BE102 profits are yours due to the lack

BE102 – Forming a company

 

Differences between legal entities:

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When forming a company, you must decide what structure you
wish to establish, below is my evaluation of three different legal entities:

Private company limited by shares (LTD):

The main advantages of a private
limited company are due to the disassociation between the company itself and
the people involved with its operations in the eyes of the law, this makes
acquiring investment easier as the liability of shareholders is limited to
their initial investment and any unpaid shares they own.

This separation allows for a
lower risk as personal assets are not vulnerable if the company dissolves.

Sole trader:

A sole trader is the single
individual who owns, controls and is held accountable for the actions of the
company it is the simplest model with all financial records remaining private and
finances going through as their personal income and so is taxed accordingly.
The ideology of being the sole controlling party comes down to a personal evaluation,
there is a greater workload and associated responsibility however all profits
are yours due to the lack of staff.

Limited Liability Partnership (LLP):

An LLP is a partnership between
two or more persons but with the liability being restricted to the value of
their initial investment or personal guarantees that were made during the
company formation. These limits allow for a similar level of protection as an
LTD. An advantage of forming an LLP over a Ltd is the members are taxed as
self-employed where as a Ltd has to pay corporation tax and then dividends are
subject to income tax.1, 2

 

 

 

 

 

                                                                                                                             

 

 

Business processes:

Health and safety:

The rules and regulations of health and safety are
represented under various legal acts, now the list is relentless but they are
all encompassed under the health and safety act of 1974. The purpose of this
act is to reduce the risk of injury and life to as low as possible for
consumers, employees and anyone that is relevant to a company.

Health and safety concerns are evaluated through risk
assessment forms, as seen below: 8

 

 

 

 

 

 

 

                                    4.

 

 

 

 

 

It is the responsibility of the company to do as much as
they can in respect to health and safety, meaning there is no need to bankrupt
yourself for safety, there is a balance between risk and cost and in the eyes
of the law you need “to ensure safety standards so far as reasonably practical.”
To reduce the probability of hazard occurring and to mitigate the consequences.
An example of this is fire safety, Non-flammable materials should be used where
possible and to have some alarms and an evacuation policy in place so that if a
fire was to break out the risk to life is drastically reduced.8

 

 

 

Finance and accounting:

There are two types of accounting in business financial and management.

Management Accounting:

 Management accounting focuses on specific
needs of the company and is used to track financial progress over a given time
for example Nike releases a new line of clothing and they want to track how
well it is doing in comparison to a pre-existing line over the course of a
year. Once this data has been collected it gives a clear representation
allowing managerial staff to generate forecasts as well as targets. 9

Financial Accounting:

Financial accounting is produced
for the needs of the stakeholders and is a legal requirement by company’s
house. It is broken down into three sections; income statements, statements of
financial position and finally statements of cash flow.9

Income statements:

 The income statement, also known as the profit
and loss account, is used to report how much profit a business has generated.
To calculate profits, it records the quantity and sources of revenue for
example £35’000 from sales of goods, alongside quantity and sources of expense
for example £10’000 in salaries and wages.9

Statement of financial position:

Secondly the statement of
financial position “this statement shows the forms in which the wealth of a
business is held and how much wealth is held in each form.” There are two main
sections assets and equity and liabilities. An asset is something that has
probable financial benefits down the road, with the company having the right to
control it. Equity “represents the claim of the owner(s) against the business”
from the funds they have contributed.9

Statement of cash flow:

 Finally, the statement of cash flows a new
addition to the requirements of financial accounting, this statement is used to
categories the cash flow under the following headings: cash flow from operating
activities (e.g.: profit before tax, depreciation and decrease in inventories),
cash generated from operations (e.g.: interest paid, taxation paid, dividends
paid), cash flows from investing activities (e.g.: interest) and cash flows
from financing activities (e.g.: issue of ordinary shares). It will then close
with net increase in cash and cash equivalents, cash and cash equivalents at 1st
January year and the same at 31st December year.9

 

 

Governance (“The action of governing a state/ business/ organisation.”):

Therefore, good governance in this aspect is to conduct the
actions of the business in an ethical and responsible manner. Which includes
the laws, policies, systems, behaviour, roles, responsibilities and procedures.
These processes are updated where needed so that excellence is consistently
practised.

