LAW OF ORGANIZATIONS
WS 1 - MANUAL – WS 1 Ch 1 – THE DIFFERENT TYPES OF BUSINESS
1. Types of business
1.1 Introduction
1.2 Incorporated and Unincorporated Businesses
An incorporated business exists as a separate legal entity from its owners and managers.
• It is formed when the individuals who wish to set it up comply with various legal
requirements in order to incorporate their business.
• Feature: owners of incorporated businesses are generally not liable for business debts.
• The most common form of incorporated business is the limited company
Unincorporated business are businesses run by individuals who have not set up a separate
legal entity to run the business and who have full personal liability for the debts of the
business.
Main types of business medium:
• unincorporated businesses
o sole traders,
o partnerships and
o limited partnerships
• incorporated businesses.
1.3 Sole Traders
A sole trader is someone who runs an unincorporated business on their own as a self
employed person.
• Most common form of business medium in UK.
• A sole trader can operate in any trade or profession. Professionals who operate as a sole
trader are known as sole practitioners (eg: solicitors).
• Sole trader owns the business and then can have employees.
• Sole traders earn income from the money received from customers or clients and keep
all the profit, once they have paid their expenses. They pay income tax as a self
employed person.
• A sole trader is personally liable for all of the debts of the business: his business assets
and personal assets are all treated the same for legal purposes
o → there is no limit to the sole trader’s liability = the concept of unlimited
liability. When the sole trader retires or dies, the business ceases, although the
individual assets or even the business itself can be sold if a buyer can be found.
• There is no dedicated piece of legislation governing businesses run by a sole trader.
• The sole trader’s activities will be governed by the law, but it will be in various pieces
of legislation which can apply to individuals or businesses generally, for example, tax
legislation or sale of goods legislation.
1.4 Partnerships
A partnership exists when two or more people run and own a business together.
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, • It is formed when the definition of ‘partnership’ set out in the Partnership Act 1890
(‘PA 1890’) is met:
o a partnership is formed when two or more people are ‘carrying on a business
in common with a view of profit’.
• A partnership is an unincorporated business but differs from a sole trader because it
involves more than one person running the business.
• Partnerships can carry on any trade or any profession
• The term ‘general partnership’ can be used to distinguish these partnerships from
limited partnerships and limited liability partnerships
• The PA 1890 provides a default partnership agreement for the partners. They can
agree to disapply some of its provisions but if they do not, then it will apply.
• A partnership is not a separate legal entity.
• ‘Partnership assets’ = assets which are used in the partnership business, but the
partnership itself does not actually own the assets. They are owned by the partners
• Partners are personally liable for all of the debts of the partnership (like sole traders).
Their personal assets are at risk if there is not enough money in the business to pay
creditors.
• The partners will divide the profits or losses.
• partners are not employees; they own the business: they can work there or they can be
“sleeping partners” (not involved in day-to-day matters, only in making fundamental
decisions about the business.).
1.5 Limited Partnerships
Not widely recognized. An LP is similar to a partnership in that there must be at least one
general partner who has unlimited liability for the partnership debts. Unlike a normal
partnership, an LP is permitted to have a limited partner whose liability is limited to the
amount they initially invested in the business. This limited liability is conditional.
• The limited partner must not:
o control or manage the LP;
o have the power to take binding decisions on behalf of the LP; or
o remove their contribution to the LP for as long as it is in business.
• If the limited partner breaches any of these rules then they will lose the protection of
limited liability and be treated as a general partner with unlimited liability.
• Formation of LPs is governed by Limited Partnerships Act 1907 (LPA 1907)
• Originally created to encourage entrepreneurs to set up businesses by reducing some of
the effects of unlimited liability which may arise from an ordinary partnership.
Overtime it became the business format of choice, as it offered even greater protection.
• Unlike ordinary partnerships, LPs must be registered with the Registrar of Companies,
who also acts as the Registrar of LPs, before they can start trading.
1.6 Companies
Companies can be private or public, and can be limited by shares or by guarantee = several
types, here focus is on private companies limited by shares and unlisted public companies
limited by shares.
1.6.1 Private companies limited by shares
A company in the UK is formed by registering certain documents with the Registrar of
Companies in accordance with the requirements of the Companies Act 2006 (‘CA 2006’).
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,• Sole traders and partners can begin trading straight away, and may not even be aware
that their business fits the definition of sole trader or partnership DIFFERENT for
companies need to take steps to set up a company before it can start trading.
• Businesses run as companies perform a wide range of economic activities.
