There are mainly three types of business organization in terms of law. While the required legal processes and needed documents differ in case of each form of business, all of these types of businesses are usually aimed at being profitable in the short and long term.
Sole trader businesses are the easiest to set up as the business and the owner are the same person in law. The sole trader doesn’t have any limited liability, meaning that they are responsible for all the debts incurred while doing business. The sole trader needs to create an annual accounting return that shows the income and losses apart from profits and taxes payable.
Partnership businesses are set up by a Deed of Partnership which is a document created by the partners having a witness (a solicitor). This deed illustrates the legal relationship between partners, e.g. profit sharing, responsibilities of partners etc.
In traditional partnerships, the partners usually have an unlimited liability, i.e. they are jointly responsible for the debts of the business. Some partnerships, such as accountancy firms can have limited liability.
Companies are separate entity in law from the shareholders of the business. This means that the shareholders are only responsible for these debts that go up to the sum they have contributed to the company. Companies Act sets out the ways in which companies should conduct their affairs.
Various documents must be registered at Companies House including a Memorandum and Articles of Association illustrating the internal relationships within the company, and the general external relationships with third parties. A public company can only sell shares on the Stock Exchange after having all the required paperwork done.
A private company never sells the shares to the wider public. The shares are traded with the permission of the Board of Directors. In contrast, a public company sells shares to all through the Stock Exchange. A private company usually has Ltd. after its name while a public company has PLC.
Public companies are bound to have an Annual General Meeting of shareholders. The Companies Act provides the power and responsibility of its directors. Public companies must produce an annual report and statement of accounts apart from other responsibilities. Paperwork associated with setting up a public company is far more complex than a private company.
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