The Company structure selected influences the Director’s personal liability, the ability to raise funding, impacts the liability for tax and the paperwork required.

Hi it’s Pauline again, this is starting a business lesson three, companies structure.

The legal structure you choose for your company influences the liability for tax, the paperwork your business has to complete, the personal liability for the directors, and your ability to raise funding for the business.

So this is an important decision.

Common structures our sole partner or proprietor or sole trader, partnership, limited company, limited liability company, limited liability partnership, employee ownership, not-for-profit and charity.

Sole trader, the most basic structure is the sole trader or proprietorship, which usually involves just one person who owns and operates the business, you have complete control over your business and make all the decisions. If you decide to start

your business as a sole trader but later decided to take on partners you can reorganise as a partnership or other entity.

The tax aspects of the sole proprietorship are simple, the income and expenses are included on your personal income tax return, this means that any business losses you suffer may offset the income you have earned from other sources.

The disadvantage is that you are personally responsible for your company’s liabilities, as a result you are placing your assets at risk, and they could be seized to satisfy business debt or a legal claim filed against you.

Raising money may be difficult banks and other financing sources may be reluctant to make business loans to sole traders so you will have to depend on your own financing sources such as savings, home equity, or family loans.

Partnership, if your business will be owned and run by several people structuring your business as a partnership may be right for you.

Partnerships can be general partnerships or limited partnerships, general partners are liable for all debts and obligations in the company.

Limited partners can contribute capital and are not liable for debts and obligations over that amount, as long as they do not receive back their contribution or take part in the management of the business.

Limited partnerships are much more complex

Administratively, general partnership is much easier to form. One of the major advantages of partnership is the tax treatment, partnership does not pay tax on its income but passes any profits or losses to the individual partners, but personal liability is an issue if you use a general partnership. General partners of personally liable to the partnerships obligations and debts unless the partnership agreement for visit each general partner can act on behalf of the partnership and may take out loans and make decisions that will affect and be legally binding on all the partners.

Partnerships are more expensive to establish than sole proprietorships because they require more legal and accounting services.

Corporation or limited company.

The corporate structure is more complex and expensive than most of the business structures, a corporation or limited company is an independent legal entity separate from its owners, it has to comply with more regulations and tax payer requirements.

The biggest benefit for businesses incorporated is the liability protection, corporations debt is not considered that of its owners, so if you organise your business as a corporation your personal assets are not at risk.

Corporation can retain some of its profits without the owner paying tax on them. However, many banks and finance companies will often insist on directors offering personal guarantees for business loans.

Limited companies or corporations can be privately or publicly owned, it is also easier for public corporation to raise money by selling stock to raise funds.

Corporations do not depend on the involvement of named partners but can continue to trade even if one of the shareholders retires, dies, or sells the shares.

Disadvantages are higher costs and more complex rules and regulations you will probably need the services of accountants and lawyers. Another drawback to forming a public corporation is the tax situation, companies pay corporate income tax for earnings distributed to shareholders as dividends or taxes personal income. However, salaries and compensation are paid before corporation tax.

A shareholders agreement can provide for and deal with other important issues including the board constitution and

control and management of the business, the contribution of each party and how those contributions may be applied, agreeing and amending a business plan, terms on which shares can be transferred, distribution policy, reserved matters to protect any minority shareholders, confidentiality and restrictive covenants, ownership of intellectual property rights.

Although these points can be included in the company’s articles of association most of them will not be included by default on the incorporation of the company, so would need to be amended.

The articles of association is a public document and any provisions included would be subject to company law, limiting in scope of bespoke provisions.

The shareholders agreement is a private document enforceable only between parties, this affords flexibility to tailor the provisions according to personal requirements and circumstances. The party’s exit strategies should be considered when drawing up these documents and may be factored into agreements.

Employee ownership is a business model in which employees totally or significantly own the company.

There are several formats the workforce directly owned most or all of the share capital, or the share capital is held in trust for the benefit of the employees or a hybrid of these two formats.

Employee ownership is becoming a popular alternative business structure for startups seeking employee commitment, long-established businesses dealing with a succession challenge, or new forms of public service delivery vehicles.

In the UK employee ownership already contributes more than 30 billion dollars each year to GDP. Growing interest in this form of business structure in both the private and public sector led to a 10% increase in the number of employee owned companies created in the UK in 2012.

Economic competitiveness and high performance are a feature of employee owned businesses, which tend to have higher productivity, greater levels of innovation, better resilience to economic Turbulence, and more engaged workers than externally owned organisations.

Shares in employee owned businesses has significantly outperformed those in the footsie AllShare index over the last 15 years. Costs of creating an employee owned business from the outset or achieving an employee buyout are modest compared with other types of company formations or mergers and acquisitions.

Building a structure that creates a genuine sense of ownership amongst employees is one of the considerations when selecting the model. Other issues to be considered include how the transfer to employee ownership will be funded, long-term safeguards for employees, how will the voice of the employees be heard, how will see their managers be free to competitively commercially drive the business and still be properly accountable to the employee owners.

The sense of purpose and commitment that employee ownership delivers makes this an attractive option, this encourages retention, the very best talent, to enable businesses to compete successfully, a practical guide to setting up employee owned businesses in the UK is published by the Employee Ownership Association.

The nonprofit and charity sector purpose our nonprofit sector is to improve an enriched society and create social wealth rather than material wealth. Firms in this sector exist to make a difference to society rather than to make financial profits. This is also referred to as the third sector the voluntary and community sector, the not-for-profit sector, the charity sector, or the social sector it is made up of many different types of activity affecting many aspects of society. The term the third sector indicates that it sits between government, the public sector, from the private or commercial sector.

These companies can exist in a range of formats from social enterprises, trade unions, public arts organisations, community interest companies, voluntary and community organisations, independent schools, faith groups, housing associations from these societies, mutual societies.

They must be registered and approved by the relevant governing body and abide by their regulations, because they broadly exist for public benefit they are usually eligible for a range of income and property tax exemptions.

Whatever option you choose for your structure, the name you choose for your business should reflect the image you want to project your market. Select one that’s easy to pronounce and remember and make sure it’s not already in use, that it is available as a web address, and will work on your business stationary.

That’s it for lesson 3 see you in lesson four where we look at director’s duties.

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