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In this article we will discuss the different sorts of business constitutions available for a new company. You must understand that William Smith, the software developer, William Smith, the software developers and William Smith Software Developers Limited are all different legal entities with distinct advantages and drawbacks, and the law puts different obligations on each of them.

Basically, you can trade under any of the following legal statuses:
â?¢ Sole Trader
â?¢ Partnership
â?¢ Limited Company

Sole Trader

This is the simplest form of business. The vast majority of very small firms in this country operate this way. If you are a sole trader, the income from your business is your own personal income. Your business expenses are deducted from your income for tax purposes, and you pay tax at personal rates. The losses of the business are yours, too, along with all the risks â?? if your firm fails you will have to pay back any debt owed to your creditors. It is very easy to set up a sole trader business, as there is no need to ask permission or get a license, with the exception on certain professional trades that require certification, such as plumbing or electrics, etc.


A partnership is similar to a sole trader business, except there are two or more partners involved. Each partner takes on responsibility for all the liabilities of the partnership. If your partner runs off with all the money and leaves you with all the business bills, you will have to pay off all the debts, whether you were responsible for their existence or not. So your partner should be chosen extremely carefully.

Partnerships also run into trouble because of misunderstandings regarding responsibility sharing and decision-making, or any other circumstances where one partner's expectations are not fully met. So, to reduce the risk, it is worth taking advice from a reputed solicitor. The solicitor might advise you to draw up a partnership agreement, covering the circumstances that most often cause trouble, and setting some procedures to follow if the partnership runs into rough weather.

Limited Company

From a legal point of view, limited companies are totally different from sole proprietorship or partnership firms. Sole traders and partners are people who earn income by means of their business activity, but a limited company is a legal entity, separate from its owners and directors, able to employ people, buy and sell things and makes its own business strategy. There are two set of people involved in the running of a limited company; the owners who have shares in it and the directors who make decisions for it, although these can, of course, actually be the same people.

As a separate entity, the limited company has sole responsibility for its debts, which frees its owners from that responsibility. Its liabilities are limited to the paid up share capital, hence the full name of 'Limited Liability Company'. Many small companies are authorized to issue £100 worth of shares, but you will find them issuing only £2 shares. So, if the firm is liquidated to pay off debts, all the shareholders theoretically stand to lose is £2, though the company could have been dealing in transactions involving thousands of pounds. The only way to make shareholders liable for the business debts of a limited company is if they have given personal guarantees. This loophole allows limited companies to be used by unscrupulous people to operate in fraudulent activities.

Author William Kensingtondate added 2009-08-26 10:07:21

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