Business and Organisational Structures

A sole trader is an individual trading in their own name (or under a business name). It is the simplest form of business.

• Legal status: Not a separate legal entity — the business and the owner are legally the same person
• Liability: Unlimited — the owner is personally liable for all debts of the business. Creditors can claim against personal assets.
• Taxation: Profits are taxed as the individual's income (income tax and Class 2/4 National Insurance)
• Regulation: Minimal regulatory requirements. No requirement to file accounts publicly (though tax returns are required).
• Advantages: Simple to set up, low cost, full control, privacy (no public filing of accounts), flexible
• Disadvantages: Unlimited personal liability, limited access to finance, limited continuity (business ends on death of owner), may lack credibility with large customers/lenders

A partnership is two or more individuals (or entities) carrying on a business together with a view to profit, governed by the Partnership Act 1890.

• Legal status: Not a separate legal entity in England and Wales (the partnership is the partners collectively). In Scotland, a partnership has separate legal personality.
• Liability: Unlimited and joint and several — each partner is personally liable for all debts of the partnership. A creditor can pursue any single partner for the entire debt.
• Governance: Governed by a partnership agreement (or by the Partnership Act 1890 default rules if no agreement exists). Partners share profits equally unless agreed otherwise.
• Taxation: The partnership is tax-transparent — each partner is taxed individually on their share of profits.
• Advantages: More capital than a sole trader, shared skills and workload, relatively simple to set up, privacy
• Disadvantages: Unlimited personal liability, potential for disputes between partners, limited life (partnership may dissolve on death/retirement of a partner unless the agreement says otherwise)

An LLP (created under the Limited Liability Partnerships Act 2000) combines elements of a partnership with the benefit of limited liability.

• Legal status: Separate legal entity — the LLP itself can own property, sue, and be sued
• Liability: Members' liability is limited to the amount they have agreed to contribute (usually their capital contribution). Personal assets are protected.
• Regulation: Must file annual accounts at Companies House (similar to companies), have a registered office, and have at least two designated members
• Taxation: Tax-transparent (like a traditional partnership) — each member is taxed individually on their profit share
• Common use: Professional firms (accountancy, law) that want limited liability but partnership-style taxation and flexibility
• Advantages: Limited liability, separate legal personality, flexible internal structure, tax transparency
• Disadvantages: Public filing of accounts (loss of privacy), must comply with accounting and audit requirements (if large enough), more complex to set up than a simple partnership

A private limited company (Ltd) is the most common form of incorporated business in the UK.

• Legal status: Separate legal entity with its own legal personality (Salomon v Salomon [1897]). The company can own property, enter contracts, sue, and be sued in its own name.
• Liability: Shareholders' liability is limited to the amount unpaid on their shares. Personal assets are not at risk for company debts.
• Shares: Cannot offer shares to the public. Shares are privately held and typically subject to transfer restrictions (e.g., pre-emption rights, board approval).
• Governance: Must have at least one director (who can also be the sole shareholder). No requirement for a company secretary (though one may be appointed). Governed by the articles of association.
• Regulation: Must file annual accounts and a confirmation statement at Companies House. May be exempt from audit if it qualifies as a small company.
• Taxation: Pays corporation tax on profits. Dividends to shareholders are subject to income tax in the shareholders' hands.
• Advantages: Limited liability, separate legal personality, perpetual succession (the company continues regardless of changes in ownership), easier to raise capital than unincorporated businesses
• Disadvantages: Public filing of accounts, regulatory compliance costs, double taxation risk (corporation tax + income tax on dividends), less flexibility than a partnership

A public limited company (plc) can offer its shares to the public and may be listed on a stock exchange.

• Key differences from a private company:
• Minimum share capital of £50,000 (at least 25% paid up on allotment)
• Can offer shares to the public and may be listed on a stock exchange (e.g., London Stock Exchange)
• Must have at least two directors and a qualified company secretary
• Must hold an AGM within 6 months of its accounting reference date
• Cannot be exempt from audit regardless of size
• Subject to more extensive disclosure requirements and, if listed, must comply with the Listing Rules, Disclosure and Transparency Rules, and the UK Corporate Governance Code
• Advantages: Access to public capital markets (can raise large amounts of equity), shares are transferable (providing liquidity for investors), greater public profile and credibility
• Disadvantages: Extensive regulatory requirements, high compliance costs, vulnerability to hostile takeover, pressure from short-term investors, loss of control for founding shareholders

Not-for-profit (NFP) entities operate for purposes other than generating profit for owners. Any surplus is reinvested to further the entity's objectives.

