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1. Distinctions between Partnership Business (unincorporated) and Limited Company (incorporated)?
2. Differences between an Employee and Independent Contractor?
1. Distinctions between Partnership Business (unincorporated) and Limited Company (incorporated)
While making decision as to which type of business would be best suited individuals must take into consideration the following;
There are two broad forms of business. These are unincorporated forms and incorporated forms. Unincorporated form includes,
- Sole Trader
- Unincorporated Association
- Limited Partnership
On the other hand, incorporated legal forms include the following;
- Limited Company
- Limited Liability Partnership(LLP)
- Community Interest Company(CIC)
- Charitable Incorporated Organization(CIO)
- Industrial and Provident Society
The prime characteristic of unincorporated legal forms of business is that they do not have separate legal entity. Here I would discuss how business may be conducted as unincorporated partnership under the heads of partnership and limited partnership (Department for Business Innovation and Skills, 2011).
The distinctions may be summarized as follows;
The best part about conducting business as partnership is that the complexities involved are far less as compared to other forms of business. A partnership may come into existence if two or more persons decide to carry on a business and thereby earn profits. Law does not mandate entering into a partnership agreement as a sine qua non for carrying on a partnership business. But it is always advisable to enter into an agreement laying down all rights and obligations as well as procedure of conduct of business so as to avoid confusion and bring clarity. Partnership agreement must state the amount of capital contributed by each of the partners and the ratio in which the profits would be shared amongst the partners.
Since partnership is not a separate legal entity all the risks, costs and responsibilities associated with the running of the business are borne by the partners. In partnership each partner is the agent as well as principal of the other partners.
As partnership business is not incorporated the partners raise the capital and also funds for the business themselves, they cannot raise funds from the public by issuing shares as is the case with limited companies(Enterprise Europe Network, 2010).
The partners pay shares depending on the share of their individual profits. He partners are also treated as self employed individuals.
Limited partnership is not the same as Limited Liability Partnership. In case of limited partnership there are two categories of partners; limited partners and general partners. This type of partnership is almost similar to the above mentioned form of partnership business, the only difference being that the limited partners have limited liability and such liability is limited to the extent of their investment in the business (Mallender and Rayson, 2005). They may not as well be involved in the management of the business. In the United Kingdom limited partnership business has to be registered with the Companies House and do not come into existence unless such registration has taken place. If any changes take place in the business the same also has to be registered with the Companies House(Moore, 2013).
Amongst the various forms of incorporated business I would discuss about limited company.
This is the most commonly used form of incorporated business. These companies have a separate legal entity. This means that these companies have an independent existence distinct from its members. It can act on its own behalf.
Upon being incorporate a company ought to have these two constitutional documents;
- A Memorandum is a document which contains records as to the initial subscribers of the company. This document of the company remains intact and cannot be altered under any circumstance.
- Articles of Association which are generally referred to as the Articles. The Articles of Association are in fact a contract between the company and the members of the company. It provides the rules which would bind the company and the members. It includes the decision making process, control as well as ownership. Under the Companies Act, 2006 the companies are at liberty to set forth such rules in the Articles of Association which suits the very nature of the company. All such rules would be binding unless they are contrary to the law.
The members of the limited company are its owners, i.e., the ones who have made investment in the business. The liability of the members is also limited and same reflects in the name itself. Limited liability means that the liability of the members of the company is limited and would not under any circumstance extend to their personal assets. The personal assets of the members are safe. The creditors are entitled to settle their debts only out of the assets of the company(Mills and Reeve, 2013).
A limited company may be limited by shares. Maximum companies adopt this structure. All the members have at least one share in the company. The holders of shares are known as share holders. The share holders have limited liability which means that they are liable only to the extent of their investment.
A company may also be limited by guarantee. In type the members of the company make an undertaking to pay a certain sum of money in case the company goes into liquidation. These types of companies acquire finance basically from loans(MacIntyre, n.d.).
The regulatory necessities for limited liability companies are far strict as compared to unincorporated forms of conducting business. The companies have to be registered with the Companies House and in case any change takes place in the company the same has to be notified to the Companies House.
If the income of any such company is taxable it must notify the same to the HMRC. These companies have to pay the Corporation Tax to the HMRC.
A company which is limited by shares may be a public limited company (Plc) or a private limited company (Ltd). The prime difference between these types of companies is that Public Limited Companies are entitled to offer shares for ale to the public. Public Limited Companies start off as Private Limited Companies and later on become Public Limited Companies for the sake of acquiring finance (Moore, 2012). It is mandatory for a Public Limited Company to have at least two directors and one company secretary also issues share capital of 50,000 pounds. A Public Limited Company may as well become a Listed Company. It might become so by floating its shares on a stock exchange(Needle, 2010).
Now I would also lay down the differences between the two so that it is easier for the three friends to make up their minds.
The main difference between a partnership and limited company is that the liability of the members of a company is limited whereas the liability of the members of a partnership is unlimited. This is the major drawback of partnership business. However, the liability in case of limited partnership is limited.
Another difference exits between the two as regards taxation. A company is taxed on its profits and the directors of a company are taxed on their remuneration. But in case of partnership, it is not taxed on its own as it does not have a separate legal entity like a company. In case of partnership the partners are taxed on the basis of the profits earned by them(UK Starting Business (Incorporating) in the UK Guide Volume 1 Strategic, Practical Information and Basic Regulations, 2010).
