As published in Commercial Motor 19 December 2013
In a competitive and highly regulated market, choosing the right business structure is essential for haulage businesses. DWF’s Guy Jackson and Vikki Woodfine, explains the difference between limited companies, partnerships and sole traders, and the legal advantages and disadvantages of these business vehicles.
Find out more about:
1. Private Limited Company
3. Sole Trader
1. Private Limited Company
A private limited company is a separate legal entity, distinct from the shareholders/owners that own it and the directors that run it. Companies are governed by detailed legislation (the Companies Act 2006), which provides a comprehensive framework within which to operate. A private company does not have its shares publicly listed or traded on a stock exchange, as opposed to a public limited company.
The key documents that govern how a company is run are its articles of association and (if there is one) a shareholders’ agreement. Whilst these documents do not need to be complex, it is advisable to take legal advice regarding their contents to ensure they enable the company to be operated efficiently and meet the requirements of the company’s owners.
Operators in the haulage trade may be well aware of the personal risks and liabilities of owning a haulage business. A key advantage of using a company is that there is an extra layer of protection (i.e. the company) between the company owners and the business conducted which enables an entrepreneur to keep his own personal wealth and assets separate from the business itself. The personal financial liability of the owners is limited to the investment they have made in the company. It is only in very exceptional circumstances that, in apportioning liability, a court would look behind the company to the owners (what is known as ‘piercing the corporate veil’).
For hauliers there are risks such as suddenly facing massive penalties over unpaid excise duty (due to a minor and inadvertent error), higher fuels costs, greater foreign competition and EU legislation which means that providing protection of personal wealth has some real attractions.
There can be some tax advantages from using a company. Limited companies are only taxed on their profits (usually at a rate of 21%) and as such are not subject to the higher (personal) tax rates placed on sole traders or partnerships which can reach 40%. There is a lower rate of tax on dividends and it may be possible to extract profits without paying the higher rate of tax.
In the case of Private Limited Companies, the Directors are also usually the main shareholders of the Company. Thus both the ownership and control of the business remain in their hands. Decisions can be made quickly and easily, with little fuss, allowing for a more successful business management platform.
In principle it is easier to raise finance through the sale of shares and to raise debt than some other forms of business structure although personal guarantees may be required by banks.
The limited liability of shareholders does not extend to the directors. Failure to comply with directors’ statutory duties, which include promoting the success of the company, exercising reasonable care, skill and diligence, and avoiding conflicts of interest, may result in the directors incurring personal liability, for example paying damages to the company. Directors may also be exposed to criminal liability in connection with the company, for example under the Bribery Act 2010 or in connection with breaches of health and safety legislation.
Information about a company is published at Companies House and remains a matter of public record. A company must be registered on incorporation and there are on-going statutory filing requirements.
A traditional partnership is simply a relationship between persons carrying on a business in common with a view to making a profit. There are no formalities required in order to form a partnership and the partners do not have to have any intention to form a partnership. A partnership is not a separate legal entity from the partners.
Being a partnership, the business owners necessarily share the profits, the liabilities and the decision making. This is one of the advantages of partnership, especially where the partners have different skills and can work well together. However, it can obviously present some problems. If the partners have entered into one, a partnership agreement is the key document that governs how the partnership operates.
There can be real advantages of using a partnership in terms of cost, both to the partnership as a whole and to the partners as individuals. It costs nothing to set up a partnership and, unlike with a company, there are minimal continuing costs specifically attributable to choosing this business structure. As the partnership is not a separate entity, it is transparent for most tax purposes and the profits are only taxed in the hands of the individual on their share of the gains or income. Partners are also required to register as self-employed with HM Revenue & Customs. This can be beneficial but the current laws mean that if the partnership (and the partners) bring in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company.
A partnership does not need to be registered at Companies House and there are no statutory requirements to file information. This means that the partnership is able to keep information regarding the way it is run, including financial information, private.
The fundamental disadvantage of a partnership is that the partners have unlimited joint liability for the debts and obligations of the partnership. The partners are also jointly and severally liable for any wrongful act or omission by the other partners in the course of running the business, and any criminal liability or negligence/ breach of health and safety rules would be borne by the partners themselves.
For a haulier operating in an evolving increasingly regulated market, the traditional partnership may not be the most appropriate business structure, given the law that governs partnerships (the Partnership Act 1890) is over 100 years old and therefore the default provisions that may apply to the partnership, such as, for example, remuneration or decision-making, may be out dated. Besides the traditional partnership, which is the focus here, there are also limited partnerships and limited liability partnerships, which may be worth considering if the limited liability of a company is attractive but the operator does not wish to be restricted by the Companies Act.
3. Sole Trader
A sole trader is an individual who operates his business alone. The sole trader as a business vehicle has no separate legal status to the trader himself. There are no constitutional documents that govern how a sole trader operates.
A haulier operating as a sole trader would have maximum flexibility to operate his business because there is no statutory framework in which the sole trader must operate. As the sole trader works alone they would be free to make any and all decisions as they saw fit.
As with a partnership, there are no set up costs and minimal on-going administrative costs. There are no statutory requirements to file information with Companies House, or any other body, which means that the operator maintains complete privacy about the way he runs his business.
The major disadvantage of operating as a sole trader is that a haulier would have unlimited personal liability for all the debts and obligations of the business, and any criminal liability incurred in the course of business would fall solely to the haulier.
The Senior Traffic Commissioner’s Statutory Document no.5 specifically covers legal entities and provides further information to operators that are considering their position and how to best operate their business. It is recommended that this document be reviewed to refresh operators’ minds on this subject.
In terms of operator licensing one of the main differences between the different entities is the ability to raise finance to evidence your financial standing. Sole traders and partnerships may look at using statutory declarations linking family funds to establish appropriate financial standing, yet limited companies may simply use audited annual accounts where they have a turnover of more than £5.6m.