Types of Business Organizations and Legal Consequences in UK

This report discusses the different types of business organizations in UK, including sole trader, partnership, limited liability partnership, and limited company. It covers the legal consequences of each type and provides recommendations for reorganizing your business structure. The report is based on IOM Solutions, a sole trader that deals in selling electrical parts to local garages and is planning to reorganize its business structure.

Business Law

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY ..................................................................................................................................3
Kinds of business organisations.............................................................................................3
Recommendation....................................................................................................................7
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
The business is an entity which can be defined as the one which undertakes commercial
activity so that the profit and revenue can be generated by the firm. The laws relating to the
business is aimed to regulate the working of enterprises so that their rights, liabilities, duties can
be governed. It is a broad ambit which covers various legislation under it which includes
company law, data protection, employment law, contract Act, etc. There are mainly two types of
laws in UK which includes the statutory that is made by the supreme law making authority that is
called the Parliament while the other is common law which is made by the judges through
judicial precedents (Willcocks, 2018). This report is based on IOM Solutions which deals in
selling electrical parts to the local garages. Its business structure is sole trader and is planning to
reorganize it. This report will cover various types of business organisations and legal
consequences of each.
MAIN BODY
Kinds of business organisations
Initiating a start up or restructuring or reorganizing the organization involves scrutinizing
every legal consequence of the organization so that the best can be chosen out of all. In order to
reorganize IOM Solutions, there are different options available to it which can help in expanding
the business. The structure which is chosen by the owner have significant implication on many
factors such as tax amount, degree of personal liability, amount of the administrative work and
also ability to extract finances from various sources (Vecherskaya, 2019). Apart from sole
traders, the options available for IOM Solutions for reorganization is illustrated below-
Partnership:
This business organisation includes two or more of the people which agree on sharing the
loss and profits of the firm. The partners are involved in sharing risk, benefits, cost and the
responsibilities of the business. It is the unincorporated entity as the partners engaged in it are
self employed. All are personally liable for the debts and losses of the business which is
undertaken and unlimited liability arises in case of loss or debt. The partners are also responsible
for the misconduct or negligence of the firm. Its formation requires the registration at HMRC and
a partnership agreement which is an optional part for the legal formation of the company.

There are many consequences of not having the written partnership agreement which includes
non clarity of the responsibilities and share of profit or loss. The agreement manages the
expectations and provide the confidence in regards to the future of business entity and act as the
safeguarding tool in order to protect both business and the investment of each of the partners
(Tomilina, and Donchenko, 2018).
Legal consequences:
 When the partnership is formed between the partners, one consequence of this is that one
partner is held liable for the misconduct, negligence and action of the other. There is
unlimited as well as personal liability of the partners for the conduct of others.
 Another consequence is that there are many types of partners in the firm which includes
sleeping partner or the part time partner which may have contributed more of the working
capital expects more share of the profit even though it has less or no responsibility in the
functioning of the firm. So this may lead to confusion or conflict among the partners and
may result in dissolution of the partnership firm.
 Another legal consequence is that as per Section 26 of the Partnership Act, the partner
dissolves entire partnership by the notice to others, it will have immediate effect to it at
any time. One notice from the partner can dissolve whole firm and if rest of the partners
wants to begin the same working, they have to establish entire firm again. This shows
dependency of the firm on the partners. Although there can be option for continuing
partner to buy the share of ongoing partner's interest but it requires the partnership
agreement for the same which has the particular clause. When a partner dies , the whole partnership firm is dissolved and the further process
involves realization of the asset in order to pay the liabilities. The whole partnership firm
is dependent on the partners and if one partner have died or gave notice to dissolve the
firm, the whole partnership firm is dissolved irrespective of other partners having ability
to continue the working of the firm (Steffen and Boßelmann, 2018).
Limited Liability partnership
It is same as the general partnership but the difference between the two lies in liability of
the partners. In this, the partners have limited liability only to the extent of their money which is
being invested in business. For opening the LLP, it is important to make its registration at
HMRC and Companies House. It is established with two or more than two members which may

be a company or the individual. The LLP agreement sets out the share of profit and
responsibilities of partners and the members are required to submit the personal self assessment
tax return on yearly basis and also are required to pay the income tax on the share of profit. They
are also required to pay the national insurance to the HMRC.
Legal consequences:
 The LLP is required to make the public disclosure of its financial accounts which are
submitted to the Companies House for public record. This disclosure may lead to
declaring the income of the partners which they do not wish to make it public.
 Another consequence of LLP is that when one of the partner wishes to dissolve the firm
or leave the partnership enterprise, the whole firm is dissolved and the remaining partner
is required to form another firm despite of continuing the same.
 In LLP, the profits earned from LLP is required to be retained in similar manner as that of
the company which is limited by shares. This is meant as that all the profits earned by the
LLP is effectively distributed to all with no flexibility in order to hold over the profits to
the future year of taxation (Smirnov, Arenkov and Yaburova, 2018). Every partner or member of the LLP is an agent and is required to bind by it so the
contract which is signed by any of the member on behalf of LLP binds all the members
on equal basis. So every member is duty obliged to act in best interest of LLP and the
members associated with it.
Limited company
It is the privately managed company which is owned by shareholders and is run by the
directors associated with it. It is the separate legal body which has its legal obligations and rights
of its own. This simply means that the company is mainly responsible for every activity which is
done by it and the finances of it is separate from personal affairs of the owners. The profit that
are generated by company is retained and is released after the payment of corporation tax. After
the payment, the profits are distributed to the shareholders by way of dividends. It may be
limited by guarantee or by the shares. Its annual filing and reporting requirements is done in both
HMRC and Companies House (Gök, Hacioglu and Peker, 2018).
The two types of limited company includes firstly the limited by shares wherein the
shareholders are responsible for financial liability of the company and it is limited to an amount
that the shareholders share to pay for shares. Another is limited by the guarantee which does not

