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19th December 2013
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Which of the following most accurately describes the problem?

In a competitive and highly regulated market, choosing the right business structure is an essential decision for a haulage operation By Guy Jackson and Vikki Woodfine

IT IS IMPORTANT for any haulier to understand the differences between limited companies, partnerships and sole traders, and to know the legal advantages and disadvantages of these different businesses.

In terms of 0-licensing, one of the main differences between the different entities is in raising finance to provide evidence of your financial standing.

Sole traders and partnerships can look at using statutory declarations linking family funds to establish appropriate financial standing, while limited companies might simply use audited annual accounts where they have a turnover of more than £5.6m. Private limited company

A private limited company is a separate legal entity, distinct from the shareholders/owners who own it and the directors who run it. Companies are governed by detailed legislation (the Companies Act 2006) that 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 a public limited company does. The key documents that govern how a company is run are its articles of association and (if there is one) a

shareholders' agreement.While 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.

A key advantage of being a company is that there is an extra layer of protection — the company — between the 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 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 fuel costs, greater foreign competition and EU legislation, which means that protection of personal wealth has some real attractions.

There can also 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 tax rates placed on sole traders or partnerships, which can reach 40%.

There is a lower rate of tax on dividends and it might be possible to extract profit without paying the higher rate of tax. In the case of private limited companies, the directors are also usually the main shareholders, 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. It is easier to raise finance through the sale of shares

and to raise debt than with some other forms of business structure, although personal guarantees might 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, can result in the directors incurring personal liability, such as paying damages to the company, for example.

Directors might 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 ongoing statutory filing requirements. •

IP For more information contact Guy Jackson, partner, corporate at DVVF on 0113 261 6586 or Vikki Woodfine, head of road haulage and logistics at DWF on 0161 603 5060.

Sole trader

• A sole trader is an individual who operates his business alone.

• As a business vehicle the sole trader has no separate legal status to the trader.

• There are no constitutional documents that govern how a sole trader operates.

• A haulier operating as a sole trader has maximum flexibility to operate their business because there is no statutory framework in which the sole trader must operate.

• As the sole trader works alone he or she is free to make any and all decisions as they see fit.

• As with a partnership, there are no set-up costs and minimal ongoing administrative costs.

• There are no statutory requirements to file information with Companies House, or any other body, which means the operator maintains complete privacy about the way the business is run.

• The major disadvantage of operating as a sole trader is that a haulier has unlimited personal liability for all the debts and obligations of the business, and any criminal liability that is incurred in the course of business falls solely to the haulier.

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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 to form a partnership, and the partners do not have to have any intention of forming a partnership.

A partnership is not a separate legal entity from the partners. As a partnership, the business owners share the profit, 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 also present 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 to using a partnership in terms of cost, both to the partnership as a whole and the partners as individuals.

It costs nothing to set up a partnership and, unlike some other entities, 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 profit is 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 if the partnership and 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 and increasingly regulated market, the traditional partnership might not be the most appropriate business structure, given that the law governing partnerships (the Partnership Act 1890) is more than 100 years old. As such the default provisions that might apply to the partnership such as, for example, remuneration or decision-making, could be outdated.

Besides the traditional partnership, there are also limited partnerships and limited liability partnerships, which might 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.


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