Exploring Nature, Formation and Management of Business Organizations

This essay provides an overview of various business structures in the UK, including sole traders, general partnerships, limited liability partnerships (LLP), and limited companies. It details the formation procedures and legal structures associated with each type, highlighting the advantages and disadvantages of each. The essay covers aspects such as registration with HMRC and Companies House, VAT requirements, and the importance of partnership agreements. It concludes with a recommendation for the most suitable business type based on factors like capital requirements, risk management, and future growth prospects, suggesting that while forming a company may not be ideal, a partnership or engaging an efficient assistant might be better alternatives for a sole trader looking to expand.

Nature Formation And
Management Of Business
Organizations

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Types of business structures........................................................................................................3
Recommendation for suitable business type................................................................................8
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................10
INTRODUCTION

Business means enterprise (entity) or organization which is engaged in operational
activities like commercial, professional and industrial. These can be profit making organization
or non- profit organizations. Businesses can be from small scale organizations to large and
international organizations. The concept of business origins from an idea and effective market
research to determine whether the idea can be converted into business. A detailed business plan
is required that outlines goals and objectives of business along with the strategies to be used to
achieve these objectives. The assignment will highlight different types of businesses along with
its formation procedures and legal structures. Evaluation of suitable business type for IOM
solutions.
MAIN BODY
Types of business structures
There are four types of business structures in UK with different formation procedures and
legal structures.
Sole Traders
Sole traders refers to self-employed individual who owns and runs business and is
entitled to all profits and losses that incur in business. The business and individual is considered
the same that is there is no separate entity and trading will end with the death, insanity, disability
and insolvency of individual (Types of businesses, 2018). The formation of sole traders is very
easy as compared to other types of business.
Self- assessment
The first step in the formation of sole trader is to register for self- assessment with
HMRC. Once the business get registered a unique tax payer reference (UTR) is generated which
will be required for filing tax return at end of financial year.
National insurance
The next step is to register for national insurance which would be automatically reflected
in self assessment tax form.
Self- assessment tax return
Sole trader is required to file self assessment tax return for every financial year with
HMRC. This form is filed to pay income tax on profits earned during the year.
VAT

Sole trader needs to register for VAT only is the turnover of business exceeds 85000
pounds (Liu and et.al., 2021. VAT notches, voluntary registration, and bunching). After
registration one need to file VAT returns and update book keeping records.
PAYE
Registration in PAYE is required only if employees are engaged in the business. It is
obligation of sole trader to collect income tax and national insurance contribution from
employees and pay to HMRC if it is registered under PAYE.
Sole traders have many advantages as well as disadvantages which are discussed below:
Advantages of sole trader
 Set- up is very easy
 Retention of all profits Sole decision-making ability
Disadvantages of sole trader
 Unlimited liabilities
 Difficult to raise funds
General Partnership
Partnership is a form of business which involves two or more individuals who agree to
share profits and losses incurred from business. This is formed as an outcome of an agreement
between two or more persons. The partnership firm is dissolved in two ways: one is when
partners decide to dissolve the partnership and other is when it is dissolved by operation of law.
General partnership is formed under Partnership Act, 1890 which states statutory requirements
and obligation to form partnership (Artunç and Guinnane, 2019). The formation of general
partnership is as under:
The articles of association
This is a legal document in writing which includes name of firm, registered office,
purpose of business, name and address of partners, profit sharing ratio and resolution and
continuation of business in case any partner quit or die. Firm is free to select any name but it
needs to add general partnership at the end of name.
Registration with companies house
To begin trading partnership needs to register itself with companies house which can be
done through post or online. Firm needs to provide some information to register itself such as

