Business Law and Practice Chapter 1

1.2 Incorporated and Unincorporated Business - What are they?

• An incorporated business sees the company as a separate legal entity from the owners and managers - a key feature is that the company’s debts are considered its own and the people involved are not personally liable for any debts

• An unincorporated business is ran by people who have not set up the company as a separate legal entity - a key feature is that owners/directors etc are then personally liable for any debts of the company

1.3 Sole Traders - What is this?

• A sole trader is someone who runs an unincorporated business on their own, as a self-employed person

• Sometimes referred to as sole proprietors

• Sole Traders may employ others, but they remain the owner who personally benefits from successes and therefore is also personally liable for any debts

  • This means that their personal and business assets are considered interchangeable

  • This also means they have unlimited liability

1.4 Partnerships - What are they?

• A partnership is when two or more people run a business together, this is an unincorporated business

• Partnerships that satisfy the requirements in the Partnership Act 1890 that one is formed when two or more people are ‘carrying on a business in common with a view of profit’ - are often referred to as General Partnerships

  • The term general partnerships also distinguish this type from limited partnerships and limited liability partnerships

• The PA 1890 provides a default partnership agreement, which is applied by default unless specifically amended by the partners

• A partnership business is unincorporated, therefore the business is not a separate legal entity - meaning partners remain personally liable for debts

  • The partnership itself cannot own any assets, they are all individually each partner’s assets

1.5 Limited Partnerships - What are they?

• Limited Partnerships are unincorporated businesses where there must be one ‘general partner’ who has unlimited liability, however another partner may limit their liability to the amount they initially invested in the business

• Therefore the general partner will be personally liable for business debts

• The partner with limited liability is not guaranteed to be not liable, their limit on this is based on the following conditions - The limited partner must not;

  • control or manage the Limited Partnership

  • have the power to take binding decisions on behalf of the limited partnership, or

  • remove their contribution to the limited partnership as long as they are still in business

• If breached, they will then be considered a general partner

• Limited Partnerships must be registered with the Registrar of Companies, unlike other partnerships

• This is not a widely recognised business model - and their significance to modern business practice is limited

1.6 Companies - Overview

• Companies can be private or public

• In Companies liability can be limited by shares or guarantee

• A company in the UK is formed by registering certain documents with the Registrar of Companies in accordance with the Companies Act 2006

• Companies are incorporated businesses - meaning companies have separate legal personalities that are liable for company debts, so the people who own and direct the company are not personally liable

  • Salomon v A Salomon and Co Ltd [1897] is a landmark case confirming the full extent of the separate legal personality

1.6.1 Private Companies Limited by Shares - What are they?

• As an incorporate business, companies limited by shares do not hold owners etc personally liable for its debts - instead their liability is limited to the amount they paid or agreed to pay for their shares

• This is helpful for companies to grow as business owners/directors are able to take risks without worrying that their personal assets will be held for company debts

• Even though the company is a separate legal entity, it still needs people to make decisions on its behalf - hence directors and shareholders

  • Shareholders (aka Members) tend to only get involved in the important decisions - usually made at general meetings

  • Directors make decisions on the day-to-day running of the company - usually made collectively at board meetings

1.6.2 Public Companies limited by shares - What are they?

• An incorporated business

• A public limited company (plc) must comply with certain requirements of the CA 2006 to enable it ;

  • 1. The constitution must state that it is a public company

  • 2. the words public limited company or plc must be included at the end of the company’s name (or the welsh translation)

  • 3. the company’s owners must invest a specified minimum amount of money for use by the company - which must be at least the authorised minimum of £50,000

• Advantage -

• More prestigious

• PLC’s are also able to raise money by offering shares to the public, unlike private companies which are prohibited from doing so (they can only offer shares to people already connected with the company or targeted individuals)

• Public companies can apply to join the UK stock market, although it is not common (if so, this is considered a listed company)

• Disadvantage -

• Public companies generally are subject to more regulation than public companies because they offer shares to the public at large - companies listed on the stock market are even more regulated

1.7 Limited Liability Partnerships - What are they?

• An incorporated business formed under the Limited Liability Partnerships Act 2000

• Like a cross between a partnership and a limited company -

  • Like a company - the business is a separate legal entity, therefore the owners are not personally liable for debts

  • Like a partnership - the business structure is flexible and partners are taxed as if the business were a partnership

• Formed by 2 or more partners by filing documents with the Registrar of Companies and paying the applicable fee - there is a same day registration service available (costs more)

• The Limited Liability Partnerships Regulations 2001 provides default contracts for partners - unless amended

• Members of LLPs can either be registered as self-employed or employed

1.8 Other types of business medium - Examples

• Companies limited by guarantee - usually used by organisations not seeking to make a profit, such as societies. In these companies, shareholders guarantee the company’s debts up to a set amount (usually £1)

• Unlimited companies - Rare, used by people who are happy to run a company with unlimited liability for its debts

• Community interest companies - Type of limited liability company intended for business that use their profits and assets for public good not private profit

• Charitable incorporated organisations - has a corporate structure without the burden of dual regulation from the Registrar of Companies and the Charity Commission

• Overseas Companies - All overseas companies that set up a branch in the UK must register details of the establishment within one month of opening

• Companies established by Act of Parliament or Royal Charter - Historical way of establishing companies, usually for trade Example of royal charter = Bank of Scotland

• Joint Ventures - Commercial enterprise entered into by two parties who pool their resources for a specific purpose - often regulated by a contract between the two parties

