Four friends are planning to start a hobby supply business. They have decided to contribute £12,000 each and will also work full time in the business. They would like to have an equal say in the management of the business while keeping things as informal as possible. They don't want to risk any personal assets beyond their contributions, and they prefer not to pay corporation tax.
The question is, which type of business entity would be the most suitable for their needs?
Four friends are planning to start a hobby supply business. They have decided to contribute £12,000 each and will also work full time in the business. They would like to have an equal say in the management of the business while keeping things as informal as possible. They don't want to risk any personal assets beyond their contributions, and they prefer not to pay corporation tax.
The question is, which type of business entity would be the most suitable for their needs?
A limited liability partnership.
(C) The best option for the friends is to form a limited liability partnership (LLP). An LLP is managed like a partnership, but it is considered a separate entity from the members. This means that the members can manage the business, but they are not responsible for any debts of the LLP beyond what they have contributed. Even though an LLP is a separate entity, it is taxed like a partnership, which means it does not pay corporation tax, and each member is liable to pay income tax on their share of profits.
(A) and (D) are incorrect as a company pays corporation tax and requires much more formality to run than an LLP. A company must hold formal meetings, take formal votes, have a board of directors, etc.
(B) is not a good choice because although it avoids formality and allows each partner to participate in management, each partner is also liable for the obligations of the partnership, which goes against the friends' objective of not risking their personal assets.
(E) is not an ideal choice either as in a limited partnership, at least one partner (the general partner) is personally responsible for the partnership's debts. The liability of the members in the case of a private company limited by shares, a public limited company, and a limited liability partnership is limited to their capital contribution. The liability of the members of a company limited by guarantee is limited.