name and address of partners, name and registered office address of firm, contact information
and article of association.
Registration for state trade licence
The general partnership needs to register itself for state trade licence depending upon the
kind of business it is going to engage in.
Registration with HMRC
The partners need to register firm as well as themself to HMRC before starting trade. The
responsibility of handling partnership tax return lies in hands of partners and also need to file
their own tax returns.
Create Business bank account
After completing all necessary requirements for forming general partnership, firm needs
to open business bank account.
The advantages and disadvantages of general partnership are:
Advantages of General partnership
 Easy to establish Easy to be dissolved
Disadvantages of General partnership
 Unlimited liability on partners
 Partners are liable for action of another partner
Limited Liability Partnership (LLP)
LLP is a body corporate which is formed under Limited Liability Partnership Act, 2000
in which liability of partners are limited to investment made by them in the firm. LLP can be
incorporated with 2 or more members who can be an individual or a company (Keers and van
Fenema, 2018). The formation of LLP is as follows:
Registration with Companies House
LLP is required to register itself with Companies House which can be through offline or
online process. The firm needs to provide information such as name and registered address of
firm, name and address of each member, etc. Name of the firm should not be same as of existing
firms and should not have the use of words and expressions for e.g. limited, unlimited, etc.
Details of members must include whether they are designated members or not.
Certificate of incorporation

Once Companies House is satisfied with all the documents filed by LLP it issues
Certificate of Incorporation which is an evidence that LLP is registered (Harris, 2020). The
certificate will state the name and registered office of LLP, date of incorporation. It is necessary
that certificate is being signed by registrar or authenticated by registrar's seal.
Registration with HMRC
The LLP is required to register itself and its members with HMRC and all the members
need to file return and are liable to pay tax on share of profits.
VAT
LLP needs to register itself for VAT if in any point during the business the turnover
exceed 85000 pounds. After registration, it is duty of members to timely file VAT returns.
LLP agreement
It is not a legal requirement for LLP to create agreement but most of the LLP decide to
create agreement to minimize conflict and smooth functioning of business (Hawes, 2020). The
agreement includes the profit sharing ratio between members, classification of members as
designated members or not, the decision-making procedures, etc.
The advantages and disadvantages of Limited liability partnership are:
Advantages of LLP
 No requirement of minimum contribution
 Registration fees is low Liability of partners is limited to amount of their investment
Disadvantages of LLP
 Profits can't be retained within businesses
 LLP needs to disclose accounts to Companies house that means profits are open for
inspection
 It is not suitable for businesses that wish to grow by raising capitals
Limited Company
Limited company is a form of business which is privately managed by directors of the
company and owned by shareholders. It is a separate legal entity which is incorporated under
Companies Act, 2006. The legal formation of limited company is as follows:
Choosing a name for company

To start a company it is very important to choose an appropriate name for the company
which is not the same as any existing companies (Widjaja, Budiono and Hamidah, 2021). After
deciding the name promoter needs to run the decided name through company name checker to
ensure that same name doesn't belong to any other company.
Shareholders and directors
Limited company is owned by shareholders and managed by appointed directors. To
incorporate a company it is necessary to appoint minimum 2 directors. Shareholders are one who
invest in the company by buying shares of the company.
Registration
The company needs to register itself with companies house. Before getting the company
registered Memorandum of association and article of association needs top be prepared. The
company also needs to identify Person with significant control (PSC), these are people who have
more than 25% shares and voting right in the company (Lysytskyi and Orlenko, 2018). After
this, company needs to file form for registering itself with Companies house along with the
informations like name and registered address of the company, details of directors, etc.
Corporation tax and PAYE
The company needs to register itself for with HMRC to file tax returns and pay
corporation taxes (Tricker, 2019). For registration company needs Government Gateway ID and
password which can be set up through online procedure.
The advantages and disadvantages of forming a limited company are as follows:
Advantages of limited company
 Corporation tax is less than tax paid by sole trader.
 Surplus profit can be reinvested in the business for future operations and growth.
 Company and shareholders are different person which enables company to enter into any
contract on its own and are liable for the debts and liabilities. Shareholders have to pay less personal tax as compared to sole traders.
Disadvantages of limited company
 It is not easy to incorporate a company as compared to other form of businesses
 The registration fees is high
 Book keeping and accounting requirements are complex and time-consuming
 Company has to comply with many policies and regulations as per Companies Act, 2006

