Running head: Business Law

Module Number: BMP4002

Module Name: Business Law
Assignment Title: Business Organizations
Business Law 1

Table of Contents

Executive Summary...............................................................................................................................1
1. Introduction.......................................................................................................................................1
2. Business Structures in the UK............................................................................................................1
2.1 Sole Proprietorship......................................................................................................................2
2.2. Partnership.................................................................................................................................3
2.3 Limited Liability Partnership........................................................................................................4
2.4 Limited Company........................................................................................................................5
3. Recommendations.............................................................................................................................6
4. Conclusion.........................................................................................................................................6
5. References.........................................................................................................................................7
Business Law 2

Executive Summary

The report is a detailed analysis of prevalent business structures in the UK to identify an

appropriate business structure for IOM solutions as per the given case study. The report
explains that the major types of business structures in the UK are sole proprietorship,
partnership, limited liability partnership and limited company. After analyzing all the given
business structures, their advantages and disadvantages and their legal consequences, it has
been identified that the most suitable business model for IOM solutions is ‘Private Company
Limited by Shares’. This model would act as a legal safeguard for the business. It would also
improve the credibility of the business.

1. Introduction
The term business organization refers to the structure of the business and how this structure
would help meet the goals of the business organization. Before starting a business venture,
the most important thing is to decide the type of business structure for this business because
the future of the business depends upon the kind of structure adopted. The selected business
structure would affect the taxation, legal liabilities and costs of the business. Every business
structure has its advantages as well as disadvantages. Therefore, it is essential to understand
the different types of business structures before selecting one for a business venture.

In the given case, Sam has been running a business named IOM solutions of selling electric
parts to the local garages of UK for eight years. He is operating this business as a sole trader.
Now he has planned to expand this business. Therefore, he is looking for a suitable business
structure which can be beneficial for the business. This report has analysed four major types
of business structures available in the UK for the reorganization of the business of Sam and
has identified the most suitable business for IOM solutions.

2. Business Structures in the UK

Business structure is also known as a legal structure for a business that is recognized in a
given jurisdiction. The business structure selected by an organization influence the day-to-
day operations of the business. In the UK, there are mainly four types of business structures
Business Law 3

consisting of different sets of taxation and legal implications. These four types of business
structure in the UK are Sole proprietorship, Partnership, Limited liability partnership and
Limited company.

2.1 Sole Proprietorship

Sole Proprietorship is known as the simplest business structure. In this type of business, a
single individual is responsible for day-to-day business operations. There is no need to file a
separate income tax form until it is a separate legal entity (Alton, 2019).

IOM solutions is already a business with Sole proprietorship. The owner of the business,
Sam, would have to get this business registered with Her Majesty's Revenue and Customs
(HMRC). The profits earned from the business would be the income of Sam, but he would be
responsible for paying taxes and insurance. If the annual limit of the profits earned from the
business exceeds £85,000, then it would be compulsory to get this business register for Value
added tax.

Advantages of Sole Proprietorship

The main advantages of this type of business structure are that all the profits earned from the
business can be retained by the owner. There are very few regulations for sole proprietors and
they can run the business according to their own will. A sole proprietorship consists of less
capital requirement to start the business. In various states, business taxes and operating
license fees are the only two main costs associated with the sole proprietorship of the
business. In addition to that owner of the business is liable for debts, liabilities, and
obligations of the business.

Disadvantages of Sole Proprietorship

The main disadvantage of this business structure is the unlimited liability for debts because
there is no legal distinction between private and business assets. There exists a limited
capacity to raise business capital. It becomes difficult to retain high calibre employees for
this business. There can be difficulties in transferring the ownership in future. There is no
difference between personal and business income.

Legal consequence

Unlimited liability is the main legal consequence of this type of business structure. The
owner of the business is accountable for all debts owned, torts and crimes committed by any
Business Law 4

employee of the company. A sole proprietor would have to pay the tax at the personal income
tax rate.

