Forms of business operation
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Forms of business operation. The options UK systems offer three main variants – Sole Trader, Partnership & Limited Liability Company Two have significant sub-divisions increasing choices The selection factors Basic form of business

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Forms of business operation

Forms of business operation

  • The options

    UK systems offer three main variants – Sole Trader, Partnership & Limited Liability Company

    Two have significant sub-divisions increasing choices

  • The selection factors

    Basic form of business

    Characteristics/performance of forms with regard to: Ease of establishment, resources available to business, distribution of profit, privacy/legal regulation, risks in failure

ARBE121 – FORMS OF TRADING


Forms of business operation

Sole Trader

  • Basic features

    Business owned and (often) operated by single person

    Usually small business but may employ others

    Owner takes all profit but is liable for all debts

  • Advantages

    Freedom of action and privacy of operations/finances

    Easy and cheap to establish – few legal restrictions

    Owner takes all profit when successful

    May be tax concessions/ financial support for start-up

ARBE121 – FORMS OF TRADING


Forms of business operation

Sole Trader

  • Disadvantages

    Unlimited liability of owner for debts – may lose personal assets as well as those of business

    Business’s capacity/effectiveness limited by owner’s technical and managerial capabilities and finances

    Difficulty in raising external finance

    No continuity of firm e.g. on retirement

  • Use in construction

    “Jobbing” builders and trades-people, small contractors and subcontractors

ARBE121 – FORMS OF TRADING


Forms of business operation

Partnerships

  • Basic features

    Natural extension of sole trader to include more owners

    Two (or more) people jointly own and run the business

    Usually formalised by agreement defining: respective roles and duties of partners, how finance, profits (and losses) are to be shared

  • Advantages

    Expands financial, technical, managerial resources

    Raising external finance easier because of greater stability

    Still relatively easy to set and operate in privacy

ARBE121 – FORMS OF TRADING


Forms of business operation

Partnerships

  • Disadvantages

    Unlimited liability of owners remains but worsened by “joint and several” liability

    Internal conflicts may be difficult to resolve

    Continuity of firm remains a problem – e.g. wishing to expand partnership or on death of partner

  • Use in construction

    Design, management, Quantity Surveying consultancies

ARBE121 – FORMS OF TRADING


Forms of business operation

Limited Companies

  • Basic Features

    Business initially financed through sale of shares

    Ownership resides with shareholders

    Owners take profit through annual dividend on shares

    Directors appointed by shareholders (may be shareholders themselves) to run business

    Shareholders control finances, strategies, appoint or remove directors at Annual and Extraordinary General Meetings (AGM & EGM)

    “Articles of Association” define company structure, aims, operations etc which constrain Directors’ control

ARBE121 – FORMS OF TRADING


Forms of business operation

Limited Companies

  • The variants

    Public (plc) and private limited company (Ltd)

  • Public companies

    Shares may be purchased by anyone

    Transfer of shares simple

    May quoted on Stock Exchange

  • Private companies

    Shares not on open sale

    Transfer only by agreement of shareholders

ARBE121 – FORMS OF TRADING


Forms of business operation

Limited Companies

  • Advantages

    Liability of owners limited to nominal value of shares

    Assets of business at risk but not owners

    Business exists independently of owners – continuity

    Raising finance simpler – external loans easier because of stability, mechanisms for selling more shares

  • Disadvantages

    Strong legal framework (Companies Acts) means formation expensive and complex and privacy lost

    Control of business may be lost – especially plc’s

ARBE121 – FORMS OF TRADING


Forms of business operation

Limited Companies

  • Use in construction

    Medium and large contractors, a few of the very largest of the consultant practices

    Large contractors use complex structures involving hierarchies of companies to control risk of failure

    Most private sector clients are limited companies

ARBE121 – FORMS OF TRADING


Forms of business operation

Limited Liability Partnership - LLP

  • New development

    LLP Act allows formation from April 1st 2001

  • Basic features

    Combines features of limited companies and partnerships

    Business owned by partners but their liability only for contribution to business and business assets

    Internal structure set by agreement as conventional partnership

    External control by obligations set in Act re: registration, filing of accounts, roles of “designated members”

ARBE121 – FORMS OF TRADING


Forms of business operation

Limited Liability Partnership - LLP

  • Advantages

    Limited liability for owners

    Flexibility of internal structure/operations compared to limited companies

  • Disadvantages

    Legal restrictions compared to partnerships

    Increased set-up costs etc, loss of privacy

  • Use in construction

    Increasing number of consultants considering switching from conventional partnerships

ARBE121 – FORMS OF TRADING


Forms of business operation

The construction firm – an example of change

  • The increasing dominance of small businesses (000’s)

ARBE121 – FORMS OF TRADING


Forms of business operation

The construction firm – an example of change

  • The reasons for change

    Increasing specialisation drives increase in number of entities

    Increasing concentration on management role of “main” contractors

    Main contractors wish to shed risk and avoid costs/implications of employment

    Changing entrepreneurial attitudes of workforce and government support for change

    Ease of establishment of small firms – trade credit etc…

ARBE121 – FORMS OF TRADING


Forms of business operation

The construction firm – an example of change

  • Advantages in current situation

    Large companies avoid high overhead costs

    A dynamic, flexible & “agile” industry capable of moving into new areas and adapting to changing situations

  • Disadvantages in current situation

    Small companies highly prone to insolvency adds to “cowboy” image of industry

    Few firms can invest in Research & Development

    Poor support for training – skills shortage

ARBE121 – FORMS OF TRADING


Forms of business operation

Further reading

  • Textbooks

    Harvey and Ashworth, The construction industry of Great Britain discusses the various forms of business used by construction team members.

  • Websites

    http://www.startinbusiness.co.uk Gives general business start-up advice including forms of trading.

    UK Government websites at:http://www.companies-house.gov.uk andhttp://www.dti.gov.uk cover specifics of setting up and legal requirements etc of limited companies and LLP’s.

ARBE121 – FORMS OF TRADING


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