The Different Types of Business

Incorporated business

Legally separate from owners and managers, no personal liability

Unincorporated business

No separation, owners have personal liability

Sole traders

• Unincorporated self-employed person (includes practitioners like solicitors)

• May have multiple employees, but the sole trader fully owns the business

• Personal and business assets are one in the same

• Unlimited liability

• When the sole trader dies/retires, the business ceases

Partnerships

Two or more people “carrying on a business in common with a view of profit”, also unincorporated, ranges from two people to much larger companies, default agreement in PA 1890, some provisions can be disapplied, NOT a separate legal entity to the partners and their personal assets, profits and losses divided between the partners, jointly and severally liable for the full amount of debt, every partner is an agent of the firm and the other partners

Limited partnerships

• Similar to a partnership, one “general” partner but a limited partner (in terms of liability) is allowed

• Conditions for limited partner: cannot control/manage the LP, make lending decisions (and have agency) on behalf of the LP, and must remove their contribution to the LP

• Governed by the Limited Partnerships Act 1907 and must register with the Registrar of Companies

Private companies limited by shares

• Company is formed after documents are filed in accordance with the Companies Act 2006 to the Registrar of Companies

• Separate legal entity, defendant in any matter will be the company itself, personal assets of directors are safe from creditors

Salomon v A Salomon and Co (1897)

Argument that a sole owner of a company was to shoulder legal liability was rejected

Prest v Petrodel Resources Limited and Others (2013)

Corporate veil can only be pierced if a person hides behind their company to evade/frustrate legal obligations

Decision-making for private companies limited by shares

Directors run the company, shareholders finance it (“member” used in CA 2006 for generalisation)

Public companies limited by shares

• Company constitution must state that it is a public company, ‘plc’ must be at the end of the name, owners must invest authorised minimum of £50k (ss761 and 763 CA 2006) and each allotted share must be paid up to at least 1/4 of nominal value + premium

• More opportunities to earn money and more prestigious

• Eligible for stock market trading (London Stock Exchange)

• More regulated than private companies, can list as public from the start or re-register later

Limited liability partnerships

• Hybrid between partnership and limited company, governed by Limited Liability Partnerships Act 2000 by default

• Separate legal entity, but flexibility and taxation of partnerships

• Registered at Companies House, mix of employees and self-employed

Factors to consider when starting a business

• Liability

• Tax

• Formalities (and their cost, particularly around registration and regulation)

• Publicity of information

• Cost (more for incorporated businesses)

• Status

• Finance

Limited liability

The members will only lose the money they have invested in the company, but nothing more, no direct liability to the creditors