1. Corporate Personality, Limited Liability
a) Forms of business organisation
- In determining how a business activity should be carried out it, be it
through a company, or through a sole trader or partnership depends
solely on the circumstances of situation. The many factors which
determine which vehicle is chosen can include:
- Facilitating investment
- Minimising risk
- Structured most effectively for tax
- Most flexible to change, employees, consumers,
suppliers
- Likely success of product/service etc, market
reaction
i) Sole Traders
- ADVANTAGE62% of all private business. Where individual goes into
business in unincorporated form, requiring no legal fees or set up etc
because simplicity does not need an organisational structure. Offers
individual entire control of company.
- DISADVANTAGENot good for raising capital, cannot minimise tax
liability, can only really operate on small scale, no perpetuity for the
business (Freedman study-28% unincorporated associations believe
non-perpetuity is bad thing) AND UNLIMITED LIABILITY for the trader as
no difference between sole trading business and individual themselves.
ii) Partnerships
- 10% of all private business. Partnership Act 1890 Section 1- sets it out
as a relationship which subsists between persons carrying on a
business in common with a view to a profit. NOT a separate legal entity
to individuals.
- ADVANTAGESnot subject to public disclosure,. No limit on amount of
members in partnerships, and partnership rules and articles can be
changed. (section 24 PA 1890 on profit sharing and management
frequently changed)
- DISADVANTAGESpartnership cannot own legal property or enter
contracts etc, it is done by individual partners who hold it on trust for
the others…Partners are all joint and severally liable for the actions of
other partners…alteration of ownership/partnership is significant
matter which must be addressed by all partners (subject to rules).
UNLIMITED LIABILITY but can offer limited liability indirectly through
, “entity shielding” whereby creditors cannot get assets partners holding
on trust
- Limited Partnerships—Partnership Act 1907 – must have one general
partner who has unlimited liability, the rest have limited liability
according to their contribution and NOT LIABLE for debts and
obligations of firm beyond that amount.
- Unlike normal partnerships, limited partners must be sleeper partners
and cannot participate in management of firm.
- Limited Liability Partnerships – Limited Liability Partnerships Act 2000-
Section 1(2) – “A LLP is a body corporate which is formed by being
corporated under this Act” Unlike above IT IS separate legal
personality, and so governed by regulations associated with Company
Act 2006
- FACTORS- has organisational flexibility of company whilst retaining tax
status of partnership (HMRC view it as transparent; pierce company
and treat profits as if earned by members themselves)…members have
limited liability and no personal liability for actions of LLP or other
members unless personally negligent etc
iii) The Company
- Salomon v Salomon (1897) , S7 CA 2006, EC Directive 89/667-
companies can be formed by a single member. Registered companies
make up 28% of private businesses.
- Governed predominantly by Companies Act 2006- Steering Group
which reviewed it said need a statutory framework which “Provides
necessary safeguards to allow people to deal with and invest in
companies with confidence”
- Many types of company:
- Limited by Guarantee
- Unlimited Company
- Limited by Shares (Ltd/PLC quoted and
unquoted)
- Companies Limited by guarantee whereby articles of association the
members guarantee that in event of liquidation they will pay a
subscribed amount (usually equal to their contribution). Used widely by
not-for-profits as very easy to join and leave and do NOT need to file
with companies house
- DISADVANTAGES- cannot raise finance so not suitable if wish to raise a
profit
- NOTE—Charities Act 2006+2011- new corporate form of CIO now
seems more advantageous for not-for-profits as only governed by
Charities Act not CA 2006
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