The most common forms of vehicle used to carry on business in the UK are:
These are discussed in more detail below. See also our pages on joint ventures, corporate governance and Shareholders' Agreements.
Other forms of vehicle available to carry on business in the UK include:
A private company limited by shares is a legal entity, separate and distinct from its shareholders. It is owned by its shareholders. It is managed by its directors in line with the provisions of the Companies Act 2006 (CA 2006) and the company’s governing constitutional document, otherwise known as the articles of association.
The company is a very commonly used business vehicle; there are over four million registered UK companies on the Companies House public register, and over 95% of those companies are private companies limited by shares.
CA 2006 provides that a company is a ‘limited company’ if the liability of its members is limited by its constitution. It may be limited by shares or by guarantee. If liability is limited to the amount, if any, unpaid on the shares held by them the company is ‘limited by shares’.
The directors of a private limited company are responsible for its day-to-day management. The directors make decisions on behalf of the company so that it can carry on business, including making decisions relating to the company borrowing money, entering into contracts, employing people or acquiring assets. The directors are empowered to act on the company’s behalf by a combination of the company’s articles of association, law (primarily CA 2006), common law and shareholder resolutions.
The Articles of a company will usually give the directors a general powers to manage the company. In the model articles for private companies limited by shares article 4 gives the directors general authority, stating that ‘the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company’.
Why incorporate as a private company limited by shares?
One of the main advantages of running a business through a company, is that it is a separate legal entity, which can enter contracts in its own name and is responsible for its own debts and liabilities and that its shareholders have the benefit of limited liability. It is also a well-known and trusted form of entity to do business with.
Disadvantages of the private company limited by shares form
Some see one of the main disadvantages of carrying on business using a limited company, including a private company limited by shares, as being the public filings and disclosure requirements at Companies House.
Unlike a company limited by shares, in a company limited by guarantee liability of the members is limited by its constitution to such amount as the members undertake to contribute to the assets of the company if it is being wound up (this is usually set at a nominal sum). The limited liability of its members is generally seen as the main advantage of carrying on business through a company limited by guarantee.
One of the disadvantages of carrying on business through a company limited by guarantee is possibly the amount of public filing required at Companies House (similar to a company limited by shares). Other disadvantages are that it is not possible to raise working capital from shareholders and there is not right to share in the profits of a guarantee company.
Hence, a company limited by guarantee is very often used by not-for-profit organisations, such as charities, clubs, associations and societies that would like their members to benefit from limited liability, but with no requirement for receiving income by way of dividend.
A sole trader is an individual who carries on business in his or her own personal capacity.
One of the main advantages of carrying on a business as a sole trader is the relative absence of filing requirements compared with, say, a company.
A sole trader is required to notify HMRC about his or her trading business, keeping record and submitting tax returns and paying income tax and/or VAT, as required.
There are three different forms of partnership:
A general partnership is one that is formed under the Partnership Act 1890 (PA 1890) and governed by English law. It is defined as a 'relation that subsists between two or more persons carrying on business in common with a view of profit'.
The main advantages of carrying on business through a partnership are that:
The main disadvantage is that each partner is jointly liable for the debts and obligations of the partnership incurred while he is a partner and such liability is potentially unlimited. After his death, a partner’s estate may also have some liability for such debts and obligations.
Limited Liability Partnerships (LLP)
LLPs are incorporated under the Limited Liability Partnerships Act 2000 (LLPA 2000) and formed by two or more persons, associated for carrying on a lawful business with a view to profit, making an application to Companies House.
An LLP is a body corporate that is a separate legal entity from its members (also commonly referred to as ‘partners’).
There are two or more 'designated members' of an LLP who are designated either on incorporation or by and in accordance with an agreement with the other members. The designated members have certain administrative responsibilities in relation to an LLP, such as delivering information to Companies House. If fewer than two members are expressly designated, then every member is deemed to be a designated member.
LLPs have to make a number of public disclosures by making filings at Companies House, similar to those made by a company. For example, an LLP must file details of its members, charges and mortgages, must file accounts annually and must notify Companies House of any changes in its name, registered office and members.
The main advantage of carrying on business through an LLP is the limited liability of the members for the debts and obligations of the LLP.
If an LLP is wound up, a member's liability to contribute is limited to the amount that the member has agreed with the other members or with the LLP that he will contribute.
One of the main perceived disadvantages of carrying on business through an LLP is the significant level of public disclosure (apart from the LLP agreement).
LLPs are frequently used by the professions (i.e. solicitors and accountants). Many law firms and accountancy firms converted their partnerships into LLPs in order for their members to benefit from limited liability.
Limited Partnerships (LP)
LPs are formed under the Limited Partnerships Act 1907 (LPA 1907) and consists of at least one ‘general partner’, who is liable for all the debts and obligations of the LP (although, in practice, the general partner is normally a limited company) and at least one ‘limited partner’.
LPs are commonly used as investment vehicles, and they are most likely to be suitable for the carrying on of a business where:
An LP is not a separate legal entity distinct from its partners.
An LP is formed by registration at Companies House, and an LP must notify Companies House of certain changes in its registered information. In addition, certain transactions and arrangements must be notified in the Gazette.
By the publications team at: Contracts-Direct.com with the assistance of the referenced third parties.
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