A Report on Establishing a Company and Recommendations for Someone Starting an Engine Company Introduction Homer wants to open a small business as he designs and builds V-engines for other companies andhas recently leased a large warehouse with offices. He is not sure whether to run his business as a sole trader or to obtain limited liability.The establishment of a business has many factors involved as well as legal responsibilities that the owner has to adhere to. This report will highlight the different types of business Homer may operate as, including coverage of legal responsibilities and the advantages and disadvantages of each type. The report will also highlight any regulations that Homer must adhere to when setting up the company as well as any responsibilities he may have as a director and how this title may be taken away from him. Main Body Companies can be created by registration under the Companies Act, by statue, or by Royal Charter (Macintyre, 2012). A company may be private which is usually the case when someone is starting their own business such as a corporation, sole proprietorship or partnership as their shares are traded privately. It can be a public company where its shares are sold in a public market such as the London Stock Exchange (enabling them to raise capital quicker) and they must inform shareholders of any changes to take place, such as financial performance, management actions and company operations (Allbusiness.com, 2014). It must be made clear when registering whether the company is public or private (Macintyre, 2012). Public companies must have an allotted share capital of at least A£50,000 and at least one quarter must be paid up, however if things go wrong the public company can sell its shares on the stock market. On the other hand a private company can be limited by guarantee which means that the directors and shareholders will financially support the organisation up to a specific point if something were to go wrong, acting as guarantors. Examples would be clubs, sports associations, and students unions (Companiesmadesimple.com, 2014). Unlike public companies, private companies are not required to publically disclose financial information and file an annual report documenting their performance in great detail. Public companies can go private by having the owners buy back shares from the shareholders, whether they are members of the public, another company, an individual, or a small group of investors (Allbusiness.com, 2014). The Companies Act 2006 was established to improve the UKs competitiveness by providing a sound, flexible framework for UK company law and make it easier for companies to be established. The majority of companies are created by registration under the companies Acts via Companies House for a low cost and by submitting certain documentation and a Memorandum of Association. This document is a statement made by each subscriber confirming their intention to form a company and become a member of that company. If the company is to have a share capital on formation, each member also agrees to take at least one share (Companieshouse.gov.uk, 2014). They are then presented with a certificate of incorporation. The application must state;
Once registered, the company must establish Articles of association which are rules about running the company that shareholders, directors or the secretary have to agree. The majority of companies will use standard model articles but they can be written by the company as long as there are no laws broken. For example the role of shareholders in decision making within the company with regards to expansion and changes in location. Macintyre (2012) states that a company is a legal person in its own right, meaning it has a legal identity of its own which is separate from the legal responsibility of its owners. This principle was established by the House of Lords in Salomon v Salomon and Co Ltd . This case shows that the owner of the business was not liable for the company’s debts as the business went into liquidation. This is an example of a limited company and is how most companies are registered. A limited company is an organisation that can be established to run a business and is responsible for everything it does but its finances are separate. Therefore if the company were to go into liquidation, the owners or shareholders’ personal income would not be affected. Every limited company has members, who are people or organisations that own shares in the company as well as directors who are responsible for running the company. It is up to the shareholders to appoint the director or board of directors who will be running the company and this is set out in the company’s articles of association (Macintyre, 2012). Gov.uk (2014) states that as a director of a company the legal responsibilities are as follows;
The only requirement stated to become a director is the person must be at least 16 years old. Below is a number of ways a director can be disqualified through the enforcement of a court order or bankruptcy order (Gov.uk 2014);
A sole trader is someone that is running their own business as an individual and are able to retain business profits after taxes have been paid. Barber’s shops are usually sole traders as they are small and easy to set up as little capital is required. They are able to hire staff however they are personally responsible for any losses the business makes, keeping accurate records of business sales and spending and any bills for things bought such as equipment and stock (Gov.uk, 2014). The drawbacks to being a sole trader are that there are long hours and there is no one to share the responsibility of running the business, such as the accounting while at the same time carrying out the trade responsibilities for a handyman. There is also the risk of unlimited liability, where by the sole trader will be responsible for the debts of the company and may have to sell some personal assets to cover the business debts (Worthington and Britton, 2009). Partnerships are relationships which occur when common business is carried out with a view of profit and are usually owned by two or more people. A contract known as a deed or article of partnership sets out how much capital each party has contributed and how profits and losses will be calculated. There is no legal requirement to draw this document up, but they are common in partnerships. A partnership can also be implied and can be created informally according to Macintyre (2012) once all the contractual requirements are met, such as an offer, acceptance, intention to create legal relations and consideration. Partners are liable for each other unless they are limited partners, but one partner has to have unlimited liability (Macintyre, 2012; Unit 7&8 Q&A Recording 2014). The main advantage of a partnership is the shared responsibility and therefore specialisation of skills will be possible. For example in the Barber’s shop, one of the partners can concentrate on cutting hair while the other partner who may have a better business