The new kaleidoscope of business forms

accapr —  26 November 2013 — Leave a comment

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By John Davies, head of technical, ACCA

It has always been the case that the first step for any entrepreneur wanting to set up in business is to work out what structure would be most appropriate for their business.

For many people, the choice of business form will seem fairly straightforward. If you want to protect your privacy and retain complete control of your business, and are prepared to be financially responsible for its debts, you will probably choose to operate as a sole trader or with trusted colleagues in a partnership. If on the other hand you value the protection of limited liability status you will opt to become a limited company. These two fundamental forms have each existed for well over a century and remain hugely popular.

But it is no longer true to say that the choice of form available to new entrepreneurs is quite as black and white as the above would suggest.

Recent years have in fact seen a significant expansion of the diversity of business forms available to new and existing businesses. Here are a few examples of this movement:

  • The limited liability partnership (LLP) was introduced in 2000. The LLP is a hybrid form, half-way between a partnership and a company. It has the hallmarks of the traditional partnership in that its partners are free to arrange the firm’s internal affairs more or less as they see fit, but it resembles a company in that it is a corporate body and is required to prepare and publish annual accounts. The LLP is available to any type of business but is especially attractive to professional firms that wish to take advantage of protection from personal liability for their individual members.
  • The community interest company (CIC) is a company structure which is expressly intended to be appropriate for enterprises with social or community benefit in mind, rather than purely for the financial advantage of its proprietors. To achieve this the format requires profits made by the company to be ‘locked in’ so as to be channelled towards furthering its corporate aims.
  • Public service mutuals are a new vehicle designed to deliver functions hitherto delivered solely by the public sector. The UK Government is actively encouraging the take up of mutuals as a means of cutting central government costs and has raised the prospect of 1 million public sector workers being transferred to mutual by 2015.

A new report by Tomorrow’s Company, contributed to by ACCA, reviews the new landscape of UK business forms and urges entrepreneurs, advisers and governments to consider the opportunities that are afforded by this expansion of choice.

What choice means is that, for the entrepreneur, it need no longer be a straight choice between partnership and company – depending on the motives of the person starting up the business, one can now contemplate becoming a social enterprise or a charitable incorporated organisation as well as a sole trader and a company limited by shares or guarantee.

From the perspective of government, the report argues that more attention needs to be paid to business form when considering its dealings with private sector businesses and the issuing of contracts to them. It poses the question of whether companies with overtly commercial business and funding models are the right sort of entity to be delivering public services, referring, as an example, to the recent case history of care homes being taken over by listed companies which have aggressive funding models.

And for advisers, such as practising accountants, it means that there is a much wider range of information that they can provide to clients wishing either to set up in business from scratch or to review their existing structure or form.

What this all means is that businesspeople today have more options as regards the structure of their firm and more freedom to organise the way they organise their business so as to align it with the expectations of their consumers and stakeholders. The report makes for interesting reading by any one who has ever felt constrained by the choices available to them.

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