Nature, Formation, And Management Of Business Organizations Assignment Sample

Business Types in the UK: Legal Consequences and Best Structure for IOM Solutions' Expansion

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Introduction Nature, Formation, And Management Of Business Organizations Assignment

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IOM Solutions is engaged in trading electronic parts to nearby garages. The business has been successfully running for the last few years successfully and in the last 2 years, the business expanded unexpectedly. Till now the business has been running with a workforce however it does not have a legal structure or framework. Sam has been running the business individually without giving it a legal framework. However, as the business has now expanded the need of giving it a proper shape has been realized. In this report, the different structures have been discussed along with their legal consequences. The suitable structure of the business has been suggested here with proper justification.

Types of organization

Currently, businesses can run in the UK under 4 different frameworks with different characteristics.

Types of Business Organizations in the UK

Figure 1: Types of Business Organizations in the UK

The above picture depicts the types of business organizations under a definite legal framework in the UK. These Frameworks have different features with a number of different advantages and disadvantages that have been discussed below.

Sole Proprietorship

As opined by Olazabal and Avila (2022), sole-proprietorship is the form of business that has the simplest structure. The term basically means a business that is owned by one person and managed, run, and funded by him only. As opined by Fath (2022), this is the oldest form of business and had been practiced since the birth of civilization.

Most small businesses start as sole-proprietorship business as it is very established. Some of the biggest brands of the world today such as Coca-Cola, Amazon, Apple, Google, Walt Disney and many more started businesses as sole proprietorship businesses (Shaw and Sørensen, 2022).

The framework of a sole proprietorship has a number of advantages as it is very easy to establish with limited legal complications. The establishment procedure is simple, cheap, and less time taking. Decision-making in this form of business is very easy as it is initiated by the proprietor without consulting with anyone else; hence decisions are taken swiftly (Olazabal and Avila, 2022). The business secrecy is maintained as the owner can keep all the business-related documents and information to himself only. Profit is not shared in this form of business and the owner can enjoy the entire profit.

With a number of advantages, a sole proprietorship business has a number of limitations as well (Geeksforgeeks.org, 2022a). As the entire business is dependent on only one person, in case the person faces any problems in life such as a major illness or accident, the continuity of the business is challenged and it may come to an end. The business does not have any proper management and in such conditions, many businesses have been seen to be mismanaged and finally came to an end as a consequence. Moreover, as the business does not have any separate entity the business liabilities become the liabilities of the proprietor.

Partnership

As opined by Dar (2018), a business under a formal arrangement by a minimum of 2 or more individuals for operating the business and sharing all the profit and losses is called a partnership business. In this arrangement, all partners share the profits and losses of the business in a pre-determined way. In a partnership, a partnership deed is prepared before the commencement of the business. It is a legal document that contains all the details related to the business such as profit and loss sharing ratio, capital invested by partners, and all the other details. As opined by Cumberlege (2021), the partnership deed is the most important document of the business and is treated as the constitution in case any dispute arises.

As opined by Berry (2021), a partnership has a number of advantages as the procedure of forming a partnership firm is easy. However, the procedure is not as simple as a sole proprietorship as a there is a need of making legal papers. One of the most advantageous points of this category of the organization is, the risk is shared among the partners and hence one singular partner does not have all the liabilities as a sole proprietor. All the work related to business is shared among the partners and no single partner is responsible for everything. Moreover, decision-making is done after consultation among all the partners and that lessens the risk of taking wrong decisions [Refer to Appendix 1]. The scope of expansion of the business is more in the case of partnership businesses and the procedure of dissolution is also very simple. Moreover, the continuity of the business can be secured in the case of partnership businesses.

It is true that partnership businesses have a lot of advantages; however, they have some limitations as well. As the business documents and information is shared among the partners, secrecy cannot be always maintained. The procedure of entry of a new partner or withdrawing the capital invested in the business by a partner is complicated. As decision-making needs to be done mutually, often dispute arises among the partners while taking decisions (Geeksforgeeks.org, 2022b). Moreover, unlimited liability upon the partners is one of the greatest disadvantages of the partnership business.

