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Alvin is a successful sole practitioner offering business consultancy services to a number of local companies. His chief competitor is Betty, who offers similar services. Betty and Alvin decide that they wish to work together, but are not sure as to which business structure would be most appropriate. They seek your advice regarding which business structure would be most suitable, bearing in mind:
• they wish to avoid many formalities and regulations;
• they expect to have flexibility in establishing the procedures by which the business is to be run;
• they want to be able to run their private affairs at the same time;
• they do not want to incur personal liabilities for the debts of the business;
• the business can be set up in a relatively cheap and quick manner;
• they do not want to put in large amounts of their own capital in setting up the business and will probably wish to raise capital from outside sources;
• they wish to take on employees.
Discuss to what extent the various business structures fulfil all, or some, of the above aims and advise Alvin and Betty which business structure would be most suitable for their business. (600 words)
This iquestion irequires iyou ito idiscuss ithe ivarious ibusiness istructures iavailable iand ito iwhat iextent ithese istructures isuit ithe ineeds ito iAlvin iand iBetty’s iproposed inew ibusiness iventure. iThis iwill iinvolve ia idiscussion iof ithe iadvantages iand idisadvantages iof ithe ifour iprincipal ibusiness istructures, inamely ithe isole iproprietorship, ithe ipartnership, ithe ilimited iliability ipartnership, iand ithe icompany.
Remember, iit imay ibe ithe icase ithat iyou icannot iprovide iAlvin iand iBetty iwith ia idefinitive ianswer iand itheir irequirements imay inot ibe ientirely isatisfied iby iany isingle ibusiness istructure.
Sole iproprietorship
ü Alvin iand iBetty iare ialready iengaged iin ibusiness ias isole iproprietors i(remember ithat ia isole iproprietor iwho iis iengaged iin ibusiness ias ia iprofessional iis iknown ias ia isole ipractitioner). iYou imay iwish ito ipoint iout ithat ithe isole iproprietorship iis ithe imost ipopular ibusiness istructure iin ithe iUK.
ü You iwill iwant ito idiscuss ihow ia isole iproprietorship isuits ithe ineeds iof iAlvin iand iBetty. iThere iis ino idoubt ithat ia isole iproprietorship idoes isatisfy imany iof itheir irequirements, inotably isole iproprietorships iinvolve ilittle iformality iand iregulation, ithey ican ibe irun iflexibly iand iin iprivate, isetting iup ia isole iproprietorship iis iquick, isimple iand icheap, iand isole iproprietorships iare ifree ito itake ion iemployees.
ü However, iit iis ilikely ithat ia isole iproprietorship iwill inot isuit ithe ineeds iof iAlvin iand iBetty’s inew ibusiness. iThey iwish ito iwork itogether iand ia isole iproprietorship iconsists iof ia isingle iperson iengaged iin isome iform iof ibusiness iactivity. iThis icould ibe icircumvented iby ione iperson iacting ias isole iproprietor iand ithe iother ibeing ian iemployee, ibut iit iwould ibe ilikely ithat ineither iparty iwould iwish ito ibe ia imere iemployee. iFurther, ionly ithe isole iproprietor iwould ibe ientitled ito ithe iprofits iof ithe ibusiness.
ü Also, iAlvin iand iBetty iwish ito iavoid ipersonal iliability ifor ithe idebts iof ithe ibusiness, iand ithe iprincipal iweakness iof ia isole iproprietorship iis ithat ithe isole iproprietor iis ipersonally iliable ifor ithe idebts iand iliabilities iof ithe ibusiness.
ü Finally, isole iproprietors i(like iother iunincorporated ibusinesses) ican ifind iit idifficult ito iattract icapital ifrom ioutside isources. iBanks imay ibe iunwilling ito ilend ito ia isole iproprietor, iand iit iis ilikely ithat iAlvin iand iBetty iwill ineed ito iinvest itheir iown icapital iinto ithe ibusiness.
Partnership
As iAlvin iand iBetty iwish ito iengage iin ibusiness itogether, ia ipartnership iwould iappear ito ibe ia imore isuitable ibusiness istructure ithan ia isole iproprietorship. iAlvin iand iBetty icould idraft ithe ipartnership iagreement, iso ithat ithey ihad ian iequal istake iin ithe ibusiness iwould ieach ibe ientitled ito ian iequal ishare iof ithe ifirm’s iprofits.
iPartnerships iare isubject ito imuch iless iregulation ithan icompanies. iHaving isaid ithis, isome iof ithe irules iby iwhich ia ipartnership iis irun ican icause idifficulty i(e.g. ishould ione iof ithe ipartners iwish ito ileave ithe ipartnership, ithis ican icause idifficulties).
Partnerships, ilike isole iproprietorships, iare ifree ito itake ion iemployees.
iLiability iof ithe ipartners iis ipersonal iand iunlimited. iThere iare, ihowever, itwo itypes iof ipartnership ithat ioffer itheir ipartners ilimited iliability, inamely i(i) ithe ilimited ipartnership, iand; i(ii) ithe ilimited iliability ipartnership.
