Types Of Business For A Small Business - Sole Trader And Limited Liability Ownership

You are a solicitor specialising in small business start ups and expansion.

Homer has a small business - V-Engines. He designs and builds engines for other companies and, due to increases in his order book, has recently leased a large warehouse with offices. He is not sure whether to continue to run his business as a sole trader or to obtain limited liability. He has two people working with him on a self-employed basis in the workshop and has identified that he needs two more, plus someone to work in the office full-time.

Highlight to Homer the different types of business he may operate, including coverage of legal responsibilities and the advantages and disadvantages of each type. You should also state any regulations that Homer must adhere to if he decides to change his business formation to that of a company. You also need to ensure that he is aware of his legal obligations with regards to those who currently work with him and those he intends to recruit.

If Homer does choose to set up a company highlight what his responsibilities would be as a Director and in what circumstances he may be disqualified.

The learning outcomes for this assignment are:

Identify and investigate 'legal problems' for businesses and suggest solutions to the same

Improve self learning skills by being able to effectively analyse a law report and piece of legislation and to tackle comprehensive case studies and problem scenarios

This report is about the small business which is V-Engines owned by Homer. He works on the designing and building engines for other companies. Due to increase in orders Homer leased a large warehouse with offices. Now he is not sure whether he should continue to run as a sole trader or to obtain a limited liability. He has two people working with him on a self-employed basis in the workshop. He needs two more plus one for full time work in the office. In this report, as a solicitor specialising in small business start-ups I will discuss the types of business, Homer can operate which will be like a sole ownership business, partnership firm, limited liability company, or legal corporate entity from which we choose sole ownership and limited liability ownership. We will discuss what will be the legal responsibilities he will have in each business type. Advantages and disadvantages of each business will be discussed in this report. Legal regulation and obligation with regard to the currently working or upcoming recruiting employees is described in this report.  If Homer set up a company his legal responsibility as director and disqualification for the same will be explained.

Sole Trader: To work as a sole trader is a business in which a person trading individually and responsible for all the activities of business. Any debt and profits will be borne by the sole proprietor of the business. This is relatively less expensive in regard to taking any decisions. The owner has full control over the assets and does not require any reporting to any senior employer. Sole trader of any company has unlimited liability towards his work and to recover debts, assets of the company can be seized to recover the debt. They can employ other people for the work diversion but he will be the only sole owner of his business. Sole proprietor gets benefited from the recruiting cost and human resource management cost. In case of any legal proceeding by the company or against the company, the creditor can compel the owner to sell the personal assets to pay the debts on the company (Wang & Poutziouris, 2010).

As a personal responsibility trader needs to manage with extra income to settle some extra funds in any circumstances. He needs to settle the debts of the company at the end of financial year even if he no sufficient income is earned by the sole trading. Sole trader is personally liable in all the legal proceedings of the company. Income tax returns will be paid by the sole trader and show the tax returns annually. It is the responsibility of the sole trader to register the business with proper licensing and documentation (Fletcher, 2010).

Advantages and Disadvantages of Sole Trader Business

As a sole trader of the company, starting up the business cost is low for the sole proprietor. The sole owner has full control over the business proceedings and any decision making process for the company. They work without the interference of the others and hassles of the long hieratical procedures. The profits are completely retained by the owner after paying all the liabilities. Sole proprietor can keep all the official data private. Personal services can be delivered by the owner to its potential customers. Even winding up the business is also easy in case of a sole ownership as no long procedures of payments are there (Birt et al. 2008).

In this case also sole trader also faces some risk of unlimited liability, Liability towards the debtors to pay the debts with the personal savings or assets in worst cases. It gets difficult for the sole owner to retain the high calibre employees because of high retaining cost. As a sole trader, he can face difficulties in the fund raising issues and expansion of the business in future dates. Sole trader is unable to get the benefits of economies of scale as they have to charge higher prices for their services and products to cover the cost (Ram, Theodorakopoulos & Jones, 2008).

To form the business as a Sole owner, the proprietor should follow some regulations and legal requirements but as it is an individual business activity it does not have lengthy procedures for the formation of Sole Ownership Company. But like all other company’s it need to obtain licence and permits with a company name, which vary from state to state regulations and provision in regard to sole ownership company. The taxes paid by the sole ownership company will be in self-employed category (Langevoort & Thomson, 2012).

Limited Liability Company is that which has less liability or debts of the member in comparison to sole ownership. It is a business formation of two or more owners with an agreement to distribute the income between the partners. The person dealing with the limited liability, distribute income between the partners and limit the liability. It also has some tax benefits and tax deductions can be used against active income. The owner cannot transfer his interest but in some companies to make the large sum of capital there is a need to transfer the stocks in the stock exchanges (Moll, 2010).

Legal Regulations and Obligations of Sole Trader Business

The responsibility of members of the company is liable in share proportionate of the company but not personally liable. Personal liability is on the manager of the Limited Liability Company (Hiller, 2013).

The members of the limited liability ownership have a protection against the debts of the company. Any loss occurred to the Company’s losses will not be cover up by the personal assets of the members. The profit sharing ratio can be selected differently; it needs not to be in the ownership ratio between the members. There is no legal obligation to conduct the meetings and give the minute details of the meetings as in the company law for the larger companies. But it has all the benefits similar to the corporations. The company protects itself from the double taxation as this company is not treated other corporate bodies and the members their taxes individually on the basis of their income. In this limited liability ownership, members or partners get good credibility in comparison to sole ownership with the other lender or suppliers (Ribstein, 2008).

