Workshop 1 - Different Business Models and Introduction to Companies

Why is it important to understand company law?

Companies are one of the most important business structures, with around five million companies in England and Wales ranging from small private companies to large public listed companies. All companies are governed by the Companies Act 2006, and a good understanding of company law is valuable for corporate and commercial practice, as well as any area of law involving companies as clients or opposing parties.

What are the main forms of business and how do businesses make a profit?

The main forms of business are sole traders, partnerships, limited partnerships, and limited liability partnerships (LLPs). Businesses are generally established to make a profit by selling goods and/or services. A profit is made when the income generated exceeds the business's expenses. Part of the profit is usually distributed to the owners, while the remainder is retained and reinvested to support the growth of the business.

Why do businesses raise finance, and what are the main ways they can obtain it?

Businesses raise finance to purchase premises, equipment, stock, and technology, employ staff, obtain professional advice, and fund growth or expansion. The four main ways a business can raise finance are: (1) capital contributions from the owners, (2) investments from outside investors in exchange for a share of future profits, (3) borrowing money (for example, from a bank), and (4) retaining profits within the business rather than distributing them to owners and investors.

Why is it important to understand different business models, and which business models should a lawyer be familiar with?

Lawyers may need to advise clients on the most appropriate business structure for their business, so it is important to understand the key characteristics, advantages, and disadvantages of different business models. The main business models are sole traders, partnerships, limited partnerships, and limited liability partnerships (LLPs). Understanding these structures helps put the company model into context and assists in comparing them with public and private companies, which are considered separately.

What are the key considerations when forming a business

Key considerations when forming a business

Costs	How much does this business model cost to set up?
Risk	Will the participants in the business have personal liability for debts of the business?
Structure	Does the business model provide a clear organisational structure? Is this flexible?
Formalities	Are there legal formalities that must be followed in running the business? How flexible is this business model regarding formalities?
Privacy	To what extent is information about the business required to be publicly disclosed?
Finance	How can the business raise capital?

What are the key characteristics of a sole trader?

A sole trader is a business owned and run by one individual. It has no set-up costs or formal legal requirements, allowing the owner to start trading immediately. The business is not a separate legal entity, so contracts are made by the individual personally, who owns the business assets and can sue or be sued. A sole trader has unlimited personal liability, meaning their personal assets may be used to pay business debts. The structure is highly flexible, with no Companies House filing requirements and complete privacy, as there is no obligation to publicly disclose accounts or other business information.

What are the key characteristics of a partnership?

A partnership can be formed without any formal set-up costs or legal formalities and may arise even without a written agreement. A partnership is not a separate legal entity; it is simply a collective name for the partners, who enter into contracts and own rights and obligations personally. Partners have unlimited personal liability for the partnership’s debts and obligations, meaning their personal assets may be at risk. Partnerships have no Companies House filing requirements, enjoy complete privacy, and are governed by the Partnership Act 1890.

How is a partnership formed, and what factors indicate whether a partnership exists?

A partnership is formed when two or more people carry on a business in common with a view to profit under section 1(1) of the Partnership Act 1890. No formalities, written agreement, or intention to create a partnership are required. When determining whether a partnership exists, courts consider all the circumstances, including whether profits and losses are shared, whether property is held jointly, and the nature of financial arrangements between the parties. Profit sharing is strong evidence of a partnership but is not conclusive on its own, and no single factor is determinative. Whether a person is held out as a partner is also relevant when assessing the existence of a partnership.

Why is it advisable to have a partnership agreement, and what are the key default rules under the Partnership Act 1890?

It is advisable to have a partnership agreement because, in its absence, the partnership will be governed by the default provisions of the Partnership Act 1890. Under s 24(1), partners share profits and losses equally regardless of their capital contributions. Under s 24(6), partners are not entitled to a salary. Under s 24(8), ordinary business decisions are made by a majority, but changes to the nature of the partnership business require unanimous consent. Under s 25, a partner cannot be expelled by majority vote unless this power has been expressly agreed. Under s 26, if a partner leaves, the partnership is dissolved unless the partnership agreement provides otherwise.

