Types of Business Organizations: Sole Proprietorship, Partnership, LLP, and Limited Company

This report discusses the legal requirements and benefits of different types of business organizations such as sole proprietorship, partnership, limited liability partnership, and limited company. It provides a clear understanding of business law and the different structures available for business expansion.

Business Organizations
TABLE OF CONTENT
INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................2
Types of business organization:...................................................................................................2
Sole proprietorship.......................................................................................................................2
Partnership...................................................................................................................................3
Limited liability partnership (LLP).............................................................................................4
Limited company.........................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9
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INTRODUCTION
Business law is well known as commercial law is legal body that govern business
organization; this law is mainly concerned with legal formality of a company that need to be
fulfilled. Every country have their own commercial law which allow them to manage corporate
contacts of business, business law is wide term which include law for employment, law for
contracts, law for dealing in market and formation law (Davies, 2020). This report will discuss
different types of business organization such as sole trader, partnership, limited liability
partnership and limited company. This report will provide clear understanding of legal
requirement in starting any type of business.
MAIN BODY
Types of business organization:
Every business organization is connected with one type of organizational structure which
allow them to understand their business process, size of business decide which type of structure
will suit their business operation (Cappellino, 2020). Sam who is sole proprietor want to expand
their business, there are different type available for them to chose one, different type these are:
Sole proprietorship
Sole proprietorship is one of the most common type of business organization which can be
found in small scale company, in this type, sole ownership or single person operate business
operation and deal in the market (Dungan, 2017). These independent entrepreneurs run business
in simplest form, profit and loss is solely controlled by entrepreneur as there is no partner so
these sole owner do not have to divide their profit into ratio. There are certain benefit and
drawback of sole proprietorship:
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Total control: sole means alone, these type of business organization have single owner who
enjoy benefit of company, entrepreneur in this type have total control over every level of
business which means decision are taken by single person.
Unlimited liability: it is very clear that if single owner is enjoying all benefit of business then
they have to face losses as well, decision of these owner decide growth of the business which
means if decision are not right then they have to bear losses. Personal need of sole owner
increase debt for business result in failure.
Legal requirement: a sole trader do not have any legal requirement to start a business but there
are certain responsibility which need to complete in their business process, these are:
Self employment: according to government of UK, sole trader have to prove that they are self
employed by registration in one of the government policy for example; Tax Free Childcare
(Brown, Liñares-Zegarra and Wilson, 2018). These sole proprietor need to claim that they are
sole trader and will trade fairly in market of UK, apart from this sole trader have to completed 2
National Insurance Payment policy under rule of HMRC (Her Majesty’s Revenue and Custom).
VAT registration: if business of sole proprietor have turnover of 85000 euro, then they have to
register their business in VAT regulation. This will keep their business safe from any kind of tax
issue while dealing in the market.
Partnership
Partnership is another most common type of business organization which allows two
people to form a contract of business under law, this type of suitable for medium scale business
firm who want to expand their business (Rahman and Ghadas, 2018). A sole proprietor only
chooses partnership if they want to expand their business which means Sam have best
opportunity to form partnership with investor or with those business organization who deal in
same industry with same business size. For IOM solution of Sam, partnership will be best for
them because in partnership, they will not only going to get investor but they will have new
advisor which will advice them in their business decision making process. Partnership have
unlimited benefit which will benefit Sam and IOM solution.
There are certain benefit and drawback of partnership, these are:
Investor: partnership is only formed on the basis of investment, new partner need to assist
business with investment activity. Partnership is very beneficial for sole proprietor like Sam who
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want to expand the business, these entrepreneur get enough investment from these partner
allowing them to fulfil business demand.
Complexity: partnership is very complexity in terms of control and profit sharing process, this
type of business organization fail when every decision become complex which means both
partner interfere in control and disturb smooth process. It is very important for both partners to
form legal agreement to avoid any issue in profit sharing.
Legal requirement: in partnership firm, both partners can form agreement by themselves
without involving law, agreement is build on trust and mutual understanding, if any conflict
arrive in partnership then they both are equally responsible and law will not provide any help.
There are certain legal requirement, these are:
Agreement: according to Partnership Act 1890, every form of partnership needs to be registered
with law to avoid any kind of conflict between partners (Kharlamov and Parry, 2020). Section 24
of this act state that both partners have to form legal agreement highlighting equal profit and loss
sharing ratio and time till partnership is dissolved. If Sam want to adopt partnership type for
IOM solution then they have to perform legal agreement to be safe from any law suit.
Nominated partner: according to HMRC, one of partner need to become nominated who is
responsible for tax return and keeping business record, this partner have more roles and
responsibility and need to choose one type of partnership for example, if Sam want to become
nominated partner then they have to adopt Limited partnership or Limited Liability Partnership.
Limited liability partnership (LLP)
Limited liability partnership is very similar to normal partnership but in this liability of
partner is limited according to amount they have invested in the company. This type of business
organization can be seen in most of country where two or more partner form partnership and
distribute power according to the amount invested (Słabuszewski, 2019). In this type, both
partner mutually share their profit into decided ration, in normal partnership profit is divided
equally but in Limited liability partnership, profit is divided according to amount invested. There
are certain benefit and drawback of limited liability partnership, these are:
Flexibility: in every type of business organization, flexibility become biggest concern. Limited
liability partnership type have most flexibility as compared to any other type. Management of
business can be easily handle by both partners because of flexibility, both partners decide which
member will going to manage business with their own management style. Due to higher
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flexibility sharing of profit become very easy and partners do not interfere in agreed profit
sharing ratio.
