Notes on the reasons for forming a company. The three main types of business organisations are analysed and compared. Furthermore, the advantages and disadvantages of each business medium are also discussed in the notes.
-Corporate governance is the way in which companies are directed and controlled
Forms Of Business Organisation
-business organisations are about the effective combination of 3 things: (1) capital (money),
so does the business organisation facilitate investment in the business, (2) no business
venture is guaranteed to succeed so does the form of business organisation mitigate or
minimise the risk involved in the venture, (3) disagreement, so does the form of business
organisation provide a clear organisational structure?
The Sole Trader (unlimited liability)
-a one-person operation where someone goes into business on their own (so no legal
requirements)
-provide the capital with personal savings or a bank loan (like Abu did for the MKG building)
-sole traders’ contract in their own name and have personal liability for all debts of the
business (so in law terms a sole trader has unlimited liability as the business is not legally
registered as a company)
-disadvantage is that legally there is no distinction between sole trader’s personal and
business assets so if business goes badly, creditors come for their assets (home or car)
-sole trader is one person so little risk of disagreement therefore no need for formal
organisational structure
-sole trader is adequate for a single person with capital but unsuitable for larger-scale
investments
The Partnership
-sole traders business doing really wellinvestors interested and want to provide capital to
expand businesssole trader agrees to a more complex form of business organisation to
facilitate expansion of businessa partnership
-types of partnership: general, limited, limited liability (LLP)
, -Partnership Act [1890] s1 defines a partnership as “the relationship which subsists between
persons carrying on a business in common with a view of profit”
-a partnership can form by oral agreement, it can be inferred by contact, or it can be a
formally written agreement specifying terms and conditions of the partnership
-no formal process of becoming partners so if you behave like partners, the law will deem
you are partners (Khan v Miah [2000])
-assets owned directly by partners unlike ‘a company’
-the Partnership Act [1890] will govern a partnership unless a partnership expressly excludes
the Act
-issue for those who don’t realise they are partners as under the Act each partner is entitled
to: participate in management, equal share of profit, an indemnity (protection against a
financial loss) in terms of liabilities, not to be expelled by other partner
-partnership will end when one partner dies
-some (smart) people that know what they are getting into, modify the Partnership Act and
draft a complex partnership agreement (law firms have a complex partnership agreement
governing their operation)
-limited liability cannot be achieved through a general partnership because under the
Partnership Act, each partner is jointly liable for i.e., debts
-so, if one partner runs away with the client’s money, the other partner is also legally
responsible for the WHOLE debt
-however, there are 2 types of partnerships that allow the limitation of liability: (1) first type
created by the Limited Partnership Act [1907] which allows certain partners to have full
limited liability as they were a ‘sleeping’ partner who played no part in the running of the
partnership. This partnership is popular because it is used a lot in the investment fund
industry, which has led to the amendment of the 1907 Act to specifically facilitate its use as
an investment vehicle (def. product used by investors to gain positive returns) = The
Legislative Reform (Private Fund Limited Partnerships) Order 2017)
(2) second type created by the Limited Liability Partnerships Act [2000] and allows partners
to utilise corporate personality to achieve limited liability up to a point. Allows limited
liability for general trading debts but not for a negligent act they have committed
themselves. This partnership (LLP) allows big professional partnerships i.e., law and
accountancy firms, to achieve a form of protection for partners that were not involved in a
negligent act
-a partnership does facilitate investment as partners can pool their funds (def. combine
money for shared use) but the risk is larger compared to shareholders in an LLP (although it
includes limited liability) as they ALL share the liability
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