Effective Board:

For a board to be effective and
make democratic decisions all parties must act within their own independent
judgement being influenced by only the evaluation of facts that results in a
solution for the benefit of the company and/ or business and not for personal
reasons such as financial gain sourced from external parties. A board must also
be comprised of a sufficient number of members with reasonable diversity in
order to provide a boost in morale for employees as they can associate on a
personal level with them allowing a positive figure in a successful position to
aspire to as well as the variety in opinion and viewpoints to broaden the
perspective of the board implemented through frequent meetings and sufficient
communication via the shareholders.7

 

Employees:

The board is responsible for
recognising and managing risks, there is always a level of risk when employing
new staff or implementing staff into new positions and so in order to mitigate these
risks it is necessary for a suitable level of training to be introduced
especially for new directors as the stakes are much higher. Skills and
knowledge must be updated regularly to adapt to the frequently changing
landscape that is the average consume. The company must also provide sufficient
remuneration (pay) so that workplace morale and therefore productivity is
maintained in both standard and quantity.7

 

 

 

 

 

 

 

Process of incorporation:

Setting up a private company limited by share like all
companies is done through company’s house there are two methods of going about
this, filling in the relevant paper work and mailing it or alternatively and
far simply doing it online. This can be done through the gov.uk website or
through a third party that are designed to make the process simpler and provide
additional services such as “Jordans” where you fill out the information for
them and they submit it to company’s house for you with the addition lawyers,
accountants, trust managers, data specialists and company formation agents at
your disposal for an addition cost (Jordans.co.uk). Although to simply register
I would not use these resources as the process in of its self is rather simple.
6

Now the requirements for incorporation are as follows:

A suitable company name:

The name for you decide for your
company is not necessarily the name that you will trade under it merely
represents the company for example if I decided to start a company called
“Holden Ltd” and I was going to sell shoes “Holden Ltd” isn’t particularly
enticing so I can trade under and have on my store front a name like “Premium
Formal Footwear”, with “Holden Ltd” being the name displayed on all official
documentation such as invoices. The name must also not be in use by another
party within a similar field to which you wish to enter, in order to prevent
confusion and people ‘piggybacking’ off the success and recognition of another.
You can check to see if a company’ name is already in use on the gov.uk
website. 5

 

An address for the company:

Your company must have a
registered address so that official mail can be sent and knowingly received as
well as if the company needs to be surveyed for any reason such as by a health
and safety inspector. It is also a legal requirement to have your company name
visible from outside at all times even if it is dark. All other addresses where
business is conducted must also be stated.5

 

Directors/ Shareholders (D/S meaning they are
interchangeable)

All directors/ shareholders must
be listed by their full name as well as their address. Additionally, for
directors their role at the company must also be shown this Is so (for example)
companies house knows where and who to send requests for financial information.
At least one director/ shareholder is required.5

 

Shares:

The information of shareholders
required is stated in the previous paragraph. Other requirements include number
of share, the distribution of said shares, their nature as well as their value.5

 

SIC code:

The standard industrial
classification code or SIC code for short is a five digit numeric that is used
to describe the industry in which your company wishes to conduct business
within for example the code of 01120 is used for the industry of growing rice.5,
4

 

Memorandum and articles of association:

The final requirements are two
fold a memorandum of association which is a legal document that needs to be
signed by all founding shareholders to state the agreement to form the company
and secondly the articles of association which is basically a rulebook on how
the company should be run. It requires agreement shareholders, directors and
the company secretary. There is a standard template that can be used on
company’s house or for an additional fee you can write your own.5

 

 

 

 

Peer assessment:

Recently we conducted peer assessment within our company
team it was assessed on five factors as seen below alongside the results
(scored out of 5):

 

Collaboration:
75% scored 4 out of 5, 25% scored 3 out of 5

Cooperation:
100% scored 4 out of 5

Critical thinking:
25% scored 5 out of 5, 25% scored 4 out of 5, 50% scored 3
out of 5. Additional comment: “you are a realist; this is a good contrast”

Communication:
100% scored 4 out of 5

Creativity:
75% scored 3 out of 5, 25% scored 2 out of 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography:

 

1 Anonymous. 2017. ‘Limited Liability
Partnership’. Small Business Pro. Available at: http://www.smallbusinesspro.co.uk/start-business/limited-liability-partnerships.html

accessed 04/12/2017

 

2 Anonymous. 2017. ‘LLP vs Ltd’. Gannons
Solicitors. Available at: http://www.gannons.co.uk/expertise/business-contract-solicitors/partnership-agreement/llp-vs-ltd/

accessed 04/12/2017

3 Anonymous.
2015. ‘General Risk Assessment Form’. Available at: http://www.sparkyfacts.co.uk/_documents/RiskAssessmentFormforElectricians.pdf                                                       accessed
05/12/2017

4 Anonymous. 2017. ‘Nature of business standard industrial
classification (SIC) codes’. Companies house. Available at: http://resources.companieshouse.gov.uk/sic/                                                                                                  
accessed 06/12/2017

5 Anonymous. 2017. ‘Set up a private limited
company’. Companies house. Available at: https://www.gov.uk/limited-company-formation                                                                                       
accessed 06/12/2017

 

6 Anonymous. 2017. ‘About Jordans’. Jordans
Limited. Available at: https://www.jordans.co.uk/about

accessed 08/12/2017

7 Chris, Jones. “Good Governance”. Lecture

8 Sarah, Fuller. “Health and Safety in the workplace”. Lecture

9 Atril, Peter and Eddie, Mclaney. 2017. ACCOUNTING AND FINANCE
FOR NON-SPECIALISTS (10th ed.). Harlow. Pearson Education Limited.