Why is it important to have a partnership agreement, and what issues does it typically cover?

Although partners can vary their rights and obligations by unanimous consent under s 19 of the Partnership Act 1890, it is advisable to have a formal partnership agreement because the default rules of the Act are often unsuitable for modern businesses. A partnership agreement typically sets out the profit-sharing ratio, partner remuneration, decision-making procedures, what happens when a partner leaves, and the process for appointing or removing partners. It provides certainty regarding the partners’ relationship and helps avoid disputes by replacing the default statutory rules with agreed terms.

What are the key characteristics of a limited partnership (LP)?

A limited partnership (LP) has two types of partners: general partners, who manage the business and have unlimited liability, and limited partners, who have limited liability but must not take part in the management of the business. If a limited partner becomes involved in management, they lose their limited liability status and become liable as a general partner. An LP must have at least one general partner and one limited partner, is governed by the Limited Partnerships Act 1907, and must be registered at Companies House, although it is not required to file accounts. LPs are commonly used as investment vehicles and joint ventures, where investors contribute capital as limited partners while the business is run by the general partner.

What are the key characteristics of a Limited Liability Partnership (LLP)?

An LLP is a business structure created under the Limited Liability Partnerships Act 2000 (LLPA 2000) that combines the flexibility of a partnership with the limited liability of a company. Unlike a traditional partnership, an LLP has a separate legal personality, meaning it can own property and enter into contracts in its own name. Under s 2(1)(a) LLPA 2000, an LLP can be incorporated by two or more persons carrying on a lawful business with a view to profit. LLP members benefit from limited liability, meaning their liability is generally limited to the amount they have agreed to contribute. For tax purposes, LLPs are tax transparent, so members are taxed individually on their share of the LLP’s profits. LLPs must be registered at Companies House and file annual accounts. In the absence of a Members’ Agreement, the default rules in the Limited Liability Partnerships Regulations 2001 (Regs 7 and 8) apply: members share profits equally, may all participate in management, receive no remuneration for management, require unanimous consent for new members or changes to the nature of the business, and cannot be expelled by majority vote unless expressly agreed. Unlike a traditional partnership, an LLP generally continues to exist even if a member leaves.

What are the key characteristics of a company, and why are companies such a popular business structure?

A company is a separate legal entity, meaning it is distinct from its shareholders (members). The company can own property, enter into contracts, and sue or be sued in its own name. It is the company, rather than the shareholders, that owns the business assets, receives profits, incurs losses, and is liable for its debts. Shareholders benefit from limited liability, as their liability is generally limited to any amount unpaid on their shares. Companies are governed by the Companies Act 2006, which imposes detailed rules on company management, filings, and disclosures to Companies House. While limited liability and separate legal personality make companies an attractive business structure, the associated compliance and procedural requirements can be burdensome, particularly for small private companies.

Who are the key people involved in a company, and what are their roles?

Companies – who’s who?

Shareholders/ members	•           Owners of the company •           Invest money in return for shares and possibility of dividends •           Not involved in day-to-day management but usually have voting rights and control key decisions
Subscribers	The name given to the first shareholders in a company who invest in the company when it is initially set up (incorporated).
Directors	•           Officers/managers of the company •           Involved in day-to-day running of the company •           Collectively known as the board •           In small private companies, directors are often also shareholders
Persons with significant control	Details of PSCs must be provided to Companies House. In general, PSCs are shareholders with over 25% of shares.
Other stakeholders	Other stakeholders include anyone interested in the company, such as employees, creditors etc.

 

What is the Companies Act 2006, and what were its main reforms?

The Companies Act 2006 (CA 2006) is the principal legislation governing companies in England and Wales. It replaced the Companies Act 1985 and was introduced primarily to simplify company law for private companies. Key reforms included the abolition of the requirement for private companies to hold Annual General Meetings (AGMs), replacing Annual Returns with a simpler Confirmation Statement, the codification of directors’ duties to make directors’ obligations easier to understand, and allowing private companies to pass shareholder resolutions in writing without the need to hold General Meetings.

What is a private company, and how is it defined under the Companies Act 2006?

