Formation of business organisation in uk PDF

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FORMATION OF BUSINESS ORGANISATION IN UK
It is important for Mr Michael to know how he can form a business and what’s the best
legal structure for his business so that Mr Michael is aware of what are requirements
needed for each legal forms of business (Legal form of organization, 2012) Basically,
there are three (3) legal forms of business which is sole proprietorship, partnership and
company or corporation (Stowers, 2020). Following is the further explanation of how to
legally establish the business organization, its procedures and its requirements in UK
for Mr Michael necessary perusal: -
SOLE PROPRIETORSHIP
Sole proprietorship is a business that is run by only one individual. The profits and
losses from the business can affect the owner personal liability because there is no
legal separation. Example of sole proprietorship business is such as barber shop, small
restaurant, car wash, online shop and etc (Ward, 2020). In terms of set up, sole
proprietorship is the easiest form of business to be established legally because the
process is very straight forward and there will be less paper work (Stowers, 2020).
 HOW TO LEGALLY FORM UP SOLE PROPRIETORSHIP
According to Business Name act 1984, in UK, firstly to from up a sole proprietor
business structure, the owner will need to come up with one name for the business,
for example Ashikin café and register that name at registrar of company or ROC at
Ministry of finance (Set up as a sole trader, 2020)
Secondly after the registration of business name is complete, the ROC will issue a
certificate of registration called Section 16 and 17 under the Business name act
1984 (Kiang, 2021).
For additional information, opening a bank account for sole proprietorship is not
mandatory as the owner can use its personal account. But it is more advisable to

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have a separate business account so that it is easier to retain the business finances
report such as profit and losses (Startup guide as a sole trader, 2020).
 THE ADVANTAGES OF SOLE PROPRIETORSHIP
Following is the advantages of sole proprietorship: -
- The easiest business structure. Sole proprietorship is a business that is easy to
be formed up as it doesn’t require a big modal or capital especially if the owner
only do small business such as set up small café that selling homemade foods,
the owner might only need a modal less than $500 or so (Stowers, 2020).
- Full control. In sole proprietorship there will be only one owner, meaning the
owner will enjoy a full control and full power of anything relate to the business
such as making decision and etc. For example, the owner has the power to
decide on the working hours of the business (Startup guide as a sole trader,
2020).
- Profit retention. The business profit is 100% belongs to the sole trader (Kiang,
2021).
- Easy exit. As the set-up of sole proprietorship is easy, so does the exit, the
owner of the business can also simply dismiss the business anytime the owner
wanted to because to close down the business doesn’t need a formal paper
works (Stowers, 2020).
 THE DISADVANTAGES OF SOLE PROPRIETORSHIP
Following is the disadvantages of sole proprietorship: -
- Difficulty in raising capital. Despite of easy to form up the sole proprietorship,
this business structure may struggle to expand their business in the future as the

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approval to lend from the bank would be very thin because for bank, sole
proprietorship can be lacked of credibility if their business is not successful
(Welsh, 2017).
- Unlimited liability and risk. Since the legal concept of sole proprietorship is
separate legal entity, all the debts, obligation, result from employee actions and
etc will be responsible by the owner which also can be said that the personal
assets of the business owner would be at risks. For example, if the business
being sue by the court, the business owner personal account can be freeze or
the car can be seized (Welsh, 2017).
- Lack of continuity. Meaning if the business owner no longer lives or absent it is
high possibility that the business will be discontinued because of no
replacement. (Kiang, 2021)
- Lack of staff. To find or hire a staff or retain staff may be difficult because
unattractive salary and unattractive benefits compare to big business (Steelee,
2014)
 HOW SOLE PROPRIETORSHIP CAN BE MANAGED AND ITS SOURCES OF
FUND
Obviously sole proprietorship is managed and run solely by a single business owner.
Sole proprietorship might have employee to help to operate the business but the
number of employees will be small. The business owner can hire a manager or
experience talent to help in making decision in the business if the business owner
don’t have experience and education in the field (Sole proprietorships, n.d)
There are many sources of where the sole trader can get his fund from. Following is
the sources of fund for sole proprietorship: -

