Main Features Of Different Forms Of Business Organizations (Essay Sample)

FORMS OF BUSINESS ORGANIZATIONS
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TASK 1: MAIN FEATURES OF DIFFERENT FORMS OF BUSINESS ORGANIZATIONS
Introduction
Different businesses have different features depending on their structure and also are governed by various legislations and laws. For instance a business run by an individual who owns it entirely (sole trader) does not operate on various legislations and laws of a given country like the company businesses. However this does not mean that it operates under no regulations at all. It’s only that it does not have many regulations like company businesses.
Sole trader
A sole trader is someone who does business single handedly by being the sole and whole owner of the business. In some cases he has assistants in running the business. The sole trader is in charge of the affairs relating to his business. There is no distinction between the owner and the business in the eyes of law they are both the same (Abramitzky, Frank and Aprajit, p 1888). The sole owner has unlimited liability. Therefore incase of bankruptcy the owner uses their own money to pay lenders and creditors. All the legal compensations that may arise while running the business are paid by the sole trader. He is the final decision maker in the business and does whatever he deems fit.
The sole trader is therefore responsible for all the decisions he makes (Blanchflower, and Shadforth, p 352). The buck starts and stops with the sole trader. For instance if an individual who is a sole trader decides to produce honey with the thought of high demand and the selling of the product succeeds, he takes the credit but if it fails him alone suffers the losses. Therefore all the profits as well as losses are entirely shouldered by him.
They maintain records of finances used for personal and business purposes. The business can easily come to an end in case of bankruptcy or untimely demise of the sole trader. These sole traders do not run separate legal existences from that of theirs. They therefore have unlimited liability on running their businesses. The wage bill of such businesses is usually very low because they operate with a few or even no employees (Guinnane et al., p 720).
The unlimited liability may make the sole trader to sell their personal properties so as to offset any business debts available. In starting this business one does not need to make any registrations with the Companies House and there is no need to pay for corporate tax. To avoid being a culprit of the business risks one is advised to have a comprehensive insurance policy.
Unlimited partnerships
This is a type of business cooperation which has joint ownership where the owners have equal responsibility for all the liabilities and debts of the business. The liability is not fixed it can be paid using the seizure of the personal assets of the business owners thus is different from limited liability. It’s a form of general partnerships (Campbell and Nardi, p 6). Therefore if there is any debt that has accrued in the business as a result of failing to pay or defaults all the owners in the business have equal responsibility for the debt and their wealth can be seized so as to offset the debt so instead of risking their personal assets most people resort to forming limited partnerships.
These partnerships are more typical in jurisdictions where some laws of the company are derived from the English law. For example in the UK unlimited business partnerships are usually formed through some registration covered under the Companies Act of 2006 (Herranz, Krasa, and Villamil, p 2). These companies are so uncommon and this is because of the severe burden on the owners in case of debts.
For example if four individuals come together and work as unlimited partners where they all invest $ 35,000 in the business that they are owning as a joint investment. After one year the company may accrue $225,000 in form of liabilities and fails to repay or simply defaults then the four partners will be equally liable for the repayment. Therefore in addition to the $ 35,000 made by each partner they will be forced to raise close to $ 56,000 each to offset the debt. Therefore this form of business partnership increases the level of business risks.
It’s therefore a legal relic. It’s a form of business partnership that is used only in areas where limited partnerships are not allowed to operate. However unlimited partnership has some advantage of nondisclosure. For example an online crafts marketplace i.e. Etsy was able to create an Irish subsidiary in the year 2015 which is classified as an unlimited liability organization. This means that all the reports on one transaction that need to be public as well as the amount paid on taxes needs not to be disclosed anymore (Blanchflower, p 37).
Limited liability partnership
This is a cooperate business which has the combination of a flexible structure of any partnership with the partners having benefits of the limited liability. The legislation that created these entities came into existence in the year 2001 and the partnership has some key features as noted below,
When it comes to decision making most of the decisions are made by the directors as provided in the Corporations Act. However there are some specific decisions that are made by the shareholders. The restrictions regarding liability are well put out. For the shareholders liability is only limited to the capital of shares owned and has not been paid. For example if a shareholder does not have any debts in association with their shares then their liability remains zero (DeNardi, Doctor and Krane, p 31).
For the directors in case the company has debts creditors have no right to recover the debts from the company’s directors unless the company has been given the go ahead to continue their trading after insolvency. Loans in such partnerships are secured by their assets of the company but under some circumstances directors are usually needed to give personal guarantees. There is also room to generate investments from outside the company by the selling of shares. The shareholders do not have the right to claim any investments in the company as a form of deductions in relation to their income that is assessable (Morrison and William, p 341).
Taxes are paid by these companies at a cooperate rate of 30% and its very essential for the company to be in possession of financial accounts to facilitate tax returns. All the profits are retained by the company so as to facilitate growth of the business. The shareholders are not given any profits (Quadrini, p 47). However all the profits that are retained are taxed as part of the company’s income. If a company is operating multiple limited businesses they are free to use cash from one business to offset debts of another business and if they are part of a similar consolidated group they can submit a group’s tax return once they have offset the debts of other businesses within their single entity. Any losses are allowed to be carried forward into the future of the business.
The consumers of products from limited companies are protected by the competition and consumer act 2010. Some costs such as ASIC registration fee and ASIC annual review are usually associated with limited companies and the companies are supposed to pay license fees which in most cases are expensive for limited companies compared to sole traders (Boissay and Gropp, p 753). In case a limited company becomes insolvent the rights of creditors are protected by the creditors and insolvency act. For example in Australia these rights are covered under the Australian securities and investment commission. The operations of limited companies are regulated by various acts and are also governed by the constitution (Chatterjee et al., p 1561).
Therefore all the company stakeholders should be aware of such regulations that govern their working and they are varied among countries. The limited companies enjoy perpetual succession and are usually treated as legal entities which are distinct. This allows the various organizations to survive the staff turnovers as well as the death of members where the share ownership is dealt with in the deceased will.
TASK 2: FIDUCIARY DUTIES OF DIRECTORS OF PRIVATE LIMITED COMPANIES IN THE UK
Fiduciary duties are duties performed on the basis of trust between the directors and shareholders. This enables the directors to act with the best interests of the company at heart with honesty and in good faith. These duties may arise either under some contract, articles or the agreements by share holders. They also come up under the statute of the Companies Act 2006.
Duty to act within powers
This role is well stipulated in the section number 171 of the companies’ act 2006. The directors should ensure that power is only exercised for the right reasons. Initially directors have been seen plundering the assets of the company for their own personal enrichment. They have even made attempts to install mechanisms that frustrate the people who bid to takeover power from them. When such practices are tolerated they are seen to go beyond the main reasons as to why these directors were given some powers (Helland and Sykuta, p 170).This section emphasizes the rule which is equitable in the sense that a director should be able to act in line with the constitution provided by a specific company and is only allowed to exercise powers for the right purposes.
However the section does not clearly clarify all the aspects of the director’s duty to exercise some powers for the right reasons. For example how these reasons are to be proved or rather the extent as to which a purpose that is not right can interfere with some decisions. In such cases such matters are only determined in relation to previous case laws in which the court has made an approach to the ...