A private company is defined by s 4(1) Companies Act 2006 as any company that is not a public company. Private companies must have names ending in “Limited” or “Ltd” under s 59(1) CA 2006. They are the most common form of company in England and Wales, accounting for the vast majority of companies registered with Companies House.

What are the different types of private company?

Private companies limited by shares (Ltd)	Private companies limited by guarantee	Unlimited companies
•           Most common type of company •           No minimum share capital requirements •           Prohibited from offering shares to the public •           Can be formed by one person	•           No share capital •           Liability of members is limited to the amount that they agreed to contribute in the event of a winding up •           Membership is not transferable •           These companies are relatively rare	•           The liability of the members is unlimited •           These companies are rare

What is a public company (plc), and how does it differ from a private company?

A public company (plc) is defined by s 4(2) Companies Act 2006 as a company whose certificate of incorporation states that it is a public company. Its name must end with “Public Limited Company” or “plc” under s 58(1) CA 2006. The key difference between a public and a private company is that public companies can generally offer their shares to the public, including through listing on a recognised stock exchange, allowing their shares to be traded. Public companies are also subject to more extensive regulatory requirements than private companies; for example, they cannot pass shareholder resolutions by written resolution.

What are the different types of public companies?

Public companies limited by shares (plc)	Listed companies
•           Can offer their shares to the public (subject to POATRs) •           Need a minimum of two directors •           Minimum share capital requirement of £50,000 (s 763 CA 2006) •           Requires a trading certificate before it can trade (s 761 CA 2006)	•           Only public companies can be listed •           Not all public companies are listed •           'Listed' means admitted on a regulated investment exchange such as the London Stock Exchange

Why might a company convert to a plc and seek a stock exchange listing?

A private company may convert into a public limited company (plc) in order to raise larger amounts of capital by offering shares to the public. Once it becomes a plc, it may apply to have its shares listed on a stock exchange, such as the London Stock Exchange. A stock exchange listing makes it easier for investors to buy and sell shares, increasing the attractiveness of the company as an investment. However, a company must be a plc before it can apply for a listing, and not all plcs are listed companies, so the fact that a company’s name ends with “plc” does not necessarily mean that its shares are publicly traded.

What are the principal differences between a private company and a public company?

The main differences between a private company and a public company relate to their name, share capital, management structure, and regulation:

• Name: A private company’s name ends in “Limited” or “Ltd”, whereas a public company’s name ends in “Public Limited Company” or “plc.”

• Share capital: A private company has no minimum share capital requirement and can be incorporated with as little as one share. A public company must have a minimum allotted share capital of £50,000 (or euro equivalent), with at least 25% paid up (ss 586 and 763 CA 2006).

• Directors: A private company requires only one director, whereas a public company must have at least two directors (s 154 CA 2006).

• Company secretary: A private company is not required to have a company secretary (s 270(1) CA 2006), while a public company must appoint one who meets the qualifications set out in s 273(2) CA 2006 (s 271 CA 2006).

• Annual General Meetings (AGMs): Private companies are not required to hold AGMs, whereas public companies must hold an AGM each year (s 336 CA 2006).

• Regulation: Because public companies can generally offer shares to the public, they are subject to greater regulatory requirements than private companies, in addition to the provisions of the Companies Act 2006.

How popular are the different forms of business?

What are the advantages and disadvantages of incorporating a business as a company?

Incorporation means setting up a business as a company, creating a separate legal entity distinct from its owners. The main advantages are limited liability for investors, reduced personal risk, a more formal business structure, easier access to finance through share issues and loans, and the potential for investors to receive dividends. The main disadvantages are that, in small private companies, the separation between ownership and control is often ineffective because the same people are both shareholders and directors, and incorporation brings increased formalities, compliance obligations, and public disclosure requirements, such as filing annual accounts and certain personal information at Companies House.

What are a company’s constitutional documents under the Companies Act 2006 and the Companies Act 1985?

A company incorporated under the Companies Act 2006 has a single constitutional document: the Articles of Association, which set out the rules governing the company’s internal management and operation. However, older companies incorporated under the Companies Act 1985 have two constitutional documents: the Memorandum of Association and the Articles of Association. It is important to be familiar with both regimes, as companies formed under the CA 1985 may still be encountered in practice.

