Forms of business operation

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. The construction firm – an example of change • The increasing dominance of small businesses (000’s) ARBE121 – FORMS OF TRADING

13. 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

14. 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

15. 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