• This chapter, along with Chapters 2 and 6, covers:
• Business and organization types like sole traders, partnerships, LLPs, private, and unlisted public companies.
• Legal personality and limited liability.
• Steps to incorporate a company, form a partnership/LLP, and other procedures under company and partnership law to begin operations.

Learning Outcomes

After reading this chapter, you should know:

• How to identify and compare different types of incorporated and unincorporated businesses in England and Wales.
• How to give basic advice on the appropriate type of business for a client.
• What needs to be submitted to create a new company.
• What an applicant must decide before registering a new company.
• The roles of solicitors, company formation agents, and the Registrar of Companies in establishing a company.
• The importance of a company's constitution, especially the articles of association and their main points.

Introduction

• Most solicitors deal with businesses, as businesses create economic wealth.
• Understanding business law is essential for corporate lawyers and relevant in other practice areas, such as divorce or fraud cases.
• A client has a variety of business structure choices to choose from.
• The chapter will discuss these forms and explain setting up a company and its constitution.

Incorporated and Unincorporated Businesses

• An incorporated business is a separate legal entity from its owners/managers, formed when legal requirements are met.
• A feature of incorporated businesses is that the owners are generally not liable for business debts.
• The most common form of incorporated business is the limited company.
• Unincorporated businesses are run by individuals who have not set up a separate legal entity, and have full personal liability for the business' debts.
• This section will begin with unincorporated businesses (sole traders, partnerships, and limited partnerships), then move to incorporated businesses.

Sole Traders

• A sole trader runs an unincorporated business as a self-employed person.
• It is the most common form of business in the UK.
• Sole traders can operate in any trade/profession, and may be called sole proprietors or sole practitioners.
• The sole trader owns the business, benefits from profits, and bears losses, paying income tax as a self-employed person.
• A sole trader is personally liable for all business debts, and their business and personal assets are treated the same legally.
• Unlimited liability means there is no limit to the sole trader's liability.
• When the sole trader retires/dies, the business ceases, though assets/the business can be sold.
• No specific legislation governs sole traders, but general laws apply such as tax/sales legislation.

Partnerships

• A partnership exists when two or more people run and own a business together, formed under the Partnership Act 1890.
• A partnership involves two or more people carrying on a business in common with a view of profit.
• It is an unincorporated business, and differs from a sole trader because it involves more than one person running the business.
• Partnerships can carry on any trade/profession and can range from simple to multinational.
• Partnerships following for the Partnership Act 1890 definition are referred to as partnerships or general partnerships.
• The Partnership Act 1890 has a default partnership agreement, but the partners can agree to disapply parts of it.
• Partnerships aren't separate legal entities, with assets owned by the partners, who are personally liable for debts.
• If the business can't pay creditors, personal assets are at risk.
• Partners divide profits/losses and are taxed separately as self-employed individuals, paying income tax on their share of the profits..
• Partners are not employees; though usually everyone works for the business, some "sleeping partners" are only involved in making fundamental decisions.

Limited Partnerships

• Limited partnerships ('LPs') are not widely recognized, but have over 50,000 in existence.
• There must be at least one general partner who has unlimited liability for the partnership debts.
• An LP can have a limited partner whose liability is limited to their initial investment, so long as they:
• Do not control/manage the LP.
• Do not have power to make binding decisions for the LP.
• Do not remove their contribution while the LP is in business.
• If any rules are broken, the limited partner loses protection and is treated as a general partner with unlimited liability.
• The Limited Partnerships Act 1907 governs LPs, which were originally meant to encourage entrepreneurs by reducing effects of unlimited liability.
• Limited companies have become the business format of choice, but LPs have returned for specialist financial businesses like investment/venture capital funds.
• Unlike ordinary partnerships, LPs must be registered with the Registrar of Companies before trading.
• Limited partnerships aren't covered in chapter 6 since their significance to modern business practice is limited.

Companies

• Companies can be private or public, and limited by shares or guarantee.
• This book focuses on private companies, limited by shares and unlisted public companies, which will be explained later.

Private Companies Limited by Shares

• Companies are formed in the UK by registering documents with the Registrar of Companies, and need to take steps before trading.
• Companies conduct a wide range of economic activities, and can range from large to small, most having 1-4 employees.
• One advantage of a company over other business mediums is the separate legal personality. This means that the people who own and run the company are separate from the company itself.
• If someone wishes to sue the company, the defendant will be the company, not the individuals.
• The individuals who own the shares in the company will not usually be liable for its debts, their liability being limited to the amount they paid or agreed to pay for their shares.
• This benefit has fueled company growth, as directors can take more risks since their personal assets are safe from creditors.

Separate Legal Personality

• Salomon v A Salomon & Co Ltd [1897] AC 22 confirmed the concept of separate legal personality.
• The House of Lords held that a legally incorporated company must be treated like any independent person with rights and liabilities, and using a company to manage risk and avoid liability for debts is acceptable.
• The claimant has tried to look behind the company and impose liability on the individuals, which is called piercing the corporate veil.
• The most recent authority on this is Prest v Petrodel Resources Limited and others [2013] UKSC 34, where the Supreme Court decided that the corporate veil could only be pierced when a person is under an existing legal obligation/liability or subject to a legal restriction which he evades by interposing a company under his control.
• Even then, the corporate veil can only be pierced to deprive the company/controller of the advantage they would have obtained by the company's separate legal personality.
• Any court decisions ignoring separate legal personality are rare and very specific.

