, Law of Organisations:
Unit 1: Business Structures
Types of Businesses:
Incorporated Business
An incorporated business exists as a separate legal entity from its owners and managers.
Including:
a) Limited Company
b) Public Company
c) Limited Liability Partnership
Have their own distinct legal personality → can assume rights and obligations
Owners are generally not liable for business debts
● If it fails, the members lose the money they invested in the company (but no more) → they
have limited liability
● MA 2: Only if the shareholder has not paid the full amount that they agreed to invest can
they be asked to contribute (up to the unpaid amount)
Unincorporated Business
Run by individuals who have not set up a separate legal entity to run the business. Including:
a) Sole Traders
b) Partnerships
c) Limited Partnerships
Have full personal liability for the debts of the business (can be made bankrupt if cannot pay)
, Other Types
● Companies limited by guarantee = usually for organisations not seeking to make a
profit (shareholder guarantees the company’s debts, up to a specified amount)
● Community interest companies = a LLC intended for businesses that wish to use their
profits & assets for the public good, not private profit
● Charitable incorporated organisations = allow for advantages of a corporate structure,
without burden of dual regulation (Registrar of Companies & Charity Commission)
● Overseas companies
● Companies established by Act of Parliament or Royal Charter = only 45 still in
existence (generally historic)
● Joint ventures = a commercial enterprise, undertaken jointly, by two or more parties
- Retain their own identity, but pool their resources for a specific purpose
- E.g. Google and NASA developing Google Earth
- Can be governed by contract or a corporate structure (controlled jointly)
How to decide
Take into account:
● Liability
● Tax
● Formalities
● Publicity of information
● Finance
, Unit 2: Partnership
General Partnerships:
Under s (1) of the Partnerships Act 1890 → a partnership comes into existence when 2 or more
persons are ‘carrying on a business in common with a view of profit’
● Partners can be individuals or companies
● The partnership does not have a separate legal personality from that of the partners
Factors which can determine if there is a partnership include:
a) Do the individuals all take part in the decision making
b) Whose names are on the title deeds of any property
c) How are profits shared
Partnership Agreement:
The PA 1890 provides a default contract governing the relationship between the partners (unless
they agree their own terms)
● Can be written or oral or implied by conduct
● Certain sections can’t be overridden by agreement:
i. Ss 1 and 2 → govern when a partnership comes into existence
ii. Ss 5-18 → cover the relationship between partners and third parties
Name
The name can’t:
a) Include limited, ‘ltd’, ‘limited liability partnership’, ‘LLP’, ‘Public Limited Company’ or PLC
b) Be offensive
, c) Be the same as an existing trademark
d) Contain a sensitive word or expression or suggest a connection with govt or local authorities,
without permission
Place and Nature of Business
● Often will rent or buy premises
● Agreement may set out the partnership’s place of business, area of geographical operation and
nature of business
Commencement and Duration
A partnership begins when the definition in s 1 is satisfied (commencement of business activities)
● Useful to insert a date to clarify
● Some partnership agreements can have a fixed term (usually when the purpose is to achieve a
specific aim)
- If they continue working after the expiry date, they are presumed to be partners on the
same terms as before (s 27 PA 1890)
Work Input
● Partners may take part in the management of the business, but they are not required to do so
● Partnership agreements should set out each partner’s working hours
● A common clause is to state that a partner must devote the whole of their time and attention to
the business
● Can state that they cannot engage in any other business (also a non-compete clause)
- Non-compete clauses can be implied by default under PA 1890
● Agreement should set out holiday entitlement, sickness and maternity and paternity leave (not
included in the PA 1890)
Roles
,Partnership agreement should set out each partner’s role → can restrict what they are allowed to do
Under common law, partners owe a duty of the utmost fairness and good faith towards one another:
Ss 28-30:
a) Must be completely open with one another regarding any relevant information about the
partnership
b) Must account to the firm for any private profits the have earned, without the other partners’
consent from any transaction concerning the partnership
c) Must not compete with the firm → if they do so without consent, must account for and pay over all
profits made in that competing business
S 24:
a) Must bear a share of any loss made by the business, in accordance with the terms of their
partnership agreement
b) Indemnify fellow partners who have borne more than their share of any liability or expense
connected with the partnership
Decision Making
All decisions in a partnership must be taken by majority (s 24 PA 1890).
Except:
a) Changing the nature of the business (s 24 PA 1890).
b) Introducing a new partner (s 24(7) PA 1890).
c) Changing the terms of the partnership agreement (s 19 PA 1890).
