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UCL 2022-23 Lecture notes: Business forms and company formation £7.49
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UCL 2022-23 Lecture notes: Business forms and company formation
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Includes a list of secondary sources on the nature of the firm and company formation. Covers different views of the firm as organising economic activity, forms of business enterprise, company formation (LLPs, limited by guarantee, limited by shares, public vs. private companies), and more.

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  • June 6, 2023
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  • 2022/2023
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2. Business Forms and Company Formation
Readings:
- Pettet’s Company Law, fifth edition, chapter 1
- 1. Coordinating Econ Activity:
- Adolf A. Berle & Gardiner C. Means, The Modern Corporation & Private Property (Transaction
Publishers, 1991), Book I Chapter I ‘Property in Transition,’ pp 3-17.
- R. H. Coase, 'The Nature of the Firm' (1937) 4(16) Economica New Series 386.
- H. Hansmann and R Kraakman, The Essential Role of Organizational Law, (2000-2001) 110 Yale
Law Journal 387-400.
- Adam Smith, Book 1 Chapters I and II ‘Of the Division of Labour’, The Wealth of Nations, available
here: http://www.econlib.org/library/Smith/smWN1.html - B.I, Ch.1, Of the Division of Labor
- 2. Forms of business enterprise
- Vanessa Finch and Judith Freedman, ‘The Limited Liability Partnership: Pick and Mix or Mix-Up?’
[2002] Journal of Business Law 475
- 4. Company formation
- Davies and Worthington, Gower & Davies Principles of Modern Company Law (11th edn, Sweet &
Maxwell 2021) pp 3-16 (excluding discussion of community interest companies, which we do not
cover on this course) and 76-87.
- 5. Impact of Corp Hierarchy on Indiv Decision-making
- Stanley Milgram, Obedience to Authority: An Experimental View, (first published Tavistock
Publications 1974, rev edn, Pinter & Martin 2010), chapter 11


1. Coordinating economic activity: the rationale for business associations
● “Island of conscious power” within the noise of the market (Coase, The Nature of the
Firm*)
○ Basically the alternative is the market system: you buy, sell, find resources -
chaotic, but also responding and moving.
○ The company creates an island of conscious power with vertical decision-
making: those at the top can tell people what to do. Creates efficiency and
addresses the chaos of the market.
● Vertical decision making authority/hierarchy
○ Efficiency (Coase, Arrow, Bainbridge)
● Management of transaction costs
○ Reduced friction (Coase)
○ Lack of liability → reduced costs in monitoring the board, conducting
due diligence
● Division of labour
○ Specialisation and efficiency (Smith)
● Separation of ownership and control
○ Specialisation, but with agency costs (Berle + Means)
● Isolation of risk and asset partitioning
○ Asset partitionoing and limited liability (Kraakman et al)

2. Forms of business enterprise (other than limited companies)

2a) Sole Trader - 1 person
● Individual (directly contracting with own customer), no separate personality
● Unlimited liability

, ● Alignment of ownership + control: no agency concerns
● Ease of operation (fewer risk concerns)
● Bc of all the above, → Few regulatory consequences
● Lack of disclosure

2b) General Partnership
● Partnership Act 1890
● No separate personality (the ‘firm’)
● No limited liability
● Arises between ‘persons carrying on a business in common with a view of profit.’ (s 1,
PA 1890)
● Automatically arises – no need for registration

Agency and liability
● Agency: Each partner is an agent of the other, as well as of the partnership itself
○ Requires significant trust
○ If ur a partner in a general partnership, potentially a huge liability
● Partners are also bound by the acts of each other (s 6, PA 1890)
● As such, the firm is liable for partner actions (s 10, PA 1890)
● Partners are joint and severally liable for firm liabilities (s 12, PA 1890)
○ Activities of a partnership are governed by the PA 1890

Profits and losses
● Equal profit/loss share (s 24, PA 1890) - close relationship
● Determination of the share:
○ On fixed term or at will (s 32, PA 1890)
○ Death or bankruptcy of a partner (s 33, PA 1890)
● Consequences
○ Low regulatory burden
○ Privacy

2c) Limited Partnership
● No separate personality, but limited liability to a degree
● Governed by the Limited Partnerships Act 1907
● Registration required (or a general partnership) (s 5, LPA 1907)

Limited and general partners (s 4(2) LPA 1907)
● General partner: responsible for the management of a business, has unlimited liability
● Limited partner: has limited liability. Limited partnership allows for a “secret
partner” → enjoys limited liability provided it does not undertake
administrative/managerial functions re: the company itself. At that point, you
lose limited status
● No dissolution on death or bankruptcy of limited partner (s 6, LPA 1907)
● Specialist venture capital vehicle

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