a small business there are no statutory requirements for formatting accounting records and no need for an annual audit. In terms of taxes, sole traders may be required to register for Value Added Tax (VAT) and pay-as-you-earn (PAYE — a system of income tax deducting and National Insurance contributions for all organizations that have employees) purposes, and maintain corresponding records.They are required to submit accounts and tax computations to the Inland Revenue —a government agency that controls individuals' and companies' tax payments. Sole traders and partnerships are dominant forms in the small business segment.

Partnership

Partners jointly own a business and each partner is personally liable for the firm's debt. If any of the partners have limited liability (in a limited partnership) in a worse-case scenario they can lose only the capital they invested in the business (limited partnership was established by the Limited Partnership Act of 1907; the use of this form of partnership has not been extensive due to the ease of incorporating a private company). However, they cannot actively run the business and are therefore called "silent" partners. There are limitations to the number of partners: minimum of two and maximum of twenty (there is no maximum for accountants and solicitors). The partners are free to choose any name for the firm; however, "limited" must not be the

last word of the name. Like a sole trader, a partnership is not obliged to publish its accounts or have them audited. It shares requirements similar to those a sole proprietor does in terms of VAT and PAYE. A partnership may be created without any legal formalities based solely on the Partnership Act of 1890.However, to prevent possible future discord among partners, it is usual practice to draw up an agreement that clarifies the following issues:

· profit-sharing arrangements;

· capital contributions;

· voting rights;

· admission or expulsion of a partner;

· withdrawal from a partnership.

The next forms of business are commonly named companies. All issues regarding formation, registration and operation of companies are regulated by the Companies Act of 1985, amended as of 1989 (hereafter — the Companies Act).

Limited company

A limited company is the most common form of business. A limited company is a legal entity that is separate from shareholders and directors. The shareholders are not liable for the company's debts beyond the amount remaining unpaid on the shares they hold or guaranteed to a third party. To register a firm as a limited company (to incorporate a company) certain documents must be submitted to the Registrar of Companies who then issues a Certificate of Incorporation. This certificate permits the company to start its operations. A limited company is managed by the Board of Directors elected at annual shareholders' meetings.

As a rule, the accounts of a limited company have to be audited by registered auditors. A limited company must submit a set of audited accounts to the Registrar of Companies each year. This set should include the directors' report, the auditors' report, profit and loss accounts, the balance sheet, the statement of cash flow and explanatory notes to the figures in the accounts. In addition, it is required to file an annual return giving details on the directors and shareholders as well as some other statutory information. All information on file at the Companies' Registry is open to public inspection.

Limited companies are classified as private limited by shares, private limited by guarantee and public limited. In a private company limited by shares, members' liability is limited to the amount unpaid on shares they hold. If a company is limited by guarantee, its members' liability is limited to the amount they have agreed to contribute to the company's assets in case of its winding up. A public limited company's (PLC) shares may be offered for sale to the general public and members' liability is limited to the amount unpaid on shares held by them. The shares of a PLC can be transferred without the shareholders' permission. A private limited company (Ltd.) is prohibited by the Companies Act from advertising its shares for sale. Its shares may only be transferred with the agreement of all shareholders. A PLC is also required to issue shares in the amount of J50.000 minimum and to have at least two people as the company owners A private company may have even one owner.

Here are some examples of well-known companies that are registered in the UK as Ltd. or PLC.

Private limited companies:

Du Pont, Henkel, Rhone Poulenc Chemicals, Shell, Kraft Foods, McDonalds, Nestle, Procter & Gamble.

Public limited companies:

British Airways, Marks & Spencer, Smithkline Beecham, Unilever.

There is no apparent preference as to which form (Ltd. or PLC) applies more to this or that sector of the British economy. As to the national origin of the companies, large multinationals originating from abroad tend to be registered as private limited in the UK, whereas large British companies are predominantly private limited.

The unlimited company

Unlimited companies are less common but sometimes they are useful entities, which combine characteristics of both companies and unincorporated businesses (sole trader or partnership). They are treated as companies for taxation purposes (they pay corporate tax instead of income tax), but the liability of theirs shareholders is unlimited. There are certain businesses, regulated by professional bodies, which are required to be unlimited companies.

Nationalized company

Nationalized companies are established by Acts of Parliament. Usually they are natural monopolies, although there are some exceptions, such as the British Broadcasting Corporation (BBC), which competes with independent radio and TV stations. The accounts of nationalized companies go directly to the Parliament for inspection.

Now let's consider the advantages and disadvantages of the reviewed forms of business organization.

Sole trader/partnership

Advantages:

- Easy to start up.

- No legal formalities (partnerships, however, should have a partnership agreement).

- Relative freedom from legislative control and more secrecy. No requirement to file or publish audited accounts or other information concerning the business with the exception of accounts for VAT and PAYE and Inland Revenue tax return.

- No requirement to be audited.

- Taxed as self-employed, which may have tax advantages in the first three years of operation.

- Low National Insurance contributions.

- More favorable tax treatment.

- Financial flexibility with regard to sharing profits.

Disadvantages:

- Some suppliers do not deal with sole traders and partnerships due to lack of statutory and financial control.

- Unlimited liability. The sole proprietor is liable for all business losses; he can lose all his assets and become a bankrupt. Partners are jointly liable for business debts.

- Profit tax paid at personal rates, top rate being 40% whether or not withdrawn from business.

- Need to make independent pension provision — less advantageous rules than for companies.

- Raising finance can be difficult.

- No statutory protection of a business name.

Limited company

Advantages:

- Lower tax rate on profits retained in business.

- Limited liability. Shareholders' liability limited to the amount of contributed capital.

- Higher confidence from suppliers and bankers; easier to raise finance for the business.

- Ideal form for expansion.

- Protection of companies' names.

- Tax efficient ways of getting shares into the hands of employees via employee share schemes.

- The ownership and management can be split.

- Company pension scheme can provide greater benefits than self-employed arrangements

Disadvantages:

- Limited liability could be negated in practice, as director/ shareholders may have to give personal guarantees to third parties.

- Disclosure of information on the company through submitting audited accounts, annual reports, etc.

- Tight regulation by the Companies Act, Insolvency Act 1986, Company Directors' Disqualification Act 1986.

- High set-up costs and annual operating costs.

- High National Insurance contributions.

- Less flexible profit-sharing arrangements.

- Statutory records to be kept.

- State duty generally payable on transfers of shares.

- Double charge to capital gains tax.

- Firstly, the company is charged on gains made by selling its assets.

- Secondly, the shareholders are charged when realizing their shares in the company.

- So, all forms of business in the United Kingdom have their pros and corns, which must be carefully considered before creating a new enterprise. The right choice of a business form is the first step to success.

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