→ Must be made unanimously
Financial Input
Partners will usually all contribute a sum of money to enable it to start operating (classed as capital)
● Agreement should set out the partners’ initial capital contributions and whether they will be
obliged to contribute more capital in the future
● Can also take out a bank loan
, Shares in income & capital profits and losses
Under PA 1890, partners share equally in the capital and profits of the business (s 24(1))
● Initial capital = money partners contribute to the business
● Capital profits = one-off gains
● Income profits = profits which are recurring in nature (trading profit / rent)
Often, where parties have contributed different amounts, they will decide to own capital profits in
those proportions
● Can be inferred from a course of conduct that the partners own capital profits in unequal shares
● Partners’ share of income profits will depend on their working hours (if can’t agree, under s 24(1)
PA 1890 will share equally)
Drawing and salaries
● The income profits which partners receive are known as drawings
● Partnership agreement should set out how much each partner is allowed to ‘draw down’ in any
given period (usually a month)
- Absence of agreement = share equally
● Sometimes also receive a salary to reflect the work they do
- But don’t have a right to remuneration (s 24(6))
Ownership of assets
Partnership agreement must set out how the assets the partnership uses are owned
● Building and land will have title deeds to show the legal owners
● Stock and machinery won’t have title deeds
Expulsion
● Under default provisions, no majority of partners may expel another partner unless the partners
have expressly agreed to this
,● Most partnership agreements will contain an expulsion clause (linked to poor performance)
Dispute Resolution
● Include a provision that in the event of a dispute, the partners must use arbitration / another form
of dispute resolution rather than formal court methods
Dissolution:
Where the contractual relationship between the partners comes to an end.
How:
PA 1890:
Under PA 1890 when:
a) A partner retires (s 26)
b) On expiry of a fixed term (s 32)
c) By the death or bankruptcy of any of the partners (s 33)
d) If the partners give notice of dissolution to a partner who has (by order of the court)
granted a charge over their share of the partnership property, for a debt owed by them
alone and not the partnership as a whole (s 33)
e) Automatically if something happens which makes it unlawful for the business of the firm
to be carried on (s 34)
By the court:
Through an application to the court if:
, a) A partner becomes permanently incapable of performing their part of the contract
b) A partner’s conduct is calculated to be prejudicial to the business
c) A partner wilfully or persistently breaches the partnership agreement
d) The partnership can only be carried on at a loss
e) The court thinks that it is just and equitable to order that partnership to be dissolved
Own Provisions:
Own provisions:
● S 32 and 33 can be disapplied by the partnership agreement
● Partnership at will = a partnership which continues indefinitely until notice is given
● No need for a notice of dissolution to be of a certain length of time or to be in writing
- A partner can end the partnership with immediate effect orally
- → Means most agreements should include notice provisions
- Will often include provisions that can’t retire during first year of trading
● Retirement = when a partner leaves a partnership
Effects of dissolution:
Automatic dissolution means that the partnership must end → all assets must be sold and the
outgoing partner has to receive their share
Partial dissolution = where it is stated in the contract that in the event that a partner leaves, the
remaining partners will continue in the partnership
● Should also be a provision setting out whether the other partners must buy the outgoing
partner’s share, or if it remains just an option, how it should be valued and what should
be paid
● If the agreement doesn’t address the issue of payment for the outgoing partner’s share,
they are entitled to either interest (at a rate of 5% per annum) on the value of their
partnership share, until they receive their share from other partners
, Goodwill:
Goodwill = a business’s reputation and the value of its clients and contacts
● Commonly 2 years profit is taken as the value for goodwill
- Beneficial to put in agreement terms that build in some time for partners to find a
buyer so that it can be sold as a going concern
● If the partnership’s assets are sold individually, goodwill will not be part of the equation
Distribution of Proceeds of Sale:
Under s 44, when a partnership is sold, the process of sale are as follows:
1) Creditors of the firm must be paid in full (if there is a shortfall, partners must pay the
balance from their private assets)
2) Partners who have lent money to the firm must be repaid the amount of the outstanding
loan
3) Partners must be paid the share of the partnership’s capital to which they are entitled
4) Any surplus is shared between the partners in accordance with the terms of their
partnership agreement
Restraint of Trade:
A restraint of trade clause will only be enforceable if it protects a legitimate business interest and
is no wider than is reasonable to protect that interest (duration / geographical area / scope)
It is a blanket description which includes:
a) Non-compete clauses → prevent former partners from competing with the partnership
business
b) Non-solicitation clauses → prevent former partners from soliciting business from the
partnership’s clients or offering employment to their employees
- Customers / employees can approach them
c) Non-dealing clauses → prevent the outgoing partner from entering into contracts with
clients, former clients or employees of the partnership that have just left (both ends)