Limited Liability Partnership (LLP)

As opined by Sharma (2020), LLP is the same as a partnership business, the only difference is the liability of partners is limited in this form of business. The liability is limited as per the amount of capital invested by the partners. As a partnership business, forming an LLP is a simple process however the legal structure of an LLP protects the interests of the partners to a great extent.

Limited Company

As stated by Blair, and Hitchens (2018), It is a privately managed company with a separate entity and legal citizenship. This form of organization has a concrete structure that follows the legal rules strictly. This organization can be formed and dissolved only by following the legal procedure. In the UK, a limited company can be limited by share or limited by guarantee. As this organization has a concrete structure it enjoys a number of additional advantages. The actual stake of the company belongs to the shareholders and the stake is limited to them in accordance with their number of shares. Transferring ownership is very easy as transferring shares means transferring ownership. Companies enjoy favorable taxation rates, a wider capital base can be created and the business becomes stronger in the case of a company.

As opined by Hardman (2022), the procedure of company formation is long, expensive, and complicated. It needs to be done following the legal rules completely in the UK that involve a number of steps. All information related to business can be public and maintaining business secrecy can be very difficult.

Legal Consequences for each option

Legal consequences of a sole proprietorship

Registration of a sole proprietorship business is not compulsory in the UK; however, a registered business can enjoy legal rights. All the documents required as per the National Insurance and Income Tax need to prepare. In the case of a sole proprietorship, businesses need to pay income tax on profit annually. In case the turnover exceeds £85,000, there is a need of paying VAT along with income tax. The procedure of registration can be summed up as

  • Send a notification to HMRC stating that tax will be paid on time during the entire period of conducting the business.
  • Pay the National Insurance as per the requirements.

The registration process begins with the information related to the business such as name, Bank details, COI, and registration with HMRC.

Legal Consequences of a Partnership

“The Partnership Act”, 1890, is the governing authority of the partnership businesses in the UK (Gov.uk, 2022a). The formation procedure is completed as per the procedure prescribed by the Act. The preparation of the partnership deed is completed beforehand and as per section 2 of the Act, the rules related to the business are fixed. All the litigations related to the business are administrated by the Act. The entire procedure can be completed following ten simple steps as per the legal guidelines of the UK (Gov.uk, 2022a).

Number Steps
1. Finalization of the number of partners
2. Determination of the type of partnership (LLP or ordinary)
3. Determination of the name of the business
4. Registration of the firm
5. Determination of tax obligations
6. Application for a tax ID and EIN number
7. Formulation of the Partnership deed
8. Fulfillment of the requirement of license and permits (in case required)
9. Opening of bank account in the name of the business
10. Choose the accounting option

Table 1: Steps followed to form a partnership business

Legal formalities of companies

Procedure of Company Formation in the UK

Figure 2: Procedure of Company Formation in the UK

The Companies Act, of 2006 governs the matters related to companies and prescribes detailed procedures for the incorporation of new companies. The company is promoted by a promoter, the person that starts the process of establishing the organization. A company needs to be formed as per part 2 of the Act. Section 7 of the Act describes the method of forming the company (Gov.uk, 2022b). The entire procedure starts with filling out the application to the company's house as per the “Companies House Norm IN01” and it needs to be delivered to the registrar of companies. Information required to be submitted to the registrar is a company name, type of company and business, registered address of office, memorandum of Association (MOA) and Article of Association (AOA) as per section 8 of the ACT, details of director and secretary, details of the subscribes, number of shares, and all the information related to “People of Significant Control”.

Recommended option

Sam is handling business successfully, already dealing with a number of clients. The kind of organization needs to be such that can help the business in further expansion of the business and not hinder its flow. As opined by Simoni et al. (2022), the market in the UK is already affected by a number of variables currently after Brexit and in such a situation any decision related to business needs to be taken after considering all the related factors very carefully. As the business of Sam is not very small and it has already created a customer base and a capital reserve it is now time to convert the business into a company.

For the purpose of incorporating the company, Sam needs to act as the promoter of the company first. The preliminary work needs to be done by him solely that involves a number of necessary activities. Discovery of the idea of business, detailed investigation, and assembling the trading procedure needs to be done by him. Then he needs to look for potential investors and incorporate, promote, float, and solicit the idea to the investors so that they can understand the scope of investing in the business of Sam. In this way, Sam can raise capital and extend the business. Currently, he deals in a limited area, however in this way he can launch the business on a national level. It is opined by Ramasubramanian et al. (2021), the work of company promotion needs to be done with utmost good faith and no false information needs to be presented to the investors. Sam needs to follow this and as the business is already growing, finding investors is not going to be tough for Sam.

