Summarises the key areas of UK Business Law in detailing, outlining the topics that students will need foundational knowledge on most and explaining the principles and their relevant case law/legislation in easy-to-follow tables.
Law of Organisations Revision
Unit 1: Business Structures
Identify the main forms of business medium and advise a client on
the suitability of each.
Sole trader Personally liable for all debts of the business as the individual’s
business and personal assets are treated as being the same.
Claimants in cases against sole traders can receive compensation
paid from the trader’s personal bank account.
Sole traders have unlimited liability. The business ceases when the
trader retires or dies, and the individual assets or the business
itself can be sold if a buyer can be found.
Sole traders do not have their own dedicated legislation, instead
they are governed by various pieces of legislation that govern
business or individuals in general (sale of goods legislation, tax
legislation, etc).
Partnership Partnerships are formed under section 1 of the Partnership Act
1890 when two or more people “carry on business in common with
a view of profit”.
Under the Partnership Act 1890, partners can enter into
agreements under the Act’s default agreement. However, many
partners create their own partnership agreement to suit their own
circumstances.
Partners are not separate legal entities from the partnership. The
partnership assets are the assets used for business, but they are
owned by the partners. The partners are personally liable for the
debts of the partnership, with the same risk as with sole traders.
Partners divide profits and losses of the business between them.
Partners are taxed individually and separately as employed
persons, paying income tax on their share of the profits. If any of
the partners are companies, they will pay corporation tax on their
share.
Partners are owners that usually work for the business, but it is
possible to have sleeping partners that are not involved in daily
affairs but can be present to make fundamental decisions about the
business.
Limited Similar to general partnerships as there must be at least one
partnership partner with unlimited liability for the debts acquired. They are
different from partnerships in the sense that they have limited
partners with limited liability based on the amount that they invest
into the business. The liability is conditional on the partner not
doing the following:
- Controlling or managing the partnership.
, - Making binding decisions on the partnership, or having the
power to do so.
- Removing their contribution to the partnership for as long as
the business exists.
Breaching these rules will mean that the partner loses the
protection of limited liability and is instead treated as a general
partner with unlimited liability.
Limited partnerships are governed by the Limited Partnerships Act
1907. They were created to encourage entrepreneurs to set up
businesses with the incentive that the risks would be lower, but
they now mainly operate for specialist financial businesses.
Company Private companies limited by shares.
Formed by registering certain documents with the Registrar of
Companies as a requirement under the Companies Act 2006 as a
contrast to sole traders and partners that are formed immediately.
As long as a company is legally incorporated, it must be treated as
its own separate legal entity with its own rights and liabilities. It is
therefore acceptable to use a company to manage risk and avoid
debt liability. (Saloman v A Saloman and Co Ltd)
Corporate veils are pierced (liability is imposed on the individuals
that own the company) when a person has an existing legal
obligation or liability, or is subject to a legal restriction which has
been evaded. The veil can only be pierced in order to deprive the
company of the advantage (Prest v Petrodel Resources Limited
and others).
Companies are separate legal entities, meaning there is need for a
human to make a decision on its behalf, which can be done by the
directors or shareholders. Shareholders only get involved in
important decisions that affect the company through general
meetings (directors make decisions in board meetings).
Public companies limited by shares.
Certain requirements must be met in order for a company to
become public:
- The company’s constitution must state it is a public
company.
- The words ‘public limited company’ or ‘plc’ (or the Welsh
equivalent for Welsh companies) must be included at the
end of the company’s name.
- The company must invest a minimum amount of money for
use by the company. This minimum is £50,000 (s 761 and
s763 Companies Act 2006)
The advantage to being in a plc is the ability to raise money by
offering shares to the public. Private companies are not allowed to
do this as they can only offer their shares to a person that is
already connected to the company or is otherwise targeted (s 756
Companies Act 2006).
, Plcs are more regulated in order to protect the public from risky
investment.
Limited liability Formed under the governance of the Limited Liability Partnerships
partnership Act 2000. They are best described as a cross between
partnerships and limited companies as they are separate legal
entities but have the same level of flexibility and informality as a
partnership. Many law firms are LLPs.