Legal person: an LLP is legal person who have power to buy, rent and own property on their
name, all partners of LLP remain relax in business operation as business itself perform certain
duties of partners. When limited liability partnership is formed between two or more person, an
automatic third person will arrive in this process which is known as spate legal entity. This
allow partners to remain safe from any legal action taken against company, and provide
unlimited power to the person who have invested the most.
Legal requirements: every type of business organization have some legal requirement which
they need to compulsorily complete to be safe from any legal action or lawsuit. In limited
liability partnership, partners have to form legal agreement, this agreement highlight every
necessary details such as profit sharing ratio and date of termination. There are certain legal
requirement in LLP, these are:
Limited Liability Act 2000: this Act was formed to allow partnership between two spate body
under legal agreement, section 2 of this Act state that partnership firm have to register their
business in companies house UK which later approve formation of partnership between two
person or spate legal entity. Section 3 of LLP Act state that after all formalities, partnership firm
have to register their business in Incorporation House and submit their document or copy of
document containing name, address, licence number and legal trade certificate.
Companies Act 2006: after Limited Liability Partnership Act 2000, it is very important for
partnership firm to understand and complete legal requirement of Companies Act 2006 which
allow them to manage their business organization (Turner, 2018). This act help company to
decide agreement on wound up process, to the subject of insolvency, this act allow partnership
firm to gain legal wound up process. Section 14 apply insolvency Act 1986 in the process to
regulate legal and beneficial process of ending a partnership firm.
Registration: every member of LLP have to register their self assessment with HMRC, this
process must be completed by every member to fulfil the legal requirement. Member of LLP
need to complete their income tax formalities and need to be clear on income tax before falling
into partnership.
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Limited company
Limited company is separate legal entity completed owned by shareholders, this type of
business can be seen in large scale business organization who deal in manufacturing or large
business project. Corporation can be owned by one single owner with multiple partners who are
shareholders where corporation can be formed completely by multiple shareholder, in this type
there is no owner but have board of director who take business decision (Hodge and Greve,
2017). If Sam want to expand their IOM solution business then they can adopt corporation type
of business, this will allow them to make their private company as public company where
shareholder become owner and decision maker. There are certain benefit and drawback of
corporation type of business organization, these are:
Limited liability: corporation type of business provide protection of asset to its partner, this type
of business is well know for personal asset protection business who not only protect partner from
any kind of legal or illegal activity but this also have repayment policy if any uncertainty occur
during the business process. There are multiple partners or shareholder in corporation business
entity which means a single shareholder is not responsible for liability of business.
Structure: the biggest problem with corporation type of business organization is structure which
is quite complex, there are certain formality in becoming shareholder of the company. If a person
wish to become member of board of director than they have to bring investment or experience in
managing business organization (Ghemawat, 2017). Long process in application process become
drawback of corporation type of business, raising capital is one of the most challenging task in
this type because every shareholder contribute different amount which means accounting of
capital is challenging for the business organization.
Legal requirement: corporation type of business need to have all legal requirements completed
under certain rules of the government, in this type, commercial law, partnership Act,
employment law and legal contract law play vital role. There are certain legal requirement in
limited company, these are:
Article of association: according to Companies Act 2006, director of limited company have to
show article of association to house of companies. this AOA state rights, responsibility and
duties of each shareholder in limited company, it is very clear that every shareholder have power
in the company which means director of limited company need to register information and power
of their shareholder in article of association.
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Certificate of Incorporation: according to Companies Act 2006, limited company has to
confirm all legal document required in the process. Companies House UK or LLP UK ask
limited company to provide evidence regarding fulfilment of Companies Act, name and
registration number, date of incorporation, shape of company whether limited or unlimited.
CONCLUSION
This report has discussed organization law required in formation and during business
process. This report has provided clear understanding of business law, this commercial law allow
company to deal fairly and legally in the country. Later this report has discussed sole trader type
of business organization which allow sole person to handle and manage business whereas
partnership firm means two or more than two people agreed to run an business. Later this report
has discussed limited liability partnership and limited company to understand type of business
structure available in expansion process.
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REFERENCES
Books and journals
Brown, R., Liñares-Zegarra, J.M. and Wilson, J.O., 2018. What happens if the rules change? The
impact of brexit on the future strategic intentions of UK SMEs. The Impact of Brexit on
the Future Strategic Intentions of UK SMEs (March 1, 2018).
Cappellino, A., 2020. How to Choose the Right Business Organization Form.
Davies, P., 2020. Introduction to company law. Oxford University Press.
Dungan, A., 2017. Sole Proprietorship Returns, Tax Year 2015. Statistics of Income. SOI
Bulletin, 37(2), pp.2-28.
Ghemawat, P., 2017. The laws of globalization and business applications. Cambridge University
Press.
Hodge, G.A. and Greve, C., 2017. On public–private partnership performance: A contemporary
review. Public Works Management & Policy, 22(1), pp.55-78.
Kharlamov, A.A. and Parry, G., 2020. Limited evidence for servitisation in UK publishing: an
empirical analysis. International Journal of Business Environment, 11(3), pp.336-346.
Rahman, H.A. and Ghadas, Z.A.A., 2018. The evolution of partnership structure; Special
reference to governance legal framework for LLPs. PROCEEDINGS–ICLG 2018,
p.511.
Słabuszewski, R., 2019. Division of the joint property of spouses–partners in a registered
partnership and shareholders in a limited liability company. Acta Iuris Stetinensis, (27
(3)), pp.167-187.
Turner, L., 2018. Fighting for partnership. Cornell University Press.
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