background can concentrate on the finances and marketing. This advantage however is also the main disadvantage as disputes can arise when the partners do not agree and there can also be a dispute on the amount of profits that is to be distributed. Other advantages include additional start-up capital and therefore more flexibility in running the business. Partners like sole traders also have unlimited liability which would mean personal assets may be needed to cover the company’s debts (Worthington and Britton, 2009). The Limited Liability Partnerships Act 2000 introduced the concept of limited liability partnerships (LLPs) in order to keep the partner’s personal assets separate from those of the business (Hartley, 2014). Therefore if the Barber’s Shop were a LLP and became insolvent, the partners would lose money they invested in starting the company, but they will not have to pay the company’s debts unless as occured (Macintyre, 2012). The LLP is a separate legal entity and although the LLP will be liable for the full extent of its assets, the liability of the members will be limited (Gov.uk, 2014). Like a company, the LLPs are required to provide annual returns and accounts, notify any changes to the LLP’s membership, address and Registered Office address. The Company Directors Disqualification Act 1986 applies to both members of a partnership and any shadow members (silent partners), therefore if a partner was disqualified as a director previously they would not be able to become a partner and would be committing a criminal offence which would make them liable without limit for the LLP’s debts (Macintyre, 2012). Incorporated companies are larger companies that have legally declared they are separate from their owners. Incorporation involves drafting a document known as an Article of Incorporation which lists the primary purpose of the business, its location, number of shares and class of stock being issued, if any. The advantages of incorporation are as follows; it protects the owner’s assets against the company’s liabilities; allows for easy transfer of ownership to another party; achieves a lower tax rate than on personal income; receives more lenient tax restrictions on loss and can raise capital through the sale of stock as they are usually large companies. As appose to being focused on a single person or a small group, ownership of an incorporated business is spread out among stockholders, who have the right to vote on key business decisions and they are usually listed on stock exchanges, such as the London Stock Exchange (LSE), and anyone can access a wide range of financial and operational data about each company (Veldman, & Willmott, 2013). The drawbacks to corporations are that the income is taxed from the company and the stockholders and executives must also pay tax on their own income. There is also the possibility of the original company founders losing all management control through the voting power of stockholders (Veldman, & Willmott, 2013). Recommendations and Conclusions As Homer’s business requires him to build engines, he has a duty of care to the companies he works with to build the engines at a good quality and standard and to ensure his premises are safe for visitors and staff as he also owes them a duty of care. Should one of the engines go wrong he will be considered negligent and could be prosecuted under Tort Law. If Homer were to hire some employees he will need to be aware of the various legislations that will affect his type of work, such as the Health and Safety at Work Act 1974 which places duties on manufacturers and also with regards to the working conditions in the factory where the engines are built and ensuring staff are able to work in a safe environment. Homer needs to be aware that he has vicarious liability over the actions of his staff and also needs to provide them with adequate insurance to cover foreseeable damage such as accidents at work and potential damage through their own negligence (Macintyre, 2012). So if a vehicle was to crash as a result of a poorly built engine, Homer would be liable and ensuring he has the right insurance will mean his company could continue to operate. In regards to the recently leased premises as this contract was made before the formation of the business, this would not be included within the limited liability and Homer would be responsible for this debt. Homer should aim to ratify any contracts made before establishing the business (Macintyre, 2012) and he should talk to the landlord of the premises and seek to re-negotiate under the grounds that the company is responsible for the rent of the premises and not Homer himself. If Homer were to set up the business as a sole trader, it would be easier as he would be able to start the business immediately, however he would be liable for the company’s debts, therefore it would be beneficial for Homer to operate as a limited company or a limited liability partnership to ensure that he is not liable should the company have any financial or legal issues. Homer has to be careful to ensure he submits his documentation such as annual return and looks to improve the business in order to avoid disqualification and not partake in illegal activities such as fraud, retaining company assets illegally and insider trading (Macintyre, 2012). Once Homer has made the decision to create the limited company, it is then his responsibility to ensure he registers the company via Companies House and files annual returns. References Allbusiness.com, (2014).Public vs. Private Companies: How Do They Differ? | Company Activities & Management > Company Structures & Ownership from AllBusiness.com. [online] Available at: https://www.allbusiness.com/business-planning/business-structures/2304-1.html [Accessed 13 Jul. 2014]. Companieshouse.gov.uk, (2014).Memorandum of Association. [online] Available at: https://www.companieshouse.gov.uk/infoAndGuide/faq/memorandumOfAssociation.shtml [Accessed 13 Jul. 2014]. Companiesmadesimple.com, (2014).Private Company Limited by Guarantee. [online] Available at: https://www.companiesmadesimple.com/company-formation-limited-by-guarantee.html [Accessed 13 Jul. 2014]. Gov.uk, (2014).Choose a legal structure for a new business – GOV.UK. [online] Available at: https://www.gov.uk/business-legal-structures/limited-company [Accessed 13 Jul. 2014]. Gov.uk, (2014).Company director disqualification – GOV.UK. [online] Available at: https://www.gov.uk/company-director-disqualification [Accessed 13 Jul. 2014]. Hartley, S 2014, ‘Limited liability partnerships’,Estates Gazette, 1374, p. 15, Business Source Complete, EBSCOhost, viewed 13 July 2014. MacIntyre, E. (2012).Business law. 1st ed. Harlow, England: Pearson Education. Small Business – Chron.com, (2014).What Is an Incorporated Business?. [online] Available at: https://smallbusiness.chron.com/incorporated-business-365.html [Accessed 13 Jul. 2014]. Worthington, I. and Britton, C. (2009).The business environment. 1st ed. Harlow, England: FT Prentice Hall.
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