Introduction
This essay aims to provide legal advice to Freya and Jamal, who are planning to establish a local restaurant with an initial investment of £2,000 each. Their key considerations include active involvement in running the business, protection from personal liability for business debts, and access to diverse methods of raising finance for future expansion. This analysis will compare two business structures— an ordinary partnership and a private company limited by shares— to determine which best suits their needs. It will also outline the process of setting up the recommended structure. By evaluating the legal implications and practicalities of each option, this discussion seeks to offer clear guidance based on established business law principles.
Comparing Business Structures: Ordinary Partnership vs. Private Company Limited by Shares
An ordinary partnership, as defined under the Partnership Act 1890, is a relationship between individuals carrying on a business with a view to profit (Partnership Act, 1890). While simple to establish, with no formal registration required beyond notifying HM Revenue & Customs (HMRC), a partnership does not provide personal liability protection. Partners are jointly and severally liable for business debts, meaning Freya and Jamal’s personal assets could be at risk if the restaurant fails (Bainbridge, 2016). Furthermore, raising finance is generally limited to contributions from partners or loans, as partnerships cannot issue shares. This structure, therefore, appears less suitable given their desire for liability protection and financial flexibility.
In contrast, a private company limited by shares, governed by the Companies Act 2006, is a separate legal entity, meaning the company itself, rather than its owners, is liable for debts (Companies Act, 2006). Freya and Jamal, as shareholders, would only risk losing their £2,000 investment, safeguarding their personal assets. Additionally, this structure offers multiple avenues for raising finance, such as issuing new shares or attracting investors, which aligns with their expansion plans (Dignam and Lowry, 2020). They can also both be directors, ensuring active involvement in management. Although running a company involves more regulatory obligations, such as filing annual accounts with Companies House, the benefits of limited liability and financing options arguably outweigh these complexities.
Process of Setting Up a Private Company Limited by Shares
Setting up a private company limited by shares is a formal but straightforward process in the UK. First, Freya and Jamal must choose a unique company name and register it with Companies House, either online or by post, at a cost of approximately £12 for online applications (Gov.uk, 2023). They will need to appoint at least one director (which can be either or both of them) and prepare a memorandum of association and articles of association, which outline the company’s purpose and internal rules. They must also specify a registered office address and issue shares, reflecting their £2,000 investment each as share capital. Once registered, the company must comply with ongoing requirements, including tax registration with HMRC and annual reporting to Companies House (Hicks and Goo, 2016). While this process is more involved than forming a partnership, detailed guidance and templates provided by Companies House facilitate compliance for new entrepreneurs.
Conclusion
In conclusion, a private company limited by shares is the more suitable business structure for Freya and Jamal, given their requirements for limited liability and access to varied financing methods for future expansion. Unlike an ordinary partnership, which exposes them to personal liability and restricts fundraising, a limited company offers legal protection and growth potential, despite increased administrative responsibilities. The process of setting up such a company, while formal, is accessible and supported by clear governmental resources. Therefore, by opting for this structure, Freya and Jamal can safeguard their personal finances while laying a strong foundation for their restaurant’s success and scalability. This choice, indeed, balances their immediate needs with long-term aspirations in a legally sound manner.
References
- Bainbridge, S. (2016) Business Associations: Agency, Partnerships, LLCs, and Corporations. Foundation Press.
- Companies Act 2006. (2006) Legislation. UK Public General Acts.
- Dignam, A. and Lowry, J. (2020) Company Law. 11th ed. Oxford University Press.
- Gov.uk. (2023) Register your company. UK Government.
- Hicks, A. and Goo, S.H. (2016) Cases and Materials on Company Law. 8th ed. Oxford University Press.
- Partnership Act 1890. (1890) Legislation. UK Public General Acts.