What is the role of the memorandum under the Companies Act 2006, and how did the treatment of objects clauses change?

Under the Companies Act 2006, the memorandum of association no longer forms part of a company’s constitution (s 17 CA 2006). Instead, it serves only as part of the incorporation process and records the subscribers’ intention to form the company and become its first members (s 8 CA 2006). Under the Companies Act 1985, however, the memorandum was a constitutional document and contained the company’s objects clause, which set out the purposes for which the company was formed. Acting beyond those purposes was known as ultra vires. Under s 31 CA 2006, companies incorporated under the 2006 Act have unrestricted objects unless their Articles expressly restrict them, meaning the ultra vires rule generally no longer applies. For companies incorporated under the CA 1985, s 28 CA 2006 provides that provisions in the memorandum, including any objects clause, are treated as part of the company’s Articles and continue to limit the company’s capacity unless removed by amendment.

What are Articles of Association, and how do they interact with the Companies Act 2006?

The Articles of Association are a company’s main constitutional document and are required for all companies under s 18 Companies Act 2006. They regulate the relationship between the shareholders, directors, and the company, covering matters such as the appointment and powers of directors, the conduct of board and shareholder meetings, rights attached to shares, and the transfer of shares.

The Articles must comply with the Companies Act 2006 and cannot override mandatory statutory provisions (the Legality Test). However, they may impose requirements that are more onerous than those in the Act, provided they are not inconsistent with it. For example, although s 154(1) CA 2006 requires a private company to have only one director, the Articles may require a higher number. Conversely, some statutory rights, such as the right to demand a poll vote at a general meeting (s 321 CA 2006), cannot be excluded by the Articles.

A company may adopt: (1) the Model Articles (MA) prescribed under s 19 CA 2006, which apply by default if no Articles are registered (s 20(1) CA 2006); (2) amended Model Articles, where certain provisions are modified or excluded; or (3) bespoke Articles, which are tailored to the company’s specific needs. Older companies incorporated under the Companies Act 1985 may instead have Table A Articles, the predecessor to the Model Articles.

How can a company amend its Articles of Association, and what limits apply to amendments?

A company can amend its Articles of Association by passing a special resolution of its shareholders under s 21(1) Companies Act 2006. Under s 22 CA 2006, specific provisions may be entrenched, meaning they can only be amended or removed if additional conditions are satisfied or more restrictive procedures are followed. However, entrenched provisions can always be amended with the agreement of all members or by court order (s 22(3) CA 2006).

Any amendment must be made bona fide for the benefit of the company as a whole, as established in Allen v Gold Reefs [1900]. In Shuttleworth v Cox [1927], the court held that an amendment will be invalid if no reasonable person could regard it as benefiting the company. Cases such as Sidebottom v Kershaw, Leese & Co Ltd [1920] and Re Charterhouse Capital Ltd [2015] confirm that amendments affecting shareholders can be valid where they are made in good faith and genuinely serve the company’s interests.

What is the legal effect of a company’s Articles of Association?

Under s 33(1) Companies Act 2006, a company’s Articles of Association form a statutory contract between the company and its members, binding both parties as if they had agreed to comply with the Articles. The Articles are enforceable only in relation to a member’s rights and obligations in their capacity as a member, as established in Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915]. For example, rights such as voting rights or the right to receive a declared dividend can be enforced under s 33.

However, rights that are personal and unrelated to membership cannot be enforced through the Articles. In Eley v Positive Government Security Life Assurance Co [1876], a shareholder could not enforce a provision appointing him as the company’s solicitor because this right arose in his capacity as solicitor, not as a member.

The Articles may also create obligations between members, although it is unclear whether one member can always enforce the Articles directly against another. Rayfield v Hands [1960] suggests that direct enforcement may be possible where a member has undertaken a personal obligation to another member, whereas Welton v Saffery [1897] suggests that enforcement generally occurs through the company. For rights that shareholders may wish to enforce directly against each other, a shareholders’ agreement is usually preferred.

What are the main ways a company can be formed?