2.2. Partnership
The partnership is a type of business structure which consists of two or more owners. The
partnership is also categorized in a general and limited partnership. A general partnership is
based on verbal agreement between two partners and it is administered according to
partnership act 1890 (Alen, 2007). A limited partnership is based on a formal agreement
between the partners. All the activities in this partnership are administered according to
Limited partnership act 1907. Partners in this type of partnership are liable for the business
debt as per the amount invested by them in the business (Horton & Prain, 2017). The
partnership has various similarities with a sole proprietorship. The main similarity is that
owners and entities are one person in this business structure. All the profits and losses of the
business are shared between the partners of the business. All partners pay their self-
employment tax as per their share in the profits of the business.

Advantages of Partnership

This type of business structure involves less paperwork because it is based on verbal
agreements. Moreover, the partners don't have to meet the same level of requirements. All the
partners are required to report their share of profit and loss on their income tax return. The
partnership brings more resources and capital into the business. Larger the number of partners
would be, higher would be the number of resources. This flexible partnership model is
flexible and cost-effective.

Disadvantages of partnership

All the partners of the business are liable for the debts of the business and, personal assets of
the partners can be sold off to repay the debt. In case of disagreement between the partners of
the business, whole business operations can be lowered down.

Legal consequences

As described above, each partner is a representative to other partners in the business. So,
negligence of anyone partner can lead to losses to other partners as well. The third-party, who
has suffered losses would recover damage from any partner of the business as held in
Frigidaire Sales Corp. v. Union Properties, Inc (Frigidaire Sales Corp. v. Union Properties,
Business Law 5

Inc., 1977). The business partners can hold the managing partners responsible for breach of
duty as held in Flanagan v Liontrust Investment Partners LLP (Flanagan v Liontrust
Investment Partners LLP & Ors, 2015).

All employees of the partnership firm have rights to enjoy their employment rights as well.
Every business partner should receive remuneration according to his share in the profits and
losses of the firms. The partner who has contributed his capital in the business has an equal
share in the assets if the business. Partner's name should appear in all the documents of the
partnership. The partners have equal right to hire new employees, to strike off the employees
and to operate the bank account of the firm.

2.3 Limited Liability Partnership

This type of business structure is known as a hybrid business structure. It consists of the
characteristics of both partnership and corporations. It increases the protection of the personal
liability of business owners by reducing their taxes. Profit and losses are equally divided
among the partners of the business. This type of business structure acts according to the
Limited Liability Partnerships Act 2000, the Limited Liability Partnership Regulations 2001
and 2009 [ CITATION Ada20 \l 1033 ].

Advantages of Limited Liability partnership

The main advantage of Limited Liability partnership is that it emphasizes the protection of
the personal assets of all the partners of the business. This acts as a distinct legal personality
that can buy, lease and rent on its name. Registration of LLP at company house can help in
preventing other companies from using the same names.

Disadvantages of Limited Liability partnership

The main disadvantage of the Limited Liability Company is public disclosure. It is required
for LLP to submit all financial accounts to a company house for public records. The profits in
this type of business are not retained but are effectively distributed. There must be at least
two members in this partnership. If one member leaves the partnership, LLP would be
dissolved.

Legal consequences

The legal consequence of a limited liability partnership is that each partner in the business
has limited liability. Every business partner cannot be held responsible for the misconduct
Business Law 6

and negligence of anyone partner in this partnership. But all the partners have equal
authority to manage the business. This business structure is based on the contractual
relationship with the client. In this case, misconduct and negligence by anyone business
partner would lead to a breach of duty and LLP would be liable for this loss as held in
Bairstow v Queens Moat Houses Plc [ CITATION Bai01 \l 1033 ].

The individual employment rights of the partners of LLP must fulfil some conditions such as
fixed disguised salary of the business partners, the less significant influence of the partners
over partnership affairs, reconsideration of the capital invested by the partners every year and
reiving of the tax status of the individual partners (Harroch, 2016). Disguised salary of the
partners should be fixed. It should not have any effect on overall profits and loss of the
partnership. But, in case, the capital invested by any partner is less than 25% of the disguised
salary then the capital invested by the partner should be reconsidered every year. HMRC is
responsible for reiving the taxation status of individual partners.

