Business Advisory Service
Legal responsibilities for business owners
Advise for new business owners about:
* Legal status and risk involved
* Contract Law
* Consumer legislation
When starting up a business, one should decide which legal status to choose. Each legal status has its own different responsibilities and there are some risks involved. There are three types of legal status: sole trader, partnership and limited companies (Ltd & Plc).
* Sole trader
Sole trader businesses are owned by just one person. The owner may employ other people or work on its own. Sole traders have unlimited liability, this means that the business does not have a separate legal identity from its owner. Such businesses can trade under the business’ name or the owner’s name. Sole trader businesses do not need to be registered, but the owner needs to make sure that the name is neither the same nor very similar to another business. Regarding the name of the business, words such as ‘Royal’, ‘International’ or ‘Authority’ cannot be used without being entitled. All the profits made by the business will go directly to the owner and the decisions are made by him. Owners will have to keep record of the sales and have an annual self-assessment tax.
Many sole traders business are often small businesses such as window cleaners, hair-dressers, gardeners or corner shops. This kind of business is easy to set up and do not require a huge investment.
One of the risks that involve being a sole trader is that as there is unlimited liability the owner is responsible for all the business debts. Also, the owner cannot share the workload and it is difficult to take holidays or sick leave. Furthermore, all the business profits will be taxed as income.
Partnerships have from 2 to 20 owners. They have unlimited liability, like the sole traders. A legal document called Partnership Agreement sets out the duties and responsibilities of the partners. This document will cover how the profits will be shared between partners, how decisions are taken and what do partners will have to invest into the business. In the absent of this agreement, all the profits will be shared equally between partners.
Partnership businesses are often doctors with different specialities that decide to join in a partnership in order to give a wider service. Firms of accountants and lawyers often form a partnership as well.
However, forming a partnership has its risks. The primary one is that there is unlimited liability, which is the same case for sole traders. In this legal status, the income needs to be split between partners and there might be disagreement between partners. Also the decisions or actions taken are legally binding on all partners.
* Private Limited Company (Ltd)
Private Limited Companies should display Ltd after their name. This type of business has limited liability. Unlike sole traders and partnerships, the company has a separate legal identity from its owners and the company itself is responsible for all the business debts. In case of bankruptcy, owners just need to pay the investments made in the company and their personal assets cannot be used to pay the company’s debts. Private limited companies are funded by shares that cannot be sold without the agreement of all the shareholders. These types of companies can keep their affairs private and can publish them if they want to. A director needs to be appointed and it is not required to have a secretary. An Ltd needs to be registered at the Companies House and file a Memorandum of Association where the company describes the purpose of the business.
The fact of the shares not being able to be sold to the public could be taken as a risk because it can make it difficult to raise finance. Decisions take a long time because all the shareholders must agree with it. The income will be split between shareholders and...
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