In this way Sam can gather the capital needed for the business for national expansion and the liability of the business can be limited as well. Sam can enjoy favorable tax rates and the business can become stable and the continuity of it can be maintained.

Conclusion

Forming a business organization is very crucial that ensures the smooth running of business. In the UK it is a legal procedure that needs to be done in the prescribed manner only so that the rights of the people involved with business can be protected. In this essay, the different organizational structures of the UK have been highlighted along with their legal consequences. The suitable form of business for the case study has been stated here with justification.

References

Journals

Berry, E., 2021. Partnership Law: Used, Misused or Abused?.European Business Law Review,32(2). https://doi.org/10.54648/eulr2021009

Blair, D.M. and Hitchens, D.M., 2018.Campus companies-UK and Ireland. Routledge. https://doi.org/10.4324/9780429460920

Cumberlege, J., 2021. Updating your partnership deeds.Practice Management,31(5), pp.32-32. https://doi.org/10.12968/prma.2021.31.5.32

Dar, A.A., Original Paper Effect of Partnership on Business: A Case Study. https://www.researchgate.net/profile/Amir-Dar/publication/360754797_Effect_of_Partnership_on_Business_A_Case_Study/links/62883efdcd5c1b0b34eb1318/Effect-of-Partnership-on-Business-A-Case-Study.pdf

Fath, R.A.R., 2022. Civil Liability for the Establishment of a Micro, Small, and Medium-sized enterprise sole proprietorship.Jurnal Hukum dan Kenotariatan,6(2), pp.815-825. http://dx.doi.org/10.33474/hukeno.v6i2.15037

Hardman, J., 2022. The Plight of the UK Private Company Minority Shareholder.European Business Law Review,33(1). https://doi.org/10.54648/eulr2022003

Olazabal, V.H.N. and Avila, N.M.G., 2022. Dynamic capabilities in sole proprietorships: theoretical model through grounded theory.Journal of International Entrepreneurship, pp.1-28. https://link.springer.com/article/10.1007/s10843-022-00321-2

Ramasubramanian, G. and Advisors, G.R., Promoter Shareholder Activism, Company Performance and Corporate Governance. https://dx.doi.org/10.2139/ssrn.3809650

Sharma, J.K., 2020. Limited Liability Partnership as a Better Alternative to Incorporation.Jus Corpus LJ,1, p.440. https://heinonline.org/HOL/LandingPage?handle=hein.journals/juscrp1&div=203&id=&page=

Shaw, K. and Sørensen, A., 2022. Coming of age: watching young entrepreneurs become successful.Labour Economics,77, p.102033. https://doi.org/10.1016/j.labeco.2021.102033

Simoni, L., Schaper, S. and Nielsen, C., 2022. Business model disclosures, market values, and earnings persistence: evidence from the UK.Abacus,58(1), pp.142-173.https://doi.org/10.1111/abac.12233

Websites

Geeksforgeeks.org (2022a). Sole Proprietorship: Features, Merits and Demerits. Available from https://www.geeksforgeeks.org/partnership-features-merits-and-demerits/ . Accessed on 02.11.2022.

Geeksforgeeks.org (2022b). Partnership: Features, Merits, and Demerits. Available from https://www.geeksforgeeks.org/sole-proprietorship-features-merits-and-demerits/ . Accessed on 02.11.2022

Gov.uk (2022a). Partnership Act 1890. Available from https://www.legislation.gov.uk/ukpga/Vict/53-54/39#:~:text=(1)Partnership%20is%20the%20relation,with%20a%20view%20of%20profit.&text=(b)Formed%20or%20incorporated%20by,Royal%20Charter%3B%20F2.%20.%20. Accessed on 02.11.2022.

Gov.uk (2022b). Companies Act 2006. Available from https://www.legislation.gov.uk/ukpga/2006/46/section/7. Accessed on 02.11.2022.

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