• Types: Charities, social enterprises, community interest companies (CICs), housing associations, clubs and societies, public sector bodies
• Governance: Governed by trustees (charities), a management committee, or directors (CICs). Charities are regulated by the Charity Commission.
• Funding: Grants, donations, membership fees, trading activities (if subsidiary trading companies are used)
• Reporting: Charities above thresholds must prepare accounts (Charities SORP), file with the Charity Commission, and may require an audit or independent examination
• Accountability: Accountable to beneficiaries, funders, regulators, and the public — not to shareholders seeking a return

The Code is structured around five broad principles:

1. Board Leadership and Company Purpose: An effective board should promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. The board should establish the company's purpose, values, and strategy, and ensure these are aligned with its culture.
2. Division of Responsibilities: The chair leads the board and is responsible for its overall effectiveness. There should be a clear division of responsibilities between the leadership of the board (the chair) and the executive leadership of the business (the CEO). These two roles should not be held by the same person.
3. Composition, Succession and Evaluation: The board and its committees should have a combination of skills, experience, and knowledge. Board appointments should be based on merit with due regard for diversity. At least half the board (excluding the chair) should be independent non-executive directors (NEDs) for FTSE 350 companies.
4. Audit, Risk and Internal Control: The board should establish formal and transparent policies for audit, risk management, and internal control. The board should present a fair, balanced, and understandable assessment of the company's position and prospects.
5. Remuneration: Remuneration policies should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned with company purpose and values and linked clearly to the successful delivery of the company's long-term strategy.

Board composition:

• The board should include an appropriate combination of executive directors (who run the business day to day) and non-executive directors (who provide independent oversight and challenge)
• For FTSE 350 companies, at least half the board (excluding the chair) should be independent NEDs
• For smaller listed companies, at least two independent NEDs
• The chair should be independent on appointment (but is not counted as independent thereafter)
• A senior independent director (SID) should be designated — available to shareholders if they have concerns that normal channels have not resolved

Independence of NEDs: A NED is independent if they are free from relationships or circumstances that could affect, or appear to affect, their judgement. Factors that may compromise independence include:

• Being a former employee of the company within the last five years
• Having a material business relationship with the company
• Receiving remuneration other than the NED fee (e.g., share options, pension)
• Having close family ties with directors or senior management
• Having served on the board for more than nine years
• Being a significant shareholder

Role of NEDs:

• Strategy: Constructively challenge and help develop strategic proposals
• Scrutiny: Scrutinise management performance against agreed goals and objectives. Monitor the integrity of financial information and internal controls.
• Risk: Satisfy themselves that financial controls and risk management systems are robust
• People: Responsible for determining appropriate levels of executive remuneration. Role in appointing and removing senior management.

The Code requires listed companies to establish at least three board committees, each comprised wholly or mainly of independent NEDs:

1. Audit Committee

• At least three members (two for smaller companies), all independent NEDs. At least one member must have recent and relevant financial experience.
• Responsibilities: Monitoring the integrity of financial statements, reviewing internal controls and risk management systems, monitoring and reviewing the effectiveness of internal audit, recommending the appointment of the external auditor, reviewing the external audit process, overseeing the relationship with the external auditor (including independence and non-audit services).

2. Remuneration Committee

• At least three members (two for smaller companies), all independent NEDs. The chair of the board may be a member (but not chair of the committee) if independent on appointment.
• Responsibilities: Setting the remuneration policy for executive directors and senior management, determining individual remuneration packages (salary, bonus, long-term incentives, pension, benefits), ensuring remuneration is aligned with strategy and linked to long-term performance.
• Executive directors should not set their own pay — this is a key governance principle.

3. Nomination Committee

• Led by the chair of the board (or an independent NED). Majority of members should be independent NEDs.
• Responsibilities: Leading the process for board appointments, evaluating the balance of skills, experience, knowledge, and diversity on the board, making recommendations for appointments, succession planning for directors and senior management.