A company can be formed in two ways: (1) by incorporating a new company from scratch, or (2) by purchasing an existing shelf company and adapting it for the intended business. A shelf company is a pre-incorporated company that has been created and left dormant until it is purchased and used by a client. Incorporation is the process of establishing a business through the medium of a company.

What is required to incorporate a company from scratch, and when does the company become a legal entity?

To incorporate a company from scratch, an application must be made to the Registrar of Companies at Companies House. Under s 9 Companies Act 2006, the application must include: a memorandum of association, any bespoke Articles of Association (if the company is not adopting the Model Articles), the prescribed fee, and an application for registration (Form IN01). Form IN01 must include details such as the company’s name, registered office, type of company, statement of capital and initial shareholdings (s 10 CA 2006), details of proposed officers (s 12 CA 2006), any guarantee (s 11 CA 2006), a statement of compliance (s 13 CA 2006), a statement of initial significant control, confirmation that the company is being formed for a lawful purpose (s 9(2)(e) CA 2006), and a registered email address.

Once the Registrar approves the application, a certificate of incorporation is issued showing the company’s name, company registration number, and date of incorporation. The company becomes a separate legal entity on the date stated in the certificate of incorporation under ss 15 and 16(3) CA 2006.

What is a shelf company, and what changes are usually required when purchasing one?

A shelf company is a pre-incorporated company created by a company registration agent, law stationer, or law firm and kept dormant until it is sold to a client. Traditionally, purchasing a shelf company was quicker than incorporating a new company from scratch, although advances in online incorporation have reduced this advantage.

After purchase, the company will usually need several changes to suit the client’s needs, including:

• Changing the company name by special resolution or another method permitted by the Articles (s 77(1) CA 2006).

• Amending the Articles of Association if the existing Articles are unsuitable (s 21(1) CA 2006).

• Changing the registered office address (s 87(1) CA 2006).

• Ensuring any required confirmation statement information is updated.

• Transferring the subscriber shares to the client.

• Appointing the client’s directors and company secretary (if any) and arranging for the original officers to resign.

Although shelf companies were traditionally viewed as a cheaper and quicker method of company formation, the overall cost may be similar to incorporating a new company once the necessary amendments and legal fees are taken into account.

What is the purpose of the Economic Crime and Corporate Transparency Act 2023 (ECCTA), and what key company law reforms did it introduce?

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) was enacted to improve corporate transparency and the accuracy of information held at Companies House, helping to combat economic crime and misuse of UK companies. ECCTA introduced reforms to the Companies Act 2006, including requirements for companies to confirm a lawful purpose, the verification of the identities of directors and Persons with Significant Control (PSCs), and enhanced filing requirements for both new and existing companies. Further reforms include identity verification for anyone making filings at Companies House and the creation of a register of Authorised Corporate Service Providers (ACSPs), such as law firms and accountants, who will be authorised to carry out verifications and make filings on behalf of companies.

Who are the key stakeholders in a company, and what is the role of shareholders?

The key stakeholders in a company include shareholders (members), directors, and persons with significant control (PSCs). Shareholders are the owners of the company who invest capital in return for shares and membership rights, such as voting rights and entitlement to dividends. Membership begins when the person's name is entered in the company's register of members (s 112(2) CA 2006). The first shareholders are known as subscribers, as they subscribe to the company's memorandum on incorporation (s 8 CA 2006).

A shareholder does not have to be an individual; a company can also be a shareholder. Where one company owns all the shares in another, the latter is a wholly-owned subsidiary and the former is its holding (parent) company. The relationship between holding and subsidiary companies is defined in s 1159 CA 2006. Multiple parent and subsidiary companies can form a group structure, which is often used to isolate business risks and achieve tax efficiencies.

What are shares, and what key concepts should be understood about share capital and shareholder liability?

A share is a bundle of rights that gives its holder an ownership interest in a company. Shareholders typically have rights such as voting at shareholder meetings, receiving dividends, and sharing in any surplus assets on a winding up, depending on the rights attached to their shares and the company’s Articles.

Shares have a nominal (par) value, which represents the minimum price at which they may be issued. Shares cannot be issued at a discount to their nominal value but may be issued at a premium above that value. A company’s issued share capital consists of the subscriber shares issued on incorporation and any further shares issued afterwards.

