Date: October 1, 2008
Describe and explain the recognised types of business enterprises. What are some of their advantages and disadvantages when seen from the viewpoint of a proprietor or manager?
In English Law, a business enterprise may be described as having the status of a “sole trader”, a “partnership” or a “company or corporation”.
The type of legal structure adopted for a business will have a considerable impact on the liability of the owner and any fellow owners and on the type and amount of tax that may have to be paid. I will attempt to discuss the above in this paper.
Types of business enterprises
A sole trader ...view middle of the document...
Advantages of sole trade
1. Administration is easy as the time and cost of registering with Companies House is inapplicable. All that needs to be done is to notify HMRC
2. No need for compliance with the large amount of legislation that regulates companies
3. National Insurance contributions for sole traders are usually lower than a company’s
4. Simple accounts can be kept without the need for an accountant saving costs
5. The proprietor is entitled to all the profits made by the business
Disadvantages of sole trade
1. Proprietor is personally liable for all business debts so personal assets such as houses, cars etc are at risk if debts cannot be repaid.
2. Proprietor gets less social security benefits
3. Finance is difficult to raise as lenders prefer to lend to companies or partnerships.
4. Business is harder to sell or pass down to children because there is no separate legal entity to transfer
5. Sometimes customers prefer to deal with limited companies than sole traders as they feel more secure
Partnerships are quite similar to sole trader businesses, except that more than one proprietor is involved. Like a sole trader, the business and personal affairs of partners are not legally separate, and personal assets may need to be used to meet partnership liabilities. Tax affairs are similar too, the new business must appear on personal tax returns and HMRC must be informed within 3 months of commencement. A separate tax return must be completed and submitted for the partnership in addition to the partners’ returns. Generally speaking, the partnership itself doesn’t pay income tax – the information from the partnership return is combined with the personal income of the partners to calculate their overall tax bill.
A new form of partnership entity, the Limited Liability Partnership, came into use in April 2001. This type of partnership is a separate legal entity from its members and has some of the benefits of a corporate structure – it can, for example, enter into contracts and offers limited liability to its member partners. However, unlike standard partnerships, LLPs are required to comply with a number of Companies House requirements – in particular the publication and audit of accounts. Other than professional partnerships like solicitors and accountants, there can’t be more than twenty partners in a partnership. It is normal and advisable though not a legal requirement for partnership agreements to be put in place detailing things like how much capital each partner contributes, how profits and losses will be shared, how much each partner can draw from the business, how the business will be run etc.
The advantages and disadvantages of a partnership are like sole trader but there are some additional considerations:
Advantages of Partnerships
1. Flexibility to tailor the structure of the partnership to how one wants it through the partnership agreement