Recommendation for suitable business type
Every type of business has its own merits and demerits one needs to choose a business
type according to their requirements. It is very easy to form a sole trader and sole trader can
enjoy all the profits in the business alone on the same time needs to borne all the risks and
liabilities of the business. Forming a partnership is also easy where the risk and rewards can be
shared among partners and if there is a problem of additional capital it can be bought by
additional partner. This will also help in effective management as expansion of business requires
effective management and control. The demerits of partnership are that the control over the
business would be distributed among the partners and one can't enjoy all the profits of business
all alone. There may be delay in taking any decision as approval of all partners need to be taken.
The merits and demerits of limited liability partnership are same as of general partnership
the only difference is that the liability of all partners will be limited up to the amount invested by
them. For expansion of business and future growth limited liability partnership is not suitable if
there is requirement of additional capital. Forming a company is not an easy task as it requires
compliance of many legal requirements and procedures. The company is good choice for future
growth and expansion of business as a large amount of capital can be bought into business
through shares. It is a time-consuming and costly to form a company and one needs to search for
appropriate directors and shareholders for forming a company (Suitable business type, 2022). As
the business expands it faces many problems and there is a requirement for capital and effective
management.
The choice for best and suitable business type depends upon the requirements of
expansion. After analysing all the merits and demerits of all type of business sole trader has two
alternatives one is to forming partnership and another is to engage efficient assistant or
employee. As forming a company is not easy and it will be time-consuming too so it is not
suitable for sole trader to form company for expansion of business. The requirement of
expansion is additional capital then partnership will be appropriate and risk of business can also
be shared. But if sole trader wants not to share the profits and control over business it would be
better to engage assistant or employee for effective management of business. For additional
capital requirement one can approach banks and financial institutes for loan which can be
invested in business.

CONCLUSION
Business is the process of procurement, production, sales and distribution of goods and
services for gaining profit. The assignment highlighted the different types of businesses along
with the requirements for formation of business type and merits and demerits of all types of
businesses. There was a proper and detailed evaluation and analyses of suitable business type for
the expansion of business of IOM solution which is a sole trader business dealing in electrical
parts. To expand the business there was two alternative ways one is forming partnership and
another is engaging employee so that form of business would remain unchanged.

REFERENCES
Books and Journals
Artunç, C. and Guinnane, T. W., 2019. Partnership as experimentation. The Journal of Law,
Economics, and Organization. 35(3). pp.455-488.
Harris, R., 2020. A new understanding of the history of limited liability: an invitation for
theoretical reframing. Journal of Institutional Economics. 16(5). pp.643-664.
Hawes, W., 2020. Observations on Unlimited and Limited Liability. In The History of Corporate
Finance: Developments of Anglo-American Securities Markets, Financial Practices,
Theories and Laws Vol 2 (pp. 373-416). Routledge.
Keers, B. B. and van Fenema, P. C., 2018. Managing risks in public-private partnership
formation projects. International Journal of Project Management. 36(6). pp.861-875.
Liu, L. and et.al., 2021. VAT notches, voluntary registration, and bunching: Theory and UK
evidence. Review of Economics and Statistics. 103(1). pp.151-164.
Lysytskyi, V. L. and Orlenko, D. Y., 2018. Models for the formation of it company strategic
portfolio of projects. Bulletin of National Technical University" KhPI". Series: System
Analysis, Control and Information Technologies. (44). pp.31-35.
Tricker, R. I., 2019. The Evolution of the Company—how the idea has changed. In Corporate
Governance (pp. 1-22). Gower.
Widjaja, A., Budiono, A. R. and Hamidah, S., 2021. Ratio legis minimum percentage of share
ownership of the limited company in the perspective of justice. Research, Society and
Development. 10(1). pp.e41310111899-e41310111899.
Online
Suitable business type, 2022. [Online]. Available through:
<https://www.businessnewsdaily.com/8163-choose-legal-business-structure.html>
Types of businesses, 2018. [Online]. Available through:
<https://www.wellersaccountants.co.uk/blog/what-are-the-different-types-of-business-
structures-in-the-uk>