1.9 What type of business is best - How to determine?

• The best business will depend on the individual needs, however there are some key factors to consider;

• Liability —

  • Often most important consideration

  • Shareholders benefit from limited liability, whilst partners are liable for company debts

  • For some types of business e.g Law Firms, the likelihood of company debts are limited so liability is less of an issue

• Tax —

  • Most businesses are set up to make money for their owners - so the impact of business structure on how much debt an owner will pay is important to consider

• Formalities —

  • Setting up a company is more onerous than a sole trader or partnership as there are more formalities to fulfill - and often more costly as people setting up a company will have to obtain legal or accountancy advise

  • For unincorporated business there are no formal requirements once established, whereas companies have to produce annual reports and stay up to date with regulations and requirements

• Publicity of Information —

  • Sole Traders and Partnerships must disclose the identity of those involved and an address for service of documents

  • Whereas companies and LLPs have to reveal this and more to the public at large, including financial information, their shareholders and directors

• Cost —

  • Sole Traders or Partnerships can be set up with little to no administrative cost

  • Companies require fees to be registered

• Status —

  • Often companies are better received, or perceived as more respectable than sole traders or partnerships - so people may be more likley to go to companies

• Finance —

  • Companies and LLPs can offer additional forms of security for loans - the floating charge. This is a charge over all the business’ assets and not available for sole traders or partnerships to do

1.10 Forming a company - How to

(everything from this point relates to Private Companies Limited by Shares unless stated otherwise)

• To incorporate a new company, the applicant must complete Companies House form IN01 and submit it alongside a Memorandum of Association, and possibly the company’s Articles of Association to Companies House with the applicable fee

• Companies House in Cardiff - for companies in England and Wales

• Companies House in Edinburgh - for companies in Scotland

• Companies House in Belfast - for companies in Northern Ireland

• The Economic Crime and Corporate Transparency Act 2023 has introduced new features to those applying for companies at Companies House

  • New powers for companies house to reject information which it suspects is wrong or fraudulent to prevent inaccurate information entering the companies register

  • New Identity Verification has been made compulsory for directors, people with significant control or anyone who files at companies house

    • It is a criminal offence to act as a director without complying with the ID rules

1.11 Who will make the application - ?

• Applications can be made online, by post or via software provided by Companies House

• If the person processing the application is satisfied that the requirements of the CA 2006 are fulfilled, they will incorporate the company and issue a certificate of incorporation

• The Certificate of Incorporation must state;

  • The name and registered number of the company

  • the date of incorporation

  • whether the company is limited or unlimited - and if limited, whether by shares or guarantee

  • whether it is a private or public company

  • whether the company’s registered office is in England and Wales, or Scotland or Northern Ireland

• The certificate will be signed by the Registrar or authenticated by their offical seal

• Companies must also then register with HMRC for corporation tax

  • Companies that applied by online form will be automatically registered with HMRC but other applications will not

1.12 Decisions to be made -

• Company Name —

  • IN01 requires the company name

  • Different companies have different required endings - e.g private companies must end in Limited or Ltd or public companies must end in plc

  • Cannot be similar or the same as an existing company

    • A new company can only register with a similar name if they are part of the same group as the existing business and they have given written confirmation of approval

  • Certain names are prohibited even if not in use

    • e.g names akin to criminal offenses, names that suggest association with government departments, certain signs or symbols

  • Companies House can also reject a name if they believe it is intended to facilitate fraud, is comprised of computer code, or is likely to give false impression that the company is connected to a foreign government or international organisation

Prepare Task: Overview of the Model Articles for private companies limited by shares (specifically articles 2, 3, 4, 7 and 14(1))

• The Model Articles are articles automatically prescribed to private companies in the process of being incorporated if they do not provide, exclude or amend any themselves

• Article 2 - The liability of the members is limited to the amount, if any, unpaid on the shares held by them

  • Members refers to Shareholders

  • Automatically limits the liability of shareholders - which is preferential for them

• Article 3 - Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company

  • Presets directors in their assumed role - as head of the company with ultimate decisional power

• Article 4 - (1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. (2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.

  • Provides decision making power to shareholders where it is clearly a big enough issue for them to have collective interest in - requires 75% approval for special resolution

  • Allows shareholders to have power within companies they have invested in

• Article 7 - (1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8 (Unanimous Decisions) —- this is unless the company only has one director then this does not apply

  • Shows the need for consensus amongst directors in order for them to run the company

• Article 14(1) - If a proposed decision of the directors is concerned with an actual or proposed transaction or arrangement with the company in which a director is interested, that director is not to be counted as participating in the decision-making process for quorum or voting purposes.

  • This is one of the more controversial Model Articles, and therefore is the most often excluded article - likely because people acting as directors will not want to enter into an agreement that means they cannot vote or adjudicate on areas they have an interest in

  • Especially an issue where there are not many directors, as this would mean there would not be enough to vote if they were excluded from issues they have an interest in

Prepare Task - Review s74(1) and s74(2)d of Insolvency Act 1986

• s 74(1) - When a company is wound up, every present and past member is liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributories among themselves.

  • Member = Shareholder

• However this liability is limited in companies limited by shares, as provided for by s 74(2)d - in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member

  • This shows the benefit of having company limited by shares, because if it was not this then the shareholders could be liable for sums greater than they have contributed - therefore this model provides more secure investment roles for shareholders