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Company Law & Types of Companies
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Company Law and types of companies including Sole Trader, Partnership and Companies.
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Types of businessIncorporated and unincorporated business
Unincorporated businesses require few or even no administrative steps to be taken to be formed
under the law. They are usually treated as being the same as its owners, with no separate legal
status.
Incorporated businesses must undergo a formal registration process before they can legally exist.
They are legal entities which have an existence separate from that of their owners.
Sole trader
A sole trader is someone who runs a business on his own as a self-employed person. No formal steps
need to be taken to set up as a sole trader, but the sole trader must register with HM Revenue and
Customs (HMRC) for tax purposes.
The business will still be classed as a sole trader where there are employees if the sole trader owns
the business alone. A sole trader earns his income form the money received from his customers or
clients and keeps all the profits himself and he pays income tax as a self-employed person.
A sole trader is personally liable for all the debts of the business. The business has no legal status of
its own. Therefore, the sole trader’s business assets and personal assets are treated as one and the
same. If the business fails, the sole trader’s business assets and personal possessions including any
savings, house and car which may be taken or sold to repay outstanding debts. If the sole trader is
unable to pay off all the debts using his business and personal assets, he may be made bankrupt.
This is known as unlimited liability.
When a sole trader retires or dies, the business ceases. Although, the business or individual assets
may be sold if a buyer or buyers can be found. Therefore, a sole trader is a person who alone:
Has the right to make all decisions affecting the business;
Owns all the assets of the business;
Is responsible for paying income tax on all the profits of the business; and
Has unlimited liability for the debts of the business.
Partnership
A partnership occurs where two or more persons run and own a business together. Partnerships are
governed principally by the Partnership Act 1890 (PA 1890). Under section 1, a partnership is legally
formed when two or more persons carry on business with a view to making a profit. The partnership
will run on the basis of a contract, which may be written or oral. There are no formalities which need
to be satisfied however, each partner must register with HMRC for tax purposes.
The partners will divide the profits and losses of the business between them. In a partnership made
up solely of individuals, the partners are taxed separately as self-employed individuals, paying
income tax on their share of the profits.
A partnership has no separate legal status. The partners have unlimited liability for the debts of the
partnership. If the partnership fails, creditors can pursue not just the assets used by the business but
also the personal assets of the partners themselves. The liability is joint and several, allowing a
creditor the choice of seeking the full amount of debt from any one individual partner or all the
partners together.
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