Business vehicles
What are the main forms of business vehicle used in England? What are the advantages and disadvantages of each vehicle?
What are the main forms of business vehicle used in England? What are the advantages and disadvantages of each vehicle?
Public companies are subject to greater regulation than private companies. Public companies can raise capital by offering shares to the public, but private companies cannot. Otherwise, the two types of company are similar.
Private companies are by far the most common form of business vehicle used.
The main advantages of a limited company are that:
• Shareholders have no liability for the company’s debts above the amount payable to the company when the shares are issued (nominal value).
• Transfer of ownership is easily effected by sale of shares.
• Investors are usually more willing to invest in companies because of their familiar capital structure and legal framework.
The main disadvantages are as follows:
• Strict disclosure requirements, including filing accounts and details of directors and shareholders at a public registry. From January 2016, companies must keep a public register of persons with significant control over the company.
• Rigid capital structure and inability to return capital to shareholders without specific procedures.
• Companies pay tax on their profits, and individuals generally pay tax on dividends, resulting in a double tax charge.
LLPs are commonly used for professional advisory businesses and joint ventures. Each member is an agent and can bind the LLP. There must be at least two members of an LLP. Where there is only one member left, the LLP can be compulsorily wound up or struck off the register. After six months, the sole member becomes jointly liable with the LLP for any subsequent debts incurred by the LLP.
The United Kingdom (UK) comprises four nations: England, Scotland, Wales and Northern Ireland. England and Wales form a single legal jurisdiction, and Scotland and Ireland are each separate legal jurisdictions. The legal system of England and Wales is known as English law; this article deals with only English law.
• Members have no liability for the LLP’s debts above the amount of capital they agreed to contribute (which can be zero).
• Very flexible structure, particularly when distributing capital and profits.
• LLPs are normally tax-transparent, so members can generally avoid a double tax charge (see above, Public or private companies limited by shares).
• Strict disclosure requirements, including filing accounts and details of members at a public registry.
• Transferring ownership involves:
o selling the LLP’s business; or
o replacing the members through an agreement between the new member, the old member and the LLP.
General partnerships are often used for professional advisory businesses. Each partner is as agent of the partnership and can bind all the other partners. There must be at least two partners at all times. If there are no longer two or more partners, the partnership will automatically cease to exist.
• No registration or public disclosure requirements (although some partnerships must file accounts).
• Very flexible structure, particularly when distributing capital and profits.
• Partnerships are tax-transparent, so partners can avoid a double tax charge.
• The partners have potentially unlimited liability to creditors for the partnership’s debts, and one partner can incur debts on behalf of the others.
• Transferring ownership is more complicated and involves selling the partnership’s business or replacing the partners.
Other vehicles
Other, less common vehicles (not covered in this article) include:
• Company limited by guarantee (common in not-for-profit businesses).
• Unlimited company (normally used only in certain circumstances to avoid the disclosure of financial information).
• Limited partnership (commonly used for investment funds).
• Open-ended investment company (OEIC) (used for investment funds).
• European company (societas europaea) (very rarely used).
What are the most common options for foreign companies establishing a business presence in England?
The most common approach is to establish a subsidiary or joint venture, as local customers, suppliers and lenders will be familiar with the structure and the overseas company can retain a higher degree of control.
A subsidiary is usually a private company. The subsidiary is a separate legal entity from the overseas company.
The main advantages are:
• The overseas company has complete ownership and ultimate control of the subsidiary business.
• Local businesses and lenders are familiar with the business format.
The main disadvantages are:
• Substantial up-front costs if acquiring an existing company or business.
• Decisions must be taken by the board of the subsidiary, which can add an extra layer of bureaucracy.
A branch is also called a representative office or a UK establishment. It is not a separate legal entity, but is simply an office or presence of the overseas company in the UK.
The main advantages are that:
• It is relatively easy and inexpensive to establish, with minimal registration requirements.
• The overseas company has complete ownership and control of the local business and can take decisions through its own board of directors.
The main disadvantages are that:
• The branch does not have a separate legal personality and, as a result, the parent company is liable for the debts and obligations of the branch.
• Local businesses and lenders may be more hesitant to do business because:
o they may not understand the overseas company’s structure; and/or
o there may be few assets in the UK to provide as security/collateral.
• Major decisions may have to be referred to overseas management, which can take time and result in the loss of opportunities.
• Disclosure requirements are the same as for private companies, including accounts.
A venture with a local partner can be structured through a company or partnership, or simply as a contract with no specific business vehicle.
The main advantages are that:
• The local partner is likely to have good market knowledge and existing contacts with customers, suppliers and lenders, making entry into the UK market easier.
• Local businesses and lenders are familiar with the business format.
The main disadvantages are that:
• The overseas company must hand over a potentially significant degree of control to the local partner.
• There are usually substantial up-front advisory costs (legal, tax, accounting) to set up the joint venture.
• Financing, management, profit-share and exit can involve lengthy negotiations with the joint venture partners.
Appointing a local agent, distributor or franchisee
An agent acts on behalf and can bind the overseas company. A distributor merely buys products from the overseas company and sells them in the UK. A franchisee normally acts like a distributor but uses the overseas company’s name and logos.
The main advantages are that:
• These structures are likely to involve less up-front advisory costs than a joint venture.
• There is generally no requirement to publish accounts or other corporate details.
• The overseas company can use the partner’s local knowledge and reputation.
The main disadvantages are that:
• The overseas company relies heavily on the local agent, distributor or franchisee and has no direct control.
• The arrangement is purely contractual. The only way of influencing the arrangement is by enforcing the agency/distribution/franchise contract.
• European law provides certain protective rights for commercial agents that may override the express provisions of the contract.
How can an overseas company trade directly in England?
Overseas companies can trade directly through a branch or representative office, or indirectly through an agent, distributor or franchisee.
A branch or representative office must be registered as a UK establishment. A fee is payable. Disclosure requirements for UK establishments are broadly equivalent to those for UK companies. The overseas company must file publicly, among other things:
• A copy of its constitution (and any changes to it).
• Details of its directors.
• Details of any persons authorised to represent it in the UK.
• Certain details of the proposed UK establishment, including its name, address and local representatives.
However, the overseas company does not have to disclose details of its shareholders.
In addition, the overseas company must file annual accounts that comply with minimum UK requirements (even if it is not required to disclose accounts in its home country). The accounts must relate to the entire overseas company and not just the UK establishment. The only exception is that an overseas company incorporated in the European Economic Area (EEA) and not required to deliver accounts by its parent law does not have to file accounts in the UK. Special rules apply to credit and financial institutions.
Once registered, the UK establishment can enter into contracts on behalf of the overseas company if it has the authority to do so.
In addition, English law applies to the UK establishment’s operations in relation to matters such as employment, health and safety, owning real estate, consumer protection and environmental protection. Tax is a complex area on which advice should be sought.