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
