legal structures of a business
The legal structure a business chooses is fundamental to the way it operates. This legal
framework determines who shares in the profits and losses, how tax is paid, where legal
liabilities rests. It also determines the nature of a business' relationships with business associates,
investors, creditors and employees.
There are three options for a business' legal structure:
(1) Sole Trader
An individual who runs an unincorporated business on his or her own. Sometimes otherwise
known as a "sole proprietor" or (in the case of professional services) a"sole practitioner".
The sole trader structure is the most straight-forward option. The individual is taxed under the
Inland Revenue's Self-Assessment system, with income tax calculated after deduction for
legitimate business expenses and personal allowances. A sole trader is personally liable for the
debts of the business, but also owns all the profits.
A partnership is an association of two or more people formed for the purpose of carrying on a
business. Partnerships are governed by the Partnership Act (1890). Unlike an incorporated
company (see below), a partnership does not have a "legal personality" of its own. Therefore the
Partners are liable for any debts of the business.
Partner liability can take several forms. General Partners (the usual situation) are fully liable for
business debts. Limited Partners are limited to the amount of investment they have made in the
Partnership. Nominal Partners also sometimes exist. These are people who allow their names top
be used for the benefit of the partnership, usually for remuneration, but they do not get a share of
the partnership profits.
The operation of a partnership is usually governed by a "Partnership Agreement". The specific
terms of this agreement are determined by the partners themselves, covering issues such as:
- Profit-sharing - normally, partners share equally in the profits;
- Entitlement to receive salaries and other benefits in kind (e.g. cars, health insurance)
- Interest on capital (the amount invested in the partnership)
- Arrangements for the introduction of new partners
- Arrangements for retiring