2.4 Limited Company

A limited company is known as a general form of incorporation that limits the liability. It
ensures that liability of the partners of the company is limited to their stake only. In this type
of business organization, assets and income of the owners are separate and distinct from the
assets and income of the company. Losses of the owner are also limited to what he has
invested in the business. The main sources of law for this limited company are Companies
Law 2006, Insolvency Act 1986, UK Corporate Governance Code, EU directives and case
laws. A limited company is owned by the investors and directors are responsible for its
execution [ CITATION Ada20 \l 1033 ]. Profits in this business are retained after paying
corporate tax and are equally divided among the partners. This limited company can also be a
private limited or a public limited company. Sometimes, this company can also be a private
unlimited company.

Advantages of a Limited company

The main advantages of this limited company are that in such type of business owners have
limited liability. Profits and losses are retained after paying corporate tax. Limited liability is
also transferrable. Owners cannot use personal assets to pay off debts of the business and
other business obligations. A limited company is free to enter into contracts of its own.
Business Law 7

Disadvantages of a Limited company

A limited company has costly business operations. Moreover, the paperwork required to
establish the business is also very complicated. The tax imposed on the income generated by
the limited company is twice as compared to other business structures.

Legal consequences

The legal consequence of a limited company is that the company must be treated as an
independent person. Duty of care is the main principle that must be followed by the business
partners to avoid any damage to the third party as held in Re Cardiff Savings Bank (Re
Cardiff Savings Bank, 1892). In Adams v Cape Industries plc, a UK company law case, it has
been described that limited company would be held responsible for any breach of duty or any
damage caused to the third party (Adams v Cape Industries plc, 1990). According to the
principle of lifting the corporate veil, directors, shareholders and authorized signatories are
liable for the debts of the company as held in the Secretary of State for Trade and Industry v
Bottrill (Secretary of State for Trade and Industry v Bottrill, 1999). It states that a limited
company is responsible for any act of the human beings associated with the company.

3. Recommendations
It has been discussed in the case that Sam, the owner of IOM solutions is looking for the most
appropriate business structure. After analyzing the four different types of business structures
prevalent in the UK, it is recommended that Sam should adopt limited company business
structure. It can be a private company limited by shares. The advantage of adopting this
business structure is that there is no minimum requirement for capital investment. Private
company limited by shares would be more tax-efficient as compared to a sole proprietorship.
Sam would be able to run his business by entirely separating it from its personal affairs.

4. Conclusion
The report concludes that the model "Private company limited by shares" would affect the
business from various aspects such as day to day operations of the business, tax structure and
risk regarding repayment of the debt of the business. This business structure is the most
popular in the UK because of its benefits for all partners of the business. This model would
Business Law 8

help him in achieving legal safeguards and rewards. This model would also improve the
credibility of the business because it is easy to authenticate all the details.

5. References
Adams v Cape Industries plc, 433 (EWCA 1990).

Alen, G. (2007). Federal Tax Compliance Guide 2008. CCH Incorporated.

Alton, F. (2019). Limited Partnerships: Limited Partners’ Liability for Managing Limited Partnership.
Journal of Corporate Affairs, 21-56.

Bairstow v Queens Moat Houses plc, 712 (EWCA 2001).

Flanagan v Liontrust Investment Partners LLP & Ors, 2171 (EWHC 2015).

Frigidaire Sales Corp. v. Union Properties, Inc., 562 ( Court of Appeals 1977).

Harroch, R. D. (2016). Accounting Principles and Procedures for a Sole Proprietorship. Law Journal
Press.

Hayes, A. (2020). Limited Company. Guide to mergers and acquisition, 41-67.

Horton, D., & Prain, G. (2017). Perspectives on Partnership: A Literature Review. Journal of Public
Affairs, 21-56.

Re Cardiff Savings Bank , 100 ( Marquess of Bute's 1892).

Secretary of State for Trade and Industry v Bottrill, 781 (England and Wales Court of Appeal (Civil
Division) Decisions 1999).