Basic Legal Entities - A Comparison

Sole Proprietorship

This is the most simple of all legal mechanisms and may provide the ideal conduit for the small businessman. Certainly, it is not encumbered with the legalistic formalities of other business organizations and the owner does have complete control to hire, fire, enter into agreements or even cease to trade however and whenever he so pleases.

Unfortunately, this complete control and simplicity is tempered by the simple fact that there is no legal distinction between the actual business and the owner. In other words, any liabilities, debts or charges for which the business is liable, you are also personally liable.

Advantages:

1. Owner has complete control over all business affairs.
2. Simple to administer and operate.
3. Long established business mechanism

Disadvantages:

1. No distinction between personal and business entities and therefore, no protection for one's own personal assets. There is no tax distinction between personal and business income, often leading to an inefficient use of potential tax savings.
2. A Sole Proprietor is directly liable for the actions of his employees.
3. Action taken by creditors is often quicker against an individual than against a corporate entity.
4. The physical movement of the entity will always correlate with the physical movement of the owner. Generally, most tax benefits are, particularly where 'foreign' transactions are involved, accrued from distinguishing between a person and his business.
5. Save where the individual's reputation is established such entities are not considered as 'reputable' despite the increased exposure.

The Partnership

By definition a Partnership is the coming together of two, or more individuals for their common good. Like the 'Sole Proprietorship', the Partnership is almost totally exposed to third party actions. Legally, a Partnership can often be formed with no written agreement, however, one would be ill advised not to set-out the rights and obligations of the partners.

If no such agreement is in existence, standard legal interpretations will generally be imposed unless there is clear evidence that the partners are subject to their own set of criteria, which would be the case for those belonging to a professional institution such as the Law Society.

One point that should always be borne in mind is that in the case of economic difficulties each partner will be liable not only for his shareholding but for all partnership debts which means that any person with assets should be very careful before going into business with a less well off counterpart as whilst the gains will be equal the potential losses will not!

Advantages:

1. It brings together two or more people who have a personal interest in the welfare of the business enterprise.
2. A partnership is generally seen as more professional than a sole proprietorship

Disadvantages:

1. There is always the potential of partnership disagreements.
2. Each partner's personal assets will often be subject to creditor action, no matter his personal obligations/liabilities under the' partnership agreement'.
3. Generally, the burden of being a partner falls unfairly on the wealthier individual. In other words, if X and Y become partners but X has twice the assets of Y, then - accepting an equal partnership - X and Y will share equally in the profits but X has twice as much to lose should the partnership fail.
4. The cost of drafting a 'partnership agreement' can be prohibitive. As with sole proprietorships, the problem with partnerships is that it is very difficult, if not impossible, to separate partnership business activities from the individual partners.
5. A partnership structure inevitably requires 'insurance' cover to be taken out. In most cases this will cost far more than a Standard English & Welsh "Limited Liability" company.

Limited Liability Companies

The primary advantage of these entities is that they are all based on the simple principle that the liability of the shareholders/subscribers and officers is strictly limited to their direct investment in the company. Generally, the only exceptions are when some kind of fraudulent or grossly reckless act or omission has occurred involving the aforementioned.

It is important to note that the 'innocent' shareholder without any involvement in the malfeasance will not lose the benefit of limited liability.

Basic Types Of Limited Liability Company

1. A Private Company Limited By Shares

Most common type of company in the England & Wales. The principal purpose is to earn profits for the shareholders who may or may not be the same as the Director(s) or Secretary. These companies can be formed and registered with as little as one Pound (UK£1.00). In most cases, they adhere to a standardized format and are remarkably inexpensive.

2. A Public Company Limited By Shares

Theoretically this is a company, which has the same profit motive as a private undertaking save that its shares can be offered for sale to the general public. In reality, the vast majority of PLC's simply operate as "private" companies employing the PLC name simply as a prestige marketing "tool". Nevertheless, even a PLC, which has not sought a public stock exchange listing, must adhere to the requirements of English & Welsh legislation.

The most important differences are that there must be a minimum paid up capital of at least UK£50,000.00 with, at least, one quarter of that sum being immediately and fully paid up. Penalties for non-adherence to the provisions of the Companies Act 1985 are also higher. The cost of a non-listed and standard format PLC will vary from UK£350.00 to UK£700.00. However, the cost of forming a publicly listed PLC can run into hundreds of thousands of Pound's since the legal documentation (the Memorandum & Articles of Association) will always need to be specially drafted and the admission rules setout in the "Yellow' Book (which outlines the requirements for public listing) will have to be adhered with.

The latter requiring the services of underwriters, accountants and lawyers - If you think that you may require this type of company please contact our offices by e-mail or by telephone.

3. A Company Limited By Guarantee

This is a company, which has not been established to earn profits for its members but rather to carry out a particular purpose. Charitable, housing and organizational associations most commonly use this type of vehicle. The price of such a company will vary greatly depending on its intended use. - If you think that you may require this type of company please contact our offices by e-mail or by telephone.

General Advantages Of Limited Liability Companies

1. Liability is, in the vast majority of cases, strictly limited to the investments made by the shareholders.
2. Company Officers are not personally liable for their actions unless, in most instances, there is a clear and serious breach of their fiduciary duty
3. Ironically, despite the limited liability, such entities often benefit from 'greater prestige' than their sole proprietorship or partnership counterparts. The reason is probably because such an enterprise normally requires more planning and thus is deemed more credible.
4. They often benefit from significant tax advantages. In fact, many countries around the world give exclusive tax incentives to this type of entity.
5. The rights of shareholders are normally clearly defined and protected. Promotes good record keeping.
6. Corporate taxes only become payable after the end of the financial year. This means that money that would otherwise be taxed on a monthly or quarterly basis is available to earn further money before the final payment of tax.

Disadvantages

1. In larger companies shareholders often lose direct control over their investment.
2. Limited liability companies generally require the appointment of accountants, auditors and professional company secretaries. This means that such a structure is often more expensive to maintain than simple sole proprietorships or partnerships.
3. Certain professional bodies, especially those representing the legal and medical fields, do not allow members to register a limited liability company. In many instances, this denial has resulted in very high indemnity insurance.