have any share capital or the shareholders rather they have members who are entrusted with the
task of to act as guarantors (Meyer von Wolff and et. al., 2021).
Legal consequences
 Although the limited companies appeals for limited liability of the partners but there are
many instances when the limited liability may be disregarded which can leave director
responsible for repaying company's debt.
 The formation of limited company is very complex and expensive to form and in order to
convert the private company into the public limited, there may be requirement of
specialist lawyer which has knowledge and expertise of the legal formation.
 There is a need to form the Articles of Association and Memorandum of Association after
making the registration at companies House and the members or directors of company are
required to act within the ambit of it so that no hardship is faced by it (Hongal, and
Kinange, 2020) .
 Limited liability use to provide major advantages and benefits over corporation especially
for all those whose shareholders has not received the relief that re related to company
losses. It use to receive various tax deductions and also gains the lowers report income
for all the loss created in business.
 This focus in maximizing the protection for all the owners of the company as they have
their own identity so owners are generally not being held liable for any kind of
responsibilities and debts.
 It makes general regulations and laws through which no person is wholly being liable for
any kind of loss that is being incurred in it. As it use to provide protection with the help
of insurance and through general abiding laws and norms.
 A proper written agreement is made between the parties through which they can
determine all the regulations that are imposed in it.
 LLC frames a corporate structure through which all the abiding laws and the principles
related to holding if shares and the maintenance of the profit and loss are being served.
This pertains to frame the essentialist in which the companies can protect their
individuals from further obligations (McMillan, 2017).

Recommendation
As IOM solutions is the sole trader wherein only one owner is required which has the
power to manage the working of the business. It has sole responsibility to manage the affairs of
business and takes decisions on its own. Now IOM solutions wants to reorganize its business
structure by way of converting the sole trader into other form of business so that it can expand
the operations of it. For the same, it is recommended to IOM Solutions that it can reorganise its
sole trader into the company with limited liability so that it can expand effectively. There is a
huge difference between the two wherein limited company have limited liability of owner and
that there is distribution of power to make decisions. It is a separate legal entity which is distinct
from owners and no personal liability arises of the owner in case of any debt or loss. This
business structure will also help in raising the finances for the growth of the firm as it is easy for
companies to raise funds as compared to sole traders,

CONCLUSION
It is concluded from this report that there are different kinds of business organisations
which are formed legally in UK. These include sole trader, partnership, limited company and
limited liability partnership. All have their different procedure of incorporation and have distinct
legal consequences must be taken care before choosing any type of business structure. The
partnership involves major consequence that there is dissolution of firm when any partner is died
or sends notice for dissolution while in Limited liability partnership, the major consequence is
that there is public disclosure of accounts, profits and income which may not be preferred by any
member. And lastly the company which has complex and expensive procedure wherein the
members are required to stick to the clauses of MoA and AoA. From these, it is recommended
for IOM solutions that it must reorganize its business into company so that it can easily raise
funds and expand business effectively.

REFERENCES
Books and Journals
Gök, O., Hacioglu, G. and Peker, S., 2018. Decision influence of the marketing department in the
organization: An emerging country perspective. JEEMS Journal of East European
Management Studies. 23(1). pp.30-54.
Hongal, P. and Kinange, U., 2020. A study on talent management and its impact on organization
performance-an empirical review. International Journal of Engineering and
Management Research. 10.
McMillan, C., 2017. Exploring the strategic business processes senior leadership use to enable
successful ethical practice within their organization (Doctoral dissertation, Colorado
Technical University).
Meyer von Wolff and et. al., 2021. Hey Spot, Can You Help Me with my Business Travel
Organization?-Design of a Process-based Chatbot Artifact.
Smirnov, S., Arenkov, I. and Yaburova, D., 2018, January. On the way to the organization of the
future: Practice, patterns, and prospects. In Proceedings of the 32nd International
Business Information Management Association Conference, IBIMA 2018-Vision 2020:
Sustainable Economic Development and Application of Innovation Management from
Regional expansion to Global Growth (pp. 2928-2936). IBIMA.
Steffen, B. and Boßelmann, S., 2018, November. GOLD: global organization alignment and
decision-towards the hierarchical integration of heterogeneous business models.
In International Symposium on Leveraging Applications of Formal Methods (pp. 504-
527). Springer, Cham.
Tomilina, E.P. and Donchenko, T.S., 2018. PECULIARITIES OF ORGANIZATION OF
BUSINESS PROCESSES OF THE INSURANCE COMPANY. In Актуальные
вопросы и достижения современной науки (pp. 236-239).
Vecherskaya, S.E., 2019. IT effect assessment for non-profit organization. International Journal
of Recent Technology and Engineering. 8(4). pp.8854-8858.
Willcocks, L.P., 2018. Global business management foundations. SB Publishing.