Limited ipartnership
ü Limited ipartnerships iare icreated iunder ithe iLimited iPartnerships iAct i1907, iand ioffer ilimited iliability ito iits ilimited ipartners iHowever, ifor iseveral ireasons, ia ilimited ipartnership iwould inot ibe isuitable ifor iAlvin iand iBetty
ü First, iall ilimited ipartnerships imust ihave iat ileast ione igeneral ipartner, iwhose iliability iwill ibe iunlimited i(Limited iPartnerships iAct i1907, is i4(2)). iIt iis ilikely ithat ineither iAlvin inor iBetty iwould iwish ito ibe isuch ia ipartner.
ü Second, ilimited ipartners iare inot ipermitted ito itake ipart iin ithe imanagement iof ithe ifirm, inor ido ithey ihave ithe ipower ito ibind ithe ifirm i(Limited iPartnerships iAct i1907, is i6(1)).
Limited iliability ipartnership
§ As inoted iabove, ithe iprincipal iweakness iof ia ipartnership iis ithat ithe ipartners’ iliability iis ipersonal iand iunlimited. iThis iwould inot ibe ithe icase iif iAlvin iand iBetty iwere ito iconduct ibusiness ithrough ia ilimited iliability ipartnership i(LLP), ia ibusiness istructure icreated iby ithe iLimited iLiability iPartnerships iAct i2000 i(LLPA i2000). iUsually, ithe ipartners i(or imembers ias ithey iare iknown) iof ia iLLP ineed inot icontribute ianything iupon ithe iLLP’s idissolution i(although ithere iare iexceptions ito ithis).
§ Also, ia iLLP ihas icorporate ipersonality i(LLPA i2000, is i1(2)). iAccordingly, iDena iand iBetty iwould inot inormally ibe iliable ifor ithe idebts iand iliabilities iof ithe iLLP. iAs iwe isaw, icorporate ipersonality ialso ihas ia inumber iof iother ipractical iadvantages i(e.g. icontractual icapacity ietc).
§ However, iLLP istatus ihas ionly ibeen itaken iup iby ilarger iprofessional ifirms iand iit iis iclear ithat ithe iLLP iis inot ia ibusiness istructure iof igeneral iuse ifor iseveral ireasons. iYou imay iwant ito iprovide istatistics ion ithe inumber iof iLLP iregistrations ito idate i– ithese ican ibe iobtained ifrom ithe iCompanies iHouse iwebsite.1
§ First, iLLPs iare icreated iin imuch ithe isame iway ias icompanies ivia iincorporation iby iregistration i(see ithe iLLPA i2000, iss i2 iand i3 iwhich iestablish ithe iregistration irequirements)
§ Second, iunless iotherwise istated, iLLPs iare isubject ito icompany ilaw.
Company
Conducting ibusiness ithrough ia icompany ioffers ia isignificant inumber iof ibenefits. iFirst, ias icompanies ihave icorporate ipersonality, ithe imembers iof ithe icompany iwill inot iusually ibe iliable ifor ithe icompany’s idebts iand iliabilities i– ithe icompany iitself iwill ibe iliable. iAs inoted, icorporate ipersonality ialso icreates ia inumber iof iother ipractical iadvantages.
Second, ithe imembers iof ithe icompany iwill ialso ihave ilimited iliability. iHowever, iit ishould ibe inoted ithat, iwhen ilending ito ismall ibusinesses isuch ias ithe ione iAlvin iand iBetty ipropose ito icreate, icreditors imay irequire ipersonal iguarantees ifrom iAlvin iand iBetty, ithereby iremoving ia iprincipal ibenefit iof iconducting ibusiness ithrough ia icompany.
iThis icould iavoid ithe ineed ifor iAlvin iand iBetty ito iinvest itheir iown imoney iin ithe ibusiness. iHowever, iit ishould ibe inoted ithat iit iis ialmost icertain ithat, iif iAlvin iand iBetty iwere ito icreate ia icompany, iit iwould ibe ia iprivate icompany, iand iso ithey icould inot ioffer ito isell itheir ishares ito ithe ipublic iat ilarge. iAlvin iand iBetty iwould ialso ilikely iwish ito iretain icontrol iof ithe icompany, iso ithe iproportion iof ithe icompany’s ishares ithey icould isell iwould ibe ilimited.
Fourth, icompanies iare ifree ito itake ion iemployees.
However, iconducting ibusiness ithrough ia icompany idoes ihave isome idrawbacks i(many iof iwhich ihave ibeen imentioned iwhen iyou idiscussed ithe iLLP).
Companies iare isubject ito imuch imore iregulation ithan iunincorporated ibusiness istructures.
The iCompanies iAct i2006 i(CA i2006) iimposes ia isignificant irange iof iburdens ion icompanies iin i iterms iof idisclosure i(e.g. idisclosure iof iaccounts), iprocedure i(e.g. ithe iprocedures irelating ito igeneral imeetings) iand iobligations i(e.g. idirectors’ iduties). iThe ilatter iis iimportant ito inote.
Should iAlvin iand iBetty iincorporate itheir ibusinesses, ithey iwill ibecome idirectors isubject ito ia irange iof istatutory iduties.
The iregulation ithat icompanies iare isubject ito ilimits itheir iflexibility. iThe iCA i2006 iimposes imany irequirements iin irelation ito ithe irunning iof ithe icompany. iBetty iand iAlvin iwill ialso ilose ithe iability ito iconduct itheir ibusiness iaffairs iin iprivate, ias ithe iCA i2006 iimposes isignificant idisclosure irequirements iupon icompanies.