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- PERSONAL SAVING: sole trader can get it from their personal saving. The
sole trader can fund or invest their business using their own money as it is
cheap money because there is no need to worry about the debt repayment
obligation (Thompson, 2019).
- FAMILIES AND FRIENDS: Sole trader can borrow money from families and
friends that have trust in the owner and willing to help the business owner is
also can be the source of fund for sole proprietorship (Thompson, 2019).
- GRANTS: Another source of fund for sole proprietorship is grant. Grant can
be obtained from the government and its free not need to pay back but the
chance for a successful application is very thin as the program will have many
applicants (Thompson, 2019).
- BANK LOANS: is another source of fund for sole proprietorship. Sole trader
can try to apply for bank loan but normally for sole proprietorship they will only
entitled for small amount (Thompson, 2019).
PARTNERSHIP
Partnership is a business structure that have 2 or more people that agree to pursue
their mutual interest in business. These people can be a member of the family, close
friends or anyone who wants to form a partnership of any type of business such as
restaurant, law firm, insurance company and etc (Stowers, 2020). Additionally,
partnership commonly divided into three types which is general partnership, a limited
partnership and limited liability partnership (Murray, 2020). In partnership, the decision
of any activities in the business will be decided together as well as business profit and
losses which it will be shared equally or as per agreed in the partnership agreement
(Stowers, 2020). And unlike sole proprietorship, partnership is more expensive and not

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easy to be formed up as it requires more documentations and services from legal and
accounting (Samuel, Garn, Monchau, n.d)
 THE 5 STEPS OF HOW TO LEGALLY FORM UP PARTNERSHIP
There are 5 steps to legally form up a partnership: -
1. PARTNERSHIP AGREEMENT
Partnership agreement is a legal document that will state the agreements of
partners in how the business will be established and other details or contents that
relate to the relationship of the partner (Haoton, 2021). This legal document will
help the partners to have an agreed plan to be referred to when in doubt or
conflict. Following is the 6 vital elements that must have in the agreement: -
- PERCENTAGE OF OWNERSHIP AND CONTRIBUTIONS
Basically, percentage of ownership will be based on how much each partner
are contributing to the business. The higher the contribution the higher the
percentage of ownership (Gray, 2018). For example, partner X contributed
$3,000, partner Y contributed $2,000 and partner Z contributed $5,000 in the
business meaning partner X will own 30% stake of the business, partner Y
will own 20% stake and partner Z will own 50% stake of the business.
- PROFIT AND LOSSES
This element will show the agreed distribution percentage of profit of the
business to be shared, normally who has the higher ownership % will receive
a higher % of the profits. In this element also to include how to handle when
there are losses and when the profit is low (Gray, 2018). For example, profit

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will only be shared if the company exceeded 5% of the yearly target of which
2% of the profit will be putting back into the business for the growth, partner Z
will get 1.5%, partner X will get 1%, partner Y will get 0.5%. And if there are
any losses, the partner will have to use only 20% of business reserve money.
EXAMPLE
- PARTNERSHIP CHANGES
Basically, this element will state the plans or strategy on how to handle any
changes in the company. Either to add or to terminate partner if necessary
and it also extent to if one of the partners are leaving the business or dies
(Gray, 2018). For example, if the business is growing and requires
expansion, they will need to a new investor/partner. Another example, if
partner X dies, partner Y will take over the role while waiting for new partner
to come in and the 50% shares of partner X will be given to his family.
- THE ROLES OF THE PARTNERS AND ITS POWER OF MAKING DECISION
In this term will be outlining the roles, responsibilities and authority of each
partner (Gray, 2018).
For example, the division of responsibilities and authority of partners: -
RESPONSIBILITIES AUTHORITY
PARTNER X Running payroll In contract signing
PARTNER Y Maintaining account books In making decision of
purchasing goods
PARTNER Z Hiring employees In making business
decision