Under s 558 CA 2006, shares are allotted when a person gains the unconditional right to be entered in the register of members, although shares are not fully issued until the shareholder is actually registered. Companies may create different classes of shares, such as ordinary shares and preference shares, each carrying different rights relating to voting, dividends, or return of capital.

A key benefit of share ownership is limited liability: a shareholder’s liability is limited to the amount payable on their shares. Once shares have been fully paid for, the shareholder generally has no further obligation to contribute to the company’s debts if it becomes insolvent.

What is a Person with Significant Control (PSC), and what are the company’s obligations in relation to PSCs?

A Person with Significant Control (PSC) is an individual who exercises significant influence or control over a company. Broadly, a PSC is someone who holds more than 25% of the company’s shares or voting rights, has the power to appoint or remove a majority of the directors, or otherwise exercises significant influence or control over the company. Under ss 790A–790ZG Companies Act 2006, every UK company must identify its PSCs, maintain a PSC register, and make that register available for public inspection. The PSC information must also be filed at Companies House as part of the company’s Confirmation Statement. The purpose of the PSC regime is to improve corporate transparency and help combat tax evasion, money laundering, and terrorist financing.

What are directors, and what are the key legal requirements relating to directors under the Companies Act 2006?

Directors are the officers who manage the day-to-day affairs of a company. Because a company is an artificial legal person, it acts through its directors, who serve as agents of the company and owe it fiduciary duties. These duties are governed by both the common law and the Companies Act 2006. Collectively, the directors form the board of directors, which is responsible for managing the company, although certain key decisions, such as amending the Articles of Association, are reserved to the shareholders (s 21 CA 2006).

Under s 154 CA 2006, a private company must have at least one director, while a public company must have at least two directors. At least one director must be a natural person (s 155 CA 2006), and directors must be at least 16 years old (s 157 CA 2006). Although directors and shareholders are often the same individuals in small private companies, their roles are legally distinct: a person acts in one capacity when making management decisions as a director and in another when exercising ownership rights as a shareholder.

What are the different types of directors, and how do they differ?

There are several types of directors, but all owe the same duties to the company and are subject to the same responsibilities under the Companies Act 2006.

• Executive directors are directors who hold an executive office (e.g. managing director or finance director), are usually employees of the company, and are involved in its day-to-day management.

• Non-executive directors are officers of the company but not employees. They do not manage the business day to day and instead provide independent advice, oversight, and protection of shareholders’ interests.

• Shadow directors are individuals whose instructions or directions the directors are accustomed to follow. Under s 251 CA 2006, a person is not a shadow director merely because they provide professional advice.

• Alternate directors are appointed under the company’s Articles to act in place of a director when that director is absent, incapacitated, or otherwise unable to act.

• De facto directors are individuals who act as directors and perform the functions of a director despite not having been formally or validly appointed.

Exam tip: The key distinction is that executive and non-executive directors are formally appointed, whereas shadow directors act behind the scenes and de facto directors act without a valid appointment. Despite these differences, all are generally subject to the same duties and liabilities.

How are directors appointed under the Companies Act 2006 and the Model Articles?

The Companies Act 2006 does not prescribe a procedure for appointing directors, so the process is governed by the company’s Articles of Association. Under Model Article 17(1), a person who is willing and legally permitted to act as a director may be appointed either by ordinary resolution of the shareholders or by a decision of the directors (the board). In practice, appointment by a board decision is usually simpler and therefore the more common method. However, companies may amend the Model Articles or adopt bespoke Articles, so it is always essential to check the company’s Articles before advising on the appointment, retirement, or removal of directors.

What are directors’ service contracts, and when is shareholder approval required?

An executive director is usually an employee of the company and should have a written service contract setting out the terms of their employment, including their duties, remuneration, and notice provisions. Under Model Article 19, the board of directors is responsible for determining the terms of a director’s service contract, including their remuneration. As a general rule, a director’s service contract only requires board approval, but shareholder approval is required for long-term service contracts that guarantee employment for a period of more than two years.