Explain some of the key characteristics of incorporated and
unincorporated businesses.
Unincorporated business Incorporated business
These businesses are owned and These businesses exist as a separate
managed by individuals that have not legal entity from the owners and
established a separate legal entity in the managers. They are formed when the
business. The owners of the business are individuals that create the business are
therefore personally liable for the debts of compliant with the relevant legal
the business. requirements that come with
incorporating a business.
Identify the objectives and concerns of a client in relation to a
proposed business venture.
Tax As businesses are set up to create profit, the amount of tax
required to be paid is a serious consideration. The
circumstances of the business and its owners will be the
deciding element on what tax structure would best suit the
business. Only companies are taxed as separate entities.
Liability This is the most important consideration for business owners as
the level of concern granted to liability is dependent on the
nature of the business. Can the owners cope if they are
personally liable for the debts of the business?
Publicity of Sole traders and partnerships are required to disclose the
business identity of rht owners and a correspondence address.
information Companies and LLPs must reveal certain information to the
public, including financial information. People wishing to create a
business but want their affairs to be more private should chose
to operate as a sole trader or partnership. However, greater
transparency in a business creates more reassurance.
Administrative Companies and LLPs face greater legal requirements to
burden and costs maintain records as they publish more information. This makes
the admin costs of compliance much higher. Sole traders and
partnerships can be set up for free, making them much cheaper
business models. Legal advice should be factored into these
costs.
Flexibility of Sole traders and partnerships enjoy greater flexibility as they
ownership can operate their business in any manner that is lawful.
management Partnerships are bound by their unique partnership agreements
or by the Partnership Act 1890. Companies are more rigid as
they divide their functions by owners(directors) and
shareholders. Private companies are more flexible than public
, companies due to the governance of unique articles of
association and shareholder agreements.
Funding Sole traders and partners can receive funding from the owners
requirements capital and bank loans. Companies and LLPs have floating
charges that are dependent on the nature of the business. This
makes companies and LLPs more secure as there is a charge
over all business assets.
Formalities Formalities are an important consideration as they dictate how
time consuming the formation of the business will be.
Unincorporated business face no formalities after being formed
with no legal documents to be prepared. The opposite is true for
companies.
SBAQs Feedback
Sole traders have unlimited liability for the debts of their business. If the business fails
and they cannot pay the full amount, they will have to meet the debts with their own
property. Failure to do this means they may have to declare bankruptcy. If the
question states that they invested all their savings, the only assets that will be
sacrificed.
Partners have unlimited liability and are jointly and severally liable for the debts of the
business. A creditor can therefore choose to sue any and all of the partners. If a
partner has no funds, there will be no point in pursuing them and the creditor will
instead choose to sue the partner who has ‘substantial assets’.
Companies are separate and distinct legal personalities and liable for their own debts.
Shareholders are only liable as far as they have invested in the company. If the
shareholder has not paid the full amount that they have agreed to invest, they can be
asked to contribute but only to unpaid amount on the shares. This is regardless of
whether or not they own a majority of the share and/or have control of the company
(Saloman v A Saloman Ltd). Companies have contractual capacity in their own right,
meaning it is irrelevant if a director concludes a contract as the contract is between a
supplier and the company.
The company, as a separate legal entity, is responsible for its own debts. The
shareholders are protected by limited liability and directors are not personally
responsible for the debts.
Partnerships are not separate legal entities (unincorporated).
An incorporated business has its own separate legal personality, responsible for its
own debts. If the company fails, the members lose the money that they have invested,
but no more. Limited liability means that the members are still liable but only to the
amount that they have agreed to invest in the company. Directors do not have the
benefit of limited liability as they are generally protected from liability in a way that is
not the same as limited liability. Shareholders are not jointly and severally liable for
the debts of the company – that is partnerships.
The only formality for setting up a sole trader business is notifying tax authorities.
An incorporated body can enter into contracts on its own behalf and will be liable for
itself under the contract.
Joint liability does not mean the partners are only liable for their half of the debt. Their
liability is not capped at the amount of their contribution to investing in the company.
A company is a legal person in its own right and can therefore enter into contracts,
own property and bring an action for breach of contract in its own name.
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