• Main advantage of a company: company has a separate legal personality.
o = the people who own and run the company are separate from the company
itself. If somebody wishes to sue a company, the defendant will be the company
itself, rather than the individuals who own and run it.
o The individuals who own the shares in the company will not usually be liable
for its debts – their liability is limited to the amount they paid or agreed to pay
for their shares.
o This huge benefit enables companies to grow → Take calculated risks to
expand: directors of companies can take more risks because most of the time
their personal assets are safe from creditors.
• Separate legal personality
o Salomon v A Salomon and Co Ltd [1897] AC 22
▪ Confirmed full extent of the concept of separate legal personality.
▪ Facts: The claimant argued that because one person controlled the
company and was entitled to all the benefits of it, the company did not
exist as a separate legal person and its principal shareholder and director
could be held personally liable for the company’s debts.
▪ Held: House of Lords rejected this, holding that as long as a company is
legally incorporated, it must be treated like any other independent
person with rights and liabilities: using a company to manage risk and
avoid liability for debts is acceptable.
o Numerous cases since Salomon where the claimant has tried to pierce the
corporate veil (= look behind the company and impose liability on the
individual(s) who own or run the company). → most recent: Prest v Petrodel
Resources Limited and others [2013] UKSC 34
▪ Supreme Court decided that the corporate veil could only be pierced
when a person is under an existing legal obligation or liability or is
subject to an existing legal restriction which he deliberately evades, or
whose enforcement he deliberately frustrates, by interposing a company
under his control. Even then, the corporate veil can only be pierced so
as to deprive the company or its controller of the advantage that they
would otherwise have obtained by the company’s separate legal
personality.
o Any decisions where the court has ignored separate legal personality are rare
and generally considered to be very specific to their facts.
• Decision-making
o the company is a legal person in its own right = it needs humans to make
decisions on its behalf. → made either by the company’s directors or by the
company’s shareholders (or by someone to whom the directors have delegated
certain decisions).
▪ The directors of a company run the company.
▪ The shareholders of the company are the individuals who provide the
money (in return for shares) to allow the company to operate.
▪ Often they are the same people, but when making day-to-day decisions
they act as directors BUT when make decisions reserved only to
shareholders they act as shareholders.
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, ▪ Shareholders tend to get involved only in the more important decisions
affecting the company.
▪ → This division of responsibility, and the fact that directors collectively
make decisions at board meetings (or in writing) whereas shareholders
make decisions at general meetings (or in writing), introduce a degree
of formality which is usually not present in partnerships.
▪ NB: The CA 2006 uses the term ‘member’ instead of shareholder,
because it can apply equally to companies limited by guarantee and
companies limited by shares.
1.6.2 Public companies limited by shares
PLC is a company limited by shares which has complied with the requirements of the CA
2006 to enable it to be registered as a plc.
• For a company to be a public company:
o the constitution, which is the set of rules which govern the company, must state that
it is a public company;
o the words ‘public limited company’ or the abbreviation ‘plc’ (or the Welsh
equivalent, for a Welsh company) must be included at the end of the company’s
name; and
o the company’s owners must invest a specified minimum amount of money for use
by the company: the allotted share capital of the company must be at least the
‘authorised minimum’, currently £50,000 (ss 761 and 763 CA 2006). Each allotted
share must also be paid up to at least a quarter of its nominal value, plus the whole
of any premium on it (s 586 CA 2006).
• Why operate as a plc:
o Main advantage: they are more prestigious and can raise money by offering
shares to the public, unlike private companies, which are prohibited from doing
so (s 755 CA 2006)
▪ Private companies can instead offer their shares to a person already
connected with the company or certain other targeted individuals rather
than to the public or a section of the public (s 756 CA 2006)
o Public companies can apply to join the stock market in the UK (but not many
have). It allows companies to raise large sums of money by enabling investors
to buy the company’s shares quickly and easily. It is not possible to start a
company as a publicly traded company; this is only an option if the business
reaches a certain size, reputation or level of growth.
o Generally, private companies are subject to less regulation than public
companies because they do not offer shares to the public at large; instead, they
raise finance either from people who already know the company or specialist
investors who understand the risks involved. DIFFERENT Publicly traded
companies are more regulated than unlisted public companies and private
companies to protect the public
• How to become a public company
o Companies can be registered as a public company on original incorporation, or
they can register as a private company and then re-register as a public company.
1.7 Limited Liability Partnerships
A limited liability partnership (LLP) is formed under the Limited Liability Partnerships Act
2000 (‘LLPA 2000’). LLP is similar to a cross between a partnership and a limited company:
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