Overview of Business Organizational Structures

Advice for Mr/Ms Wilkes

There ae five forms of business organisations: sole traders; partnerships; private limited companies; public limited companies; and co-operatives.

Depending on the objectives, goals, and risks involved, the form of business best suited to the individuals can be adopted. Individuals may consider several points before they make an assessment as to which form of business is suited to them. These factors may include number of employees, market value, and sharing of profits and losses.

Each form of business has advantages and disadvantages.

Forms of Business Organisations

Forms of business organisations allow two or more persons to come together and conduct a business for common purposes and gains. These include Partnership, Private Limited Company (Ltd), and Public Limited Company (Plc).

Partnership

Partnership has been defined as the coming together of two or more persons for the purpose of acting in common to form a business with a view to earning profit. If the business is already in existence, as a sole tradership, then it can even be converted into a partnership with the very few formalities and no registration requirements. Friends can come together to form a business through a partnership as this allows them to get the benefits of partnership. The most important benefit is the spreading of risk amongst the partners so that no one individual has unlimited liability. The second benefit is that they would each bring in money and resources into business, which can be used to get office premises, hire staff, and invest more into the business. The third benefit is that the partnership property stays within the partnership and is not appropriated by any one individual because the Partnership Act 1890, Sections 20 and 21, identifies property purchased with partnership money to be partnership property. The fourth benefit is that if the business is ever dissolved, each partner takes back whatever property they brought into the business. The fifth benefit is that the partners may bring specific skills and ideas to business so that they have greater knowledge capital that benefits them all. The sixth benefit is that the partnership has credibility with potential customers and suppliers, as business with an LLP is a less risky proposition than dealing with sole traders. Partners are the agents of the partnership and have power to bind the partnership to actions taken.

The disadvantages of partnership are that each partner has less control over the business as partners have to take all decisions together. The second disadvantage is that unless the partnership is LLP, the partners still continue to have unlimited liability. Partners are jointly

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1. Karen Borrington and Peter Stimpson, Cambridge IGCSE Business Studies (Cambridge University Press 2015).
2. Ibid.
3. M Young Legal Associates Ltd v Zahid [2006] EWCA Civ 613.
4. James Marson, Business Law (Oxford University Press 2013) 465.

and severally liable for their actions and this makes each partner liable for the torts or other actions. An LLP is a better option to avoid these risks.

Limited Liability Partnership

Limited Liability Partnership (LLP) offers more benefits than partnership. The Unlimited Liability Partnerships Act 2000 allows establishment of partnership organisations imbibing two important features of an incorporated company: separate legal entity; and unlimited liability. This means that the partners in an LLP can have the advantages of partnership and incorporated company if they choose to register an LLP instead of a normal partnership. LLP requires more formalities to be completed than Partnership. LLP is formed as per registration requirements under the Unlimited Liability Partnerships Act 2000. LLP has to be registered with the Registrar of Companies. This makes LLP a separate legal person. Unlimited liability principle is only applicable to the partners and not the partnership; in other words, the liabilities for the partnership debts and losses is unlimited for the partnership but limited for the partners. All contracts and obligations of the partnership are created with the LLP and not the individual partners. LLP’s personality continues even after the death of the partners because it has that feature of an incorporated company. The disadvantage of an LLP is that shares in the business cannot be bought or sold by partners. This means that LLP will have some challenges in expanding their business by bringing in more partners. If business expansion over the period of time is one of the key goals of the friends, then LLP is not the appropriate vehicle for doing that. In that case, they may want to consider a limited company, as this would allow them to sell the shares.

Private Limited Company

A private limited company allows the ownership of a business by shareholders. In this case, the friends will not be partners. Rather they will be members of a company

A company has to be registered with the Companies House, and there are several formalities that have to be completed for this purpose. Once the company is registered, it is issued a Certificate of Incorporation. This means that the company has now come into being and it is a separate legal person.

Friends who want to expand the business in future and have ownership of the business, can choose to form a company. The shareholders of the company can be the directors as well because directors are usually those who are majority shareholders of the company. This allows them to have control over the day to day business of the company as well.

The contracts and property of the company is in the name of the company. The accounts of the company are separate from the members. Therefore, the company is a separate legal person and has its own property and its own rights. The shareholders of the company have limited liability. This is an important benefit of forming an incorporated company because it allows the members to limit their liability to a certain point. Generally, the liability of shareholders is to their investment when the company was formed.



A company is good vehicle for expansion of business. The shares of the company can be sold to others who wish to invest in the company. As it is a private limited company, members

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5. Ibid, p.466.
6. Ibid, p.468.
7. Ibid.

Karen Borrington, Peter Stimpson, Cambridge IGCSE Business Studies (Cambridge University Press 2015)

can control how much shares they sell to outsiders so that they can still continue to maintain their control in the company. This allows an important benefit to friends who wish to keep the control of the company to themselves, but also increase the outside investment into the company by selling shares of the company to expand their business. The advantage of the private limited company is that shares can only be sold to outsiders with approval of members of the company.

The disadvantages are that the formation of a company is more complicated than forming an LLP. Memorandum of Association and Articles of Association have to be drafted and sent to the Registrar of Companies. The company has to be registered by the Registrar. All of these processes may involve the use of legal advice and some expense.

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