The conduct of a partnership business is governed by a deed of partnership. It puts forth the rules concerning the maintenance of capital, the way the profits are to be shared amongst the partners also the rules and regulations governing the admission and retirement of partners from the partnership business. Whereas in case of limited company, the rules and regulations governing the working of the company are contained in the Memorandum of Association and Articles of Association of the company(Companylawclub.co.uk, 2013).
Thus we may conclude our discussion by stating that by taking into consideration the above mentioned points it would be easy for the three friends to make up their minds as to which form of business they should start.
2. Differences between an Employee and Independent Contractor
Many a times, independent contractor and employees work together in an organization; in fact they may as well do similar work. But there exist very important differences between the two.
Independent contractors work for themselves. An independent contractor is also referred to as freelancer, self employed, consultant etc. Generally, an independent contractor works independently and is not bound by the company’s rules and regulations. An independent contractor is much more than a label. After signing an agreement of independent contractor a person may be an employee. Independent contractors earn their living on their own without relying on an employer(Dibben, Klerck and Wood, 2011).
On the other hand an employee is an individual who works for an employer. His actions as regards the employment are controlled by the employer as in what work has to be done and how it has to be done. The definition of an employee as laid down under the Common Law is that an independent contractor is an individual who performs duties under the control of an employer. An employer has the right to terminate the employee. The employer provides the employee with tools to work with and also the place of work(Amy, 2013). The status of the employee is governed by the substance of the relationship and not the label.
The significant distinctions between the two are as follows;
- It is mandatory for an employee to comply with the instructions of the employer as to where, when and how to perform his/ her duties. The instructions may be contained in written manuals and may as well be oral.
- An independent contractor may be hired to provide services or goods but does the work ads per his convenience.
- Generally training is provided to an employee by the experienced staff of the organization. The significance of the training is that work should be performed in a specific manner.
- But an independent contractor works as per his/ her own methods. Training is not rendered to an independent contractor.
- The services rendered by an independent contractor are integrated into the operations of the business indicating that control is being exercised. Integration of service into the operations of the business is said to take place when the success of the business is largely due to such service and is not possible to separate the service form the operations of the business.
- On the other hand the services rendered by an independent contractor are not integrated into the operations of business of the organization and have the potential to stand alone.
- In case of employment an employer is expected to perform the job personally. The employer controls as to who does the job, how the job has to be done as well as the methods adopted to complete the job.
- The purpose behind the hiring of an independent contractor is to render a particular service. An independent contractor is generally hired for his expertise. The employer is not concerned as to who does the work. The only concern of the employer is the accomplishment of the end result.
- When assistants are being hired an employee generally does not have a say. The employer decides who has to be hired as an assistant for an employee. This aspect indicates control.
- On the other hand, an independent contractor hires, supervises and also pays the workers who work under him. He may exercise control over his assistants. An independent contractor is also held responsible for the attainment of a particular end result.
- The relationship between an employee and employer is a continuing one. Even when services are rendered seasonally, on a part time basis or over a short duration of time.
- The relationship between an employer and independent contractor is not a continuing one. The relationship generally ends after the completion of the designated work unless a new contract is entered into.
- An employee has definite working hours and he/ she cannot do outside work during the working hours. Whereas an independent contractor has no fixed working hours. It is the right of the independent contractor to decide his own working hours.
- Payment is provided to an employee on an hourly, daily, weekly or monthly basis. On the other hand, payment to an independent contractor is made either in a lump sum or on the basis of commission.
- As a consequence of the services rendered an employee does not generally get a share of the profit or does not have to bear losses. An independent contractor realizes profit as well as suffers loss as a consequence of the performance of the job.
- An employee generally works for one particular employer but an independent contractor has the liberty to work for as many employers as he wishes to.
- An employee has the liberty to terminate the employment at any time by giving a notice whereas an independent contractor is appointed to perform a particular job and is liable for its successful completion. In case an independent contractor fails to complete the designated job legal action may be initiated against him.
- An employee is protected at workplace by virtue of the workplace safety laws as well as employee anti discrimination laws. Provisions of such laws are not applicable to an independent contractor.
- An employee is entitled to receive benefits of employment from the employer, like, disability and health insurance. Such emoluments are not available to an independent contractor.
- An employee does not have to invest or incur costs in the business but an independent contractor incurs costs for the accomplishment of the job.
- The salary paid to an employee is the net salary after the deduction of Medicare tax, income tax and social security tax. The payment to an independent contractor is not subjected to any such withholding and he/ she pays the taxes himself/ herself.
- If an employee has been terminated then he/ she is eligible to unemployment compensation. Such unemployment compensation is never paid to an independent contractor.
- An employee generally works in the premises of the employer. This aspect proves control of the employer over the employee. However, in case of offsite work con troll is exercised by the employer. Generally an independent contractor performs work on or off the employer’s business premises without control being exercised by the employer over him/ her.
- Generally an employer reimburses an employee for the expenses incurred by him/ her for the purpose of the business of the organization as well as travelling and other expenses. But in independent contractor is paid on the basis of the job performed and has to bear all expenses excluding the ones which have been expressly specified in the contract .
Thus we conclude our discussion by stating that various differences exist between an employee and an independent contractor and the both have entirely different characteristics from each other.
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