Forms of business organisation (Weeks
0-2)
Format
- Pre year reading (which should be tutorial reading)
- Lecture notes
- Further reading
- Tutorial questions
Alan Dignam & John Lowry Chapter 1
Different forms of business organisations
Sole trader
1) No legal filing requirements
2) Provide capital with personal savings or bank loan
3) Contract in own name, have personal liability for all the debts of the business
4) No separate legal entity
Partnership
1) s.1 Partnership Act 1890 defines a partnership as “the relationship which subsists
between persons carrying on a business in common with a view of profit”
2) Partnership come about via
a) Oral agreement
b) Conduct
c) Formal written agreement outlining the T&Cs
3) No formal process of becoming partners. If behave as partners, law deems you as
partners (Khan v Miah)
4) Partnerships that do not exclude Partnership Act 1890 will be governed by it
5) Each partner is entitled to…
a) Participate in management
b) Equal share of profit
c) Indemnity in respect of liabilities assumed in course of partnership business
d) Not to be expelled by other partners
6) Cannot acquire limited liability through partnership per Partnership Act 1890
7) I.e. each partner is jointly and severally liable for debts and obligations of the partnership
incurred while he is partner
8) 2 types of partnership that allow a limitation of liability (not limited liability!!!)
, a) Limited Partnership Act 1907 -> allows certain partners to have full limited
liability. (sleeping partners).
b) Limited Liability Partnerships Act 2000 -> allows partners to achieve limited
liability up to a point. Allowing liability to be limited regarding general trading
debts, but individual partners are not able to limit personal liability for a negligent
act that they themselves committed. (LLPs)
9) General partnerships does to an extent facilitate investment, allowing partners to pool
their funds
10) Risk for partners is generally larger than in limited companies (though reduced in LLPs)
The Company (making it a limited company)
1) Registering the company makes it “limited by shares” (i.e. a company where the liability
of the shareholders for the debts of the company is limited to the amount unpaid on their
shares)
2) Setting up a company is governed by the Companies Act 2006. Ss.7-15 is a simple
process
a) Provide Registrar of Companies with…
i) Constitution of the company (containing internal rules of the company:
aka articles of association and an objects clause limiting the power the
company may have)
ii) Memorandum of association, stating that subscribers intend to form a
company and become members
iii) Application for registration which contains -> company name, share
capital, address of its registered office, whether it is pte or public
company, whether liability of its members is limited, statement of the
company directors’ names and addresses, and a statement of compliance
with the CA 2006.
3) Purpose is for clarity for general public or government agencies if necessary.
4) Concerns over complex company ownership resulting in discouragement of investment,
facilitation of crime/ tax evasion led to statutory guidance. -> NOW, Persons with
Significant Influence or Control (PSC) appears on the public register.
a) A PSC is defined as an individual: a) holding more than 25% of shares or voting
rights of the company, b) who could appoint or remove a majority of the board, c)
who could or does exercise significant influence over the company, d) an
individual behind a trust or firm that if it were an individual, would fulfil these
criteria.
5) CA 2006 amending the Criminal Justice and Police Act 2001 allows all directors to
choose a service address (which can be the company’s registered address) on record
rather than a residential one.
6) The Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) s.96 allows
directors and major shareholders to withhold full birth information from public record
(they still have to disclose the month and year, but not exact day)
, 7) Register of Shareholders is not public, but can be accessed on request when done for a
proper purpose (CA ss 116-118) and (Burry & Knight Limited v Knight)
8) s.7 CA 2006 allows a single person pte and public companies. I.e a sole trader can have
a registered company
The Memorandum of association and Constitution of the company
1) s.8 CA makes MOA a document providing basic information and key declarations to the
public which state that subscribers wish to form the company and agree to become
members taking at least one share each.
2) Subscribers are those who agree to take some shares or share in the company, thus
becoming its first members.
3) Per CA 2006 s.10, only require statement of the total number and nominal value of
shares to be taken on formation by subscribers to the memorandum of association.
4) Any rights associated with the shares of the subscribers must be stated alongside paid
up and unpaid amount of each share (if any)
5) Value given to each share is known as its “par” or “nominal” value.
6) The Insolvency Act 1986 s.74 deems nominal value or any amount paid above the
nominal value to be the limit of shareholders’ liability in insolvency.
7) If shares paid for immediately, they are described as fully paid, but shares can be issued
as partly paid or unpaid.
8) Partly paid or unpaid shares, company can call on the shareholders to pay at a later
date. (Coys do need to declare the aggregate amount unpaid on their shares SBEEA
2015, s.92.)
9) Shares can be paid for in goods and services too
10) An example
a) Share capital of a coy is £10,001 subdivided into shares of £1 each
b) Our entrepreneur subscribed for 5001 shares on registration, thus a member of
the coy, holding 5,001 shares at nominal value of £1
c) In purchasing these 5,001 shares, she has paid for half with cash, and the rest
unpaid with agreement that they are to be paid for in 3 years time.
d) Other investors subscribed for total of 5,000 shares and are members of
company
e) In this scenario, our entrepreneur has majority voting rights, giving her ability to
elect or remove someone from the board.
11) Constitution or Articles of Association are a set of rules governing the running of the
company. They are the core of the organisational structure of the company - the board of
directors (management committee) and the general meeting (shareholders’ committee).
These documents allocate powers of each committee