As it is not the other corporate bodies and does not follow the procedures of company’s acts, so in this way it has a limited potential of growth with which it does not attract good investors for the business. Limited liability ownership does not have any uniform laws for the regulation of the company; it is treated differently in different states. As mentioned with its name as a limited liability with limited number of members in it with no proper corporation identity, it dissolves easily with financial loss to the company or bankruptcy or insolvency of any member. Limited Liability Ownership has no shareholdings and no shares listed in the stock exchange which results in limited market for the company. Even the formation of these companies is less complex than the other major corporations but in comparison to the partnership firms it is a complex procedure (Guinnane et al. 2007).

There must be a unique name of the company which should be registered with the state regulations. The article of organisation should be filed which will have all the information of company and its business, legal authority, address, members and the legal authority authorised to deal with the affairs of the company. There should be agreement includes the finances, rights, organisation and responsibility of the members and rules and regulations for the smooth functioning of the business. After all the procedure of formation company announce its business by advertising it in the local newspaper (Steele, 2007).

Limited Liability Company

Homer has some legal responsibility towards his present employees or with the future recruitments. As having business of building engines, employees have few risks of health issues which need to be regulated with the health and safety rules. Employer has duty to pay agreed amount to employee and give the correct information regarding the legal rights of the employee. He has a duty to create mutual trust and confidence relationship between employee and employer (Foster, 2007).

Directors of the company have some duties and responsibility towards his company or employees which are like duty to act in best interest and good faith of the company. It is the duty of directors not to make secret profits out of his position of director or by using company’s sensitive or unpublished information. To keep updated the books and accounts. Disclose the shareholding and contracts made by the company.  The director keeps the every detail of the meetings and makes the annual report of the company (Post et al. 2011).

A director of the company will be disqualified if he is declared as unsound mind, insolvent or convicted by the court for any offence of moral turpitude or sentenced for not less than 6 months or more. Non-payment of call money or filing the financial statement for the last 3 financial years also includes in the disqualification (Shopovski et al. 2013).

The legal issues which can occur at the time of formation of the sole ownership business is mainly the debt and tax payments which is completely on the one individual for which he doesn’t have any shield of protection. On the death of sole proprietor the company dissolves. Similarly LLC also has some legal issues regarding its formation in the form of taxation which is limited to the share proportionate of the members; remaining debt is borne by the company. The registration fee is higher and regulations are different according to the state norms (Lechner & Leyronas, 2009).

Conclusion and Recommendation

This report is about the types of business Homer can do to expand his business of building engines. From many options of running business, two businesses of being a sole trader or limited liability ownership were chosen. It talks about the legal responsibilities, advantages and disadvantages of each business type. Regulation which needs to be followed for the formation of the company was discussed with the legal obligation of Homer towards his current employees and future employees to whom he wants to recruit. If Homer chooses to establish a company he has some responsibility to fulfil otherwise he will be disqualified from the position of director.

According to this report, Homer should run his business as a Limited Liability Ownership, in which the risk associated with the business will be less as compared to sole ownership. As in LLC members are more than one so the liability also divides between the members. It has benefit of double taxation.  Members of the company get good credibility with the lenders of suppliers.

References

Wang, Y. and Poutziouris, P., 2010. Leadership styles, management systems and growth: Empirical evidence from UK owner-managed SMEs. Journal of Enterprising Culture, 18(03), pp.331-354.

Fletcher, D., 2010. ‘Life-making or risk taking’? Co-preneurship and family business start-ups. International Small Business Journal, 28(5), pp.452-469.

Birt, J., Chalmers, K., Beal, D., Brooks, A., Byrne, S. and Oliver, J., 2008. Accounting: Business reporting for decision making. John Wiley & Sons Australia, Ltd.

Ram, M., Theodorakopoulos, N. and Jones, T., 2008. Forms of capital, mixed embeddedness and Somali enterprise. Work, employment and society, 22(3), pp.427-446.

Langevoort, D.C. and Thompson, R.B., 2012. Publicness in Contemporary Securities Regulation after the JOBS Act. Geo. LJ, 101, p.337.

Moll, D.K., 2010. Minority Oppression & the Limited Liability Company: Learning (or Not) from Close Corporation History.

Shopovski, J., Bezzina, F. and Zammit, M.M., 2013. The disqualification of company directors and its effect on entrepreneurship. European Scientific Journal, ESJ, 9(7).

Post, C., Rahman, N. and Rubow, E., 2011. Green governance: Boards of directors’ composition and environmental corporate social responsibility. Business & Society, 50(1), pp.189-223.

Post, C., Rahman, N. and Rubow, E., 2011. Green governance: Boards of directors’ composition and environmental corporate social responsibility. Business & Society, 50(1), pp.189-223.

Steele, M.T., 2007. Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies. Del. J. Corp. L., 32, p.1.

Guinnane, T., Harris, R., Lamoreaux, N.R. and Rosenthal, J.L., 2007. Putting the Corporation in its Place. Enterprise & Society, 8(3), pp.687-729.

Ribstein, L.E., 2008. An Analysis of the Revised Uniform Limited Liability Company Act. Va. L. & Bus. Rev., 3, p.35.