Decision-Making

• Since a company is a legal person, humans make decisions on its behalf, either the directors or shareholders, or someone delegated by the directors.
• The directors run the company and the shareholders provide the money in return for shares.
• Often the directors/shareholders are the same people, but should act like directors when making decisions affecting the day-to-day business, and shareholders when making decisions reserved for them alone.
• Shareholders get involved in the more important decisions.
• Directors collectively make decisions at board meetings, while shareholders make decisions at general meetings, and this introduces a degree of formality.
• The Companies Act 2006 uses 'member' instead of shareholder, focusing on companies limited by shares and using 'shareholder' throughout.

Public Companies Limited by Shares

• A public limited company ('plc') is a company limited by shares that has met the Companies Act 2006 requirements to register as a plc.
• For a company to be a public company:
• The constitution must state that it is a public company.
• The words 'public limited company' or the abbreviation 'plc' must be included at the end of the company's name.
• The company's owners must invest a specified amount of money: the allotted share capital must be at least the 'authorised minimum', currently £50,000, and each allotted share must be paid up to at least a quarter of its nominal value, plus the whole of any premium on it.

Why Operate as a public limited company?

• Being a public company has prestige and the ability to raise money by offering shares to the public.
• Private companies can instead offer their shares to a person already connected with the company or certain other targeted individuals.
• Public companies can join the UK stock market, and the main stock markets are the London Stock Exchange's Main Market and the Alternative Investment Market.
• Stock markets let companies raise money by enabling easy investor purchase.
• A company cannot start as publicly traded; this is only an option if the business reaches a certain size/reputation/level of growth.
• Private companies face less regulation than public companies, raising finance from people who know the company or specialist investors.
• Publicly traded companies are more regulated to protect the public, who can easily invest in a stock market and are at risk if the company does not perform well financially.
• Unlisted companies can offer shares to the public, but it is harder to find buyers.

How to Become a public company

• Companies can register as a public company on original incorporation, or register as a private company and then re-register.

Limited Liability Partnerships

• An LLP can be likened to a cross between a partnership and a limited company, and it has a separate legal personality for its owners.
• It also offers its owners protection from liability for the LLP's debts, run flexibly like a partnership, and taxed as a partnership rather than a company.
• Many law firms are LLPs.
• LLPs can be formed by two or more members running a lawful business with a view of profit.
• They are formed by filing documents with the Registrar of Companies and paying the fee.
• In the same way that partners in a partnership do not have to have an express partnership agreement because the Partnership Act 1890 provides a default contract, in an LLP the Limited Liability Partnerships Regulations 2001 provide a default contract for partners who have not agreed to the terms of their partnership.
• Individual members of the LLP must register with HMRC as self-employed.
• LLPs combine the best features of both companies and partnerships, but are not widely used because the business world is more familiar with companies.

Other types of business medium

• Other business mediums are used for specific purposes, such as:
• Companies limited by guarantee: Usually used for organizations not seeking to make a profit, such as professional societies, which guarantee the company's debts up to a specified amount instead of buying shares.
• Unlimited companies: Rare, most people who are happy to run a business with unlimited liability for its debts will choose to run it as a sole trader or partnership.
• Community interest companies: Limited liability company to use their profits/assets for the public good and not for private profit.
• Charitable incorporated organisations: Offers the corporate structure, such as reduced risk of personal liability, without the burden of dual regulation.
• Overseas companies: Overseas companies set up a regular presence in the UK, governed by the Overseas Companies Regulations 2009. All overseas companies setting up a branch/place of business in the UK must register selected details within one month of their opening.
• Companies established by Act of Parliament or Royal Charter: Trading companies were established by special Act of Parliament to establish railways/public utilities, with 45 still in existence. Sometimes companies were formed by Royal Charter like the Royal Bank of Scotland.

Joint ventures

• Joint ventures are a business enterprise undertaken jointly by two or more parties, who retain their own identity but generally pool their resources for a specific purpose.
• Joint ventures can often be governed merely by contract, or set up a corporate structure to be jointly controlled.
• Joint ventures are not a separate type of business.

What type of business is best?

• Those who wish to set up a business may want advice on which business format to choose, and this depends on many factors.

Liability

• Liability is the most important consideration for setting up a business.
• Shareholders benefit from limited liability for company debts, and partners are personally liable and risk losing everything.
• The concern depends on the business, such as a law firm's largest liability being professional negligence, so it's not as large an issue as it seems.
• Law firms have operated as partnerships but have largely switched to LLPs.

Tax

• Tax is a crucial factor in deciding on a business medium, with important consideration on the tax the owners will pay.
• Whether an incorporated business or unincorporated business is more advantageous depends on the business' financial circumstances and its owners.

Formalities

• It is possible to run a business as a sole trader/partnership without the owner(s) even realizing it, because no formalities are required.
• Setting up a company/LLP is more time-consuming and costly.
• However, it is advisable for partners to have a written partnership agreement, which requires legal advice that costs time and money.
• A benefit for unincorporated businesses is that there are no formal requirements once established (other than tax-related formalities required by HMRC), and no legal documents have to be prepared.
• Companies have to complete meeting minutes, maintain registers, file documents at Companies House, and have their accounts audited, which is time-consuming and may involve extra professional costs.
• Companies are also subject to the Companies Act 2006, which governs how they make decisions.
• Sole traders/partnerships have more freedom over decision-making, but partners may (and should) choose to enter into a partnership agreement.
• Limited liability partnerships must also file documents at Companies House, but are freer on how they make decisions.

Publicity of information

• Sole traders/partnerships must only disclose the identity of the sole trader/partners and an address for service of documents.
• Companies and LLPs must reveal certain information, including financial data, to the public at large.
• Companies must publicize information like their directors/shareholders and significant decisions by filing documents with the Registrar of Companies and keeping company registers open for inspection.

Cost

• Sole traders/partnerships can be set up without any legal/adminstrative cost.
• Forming a company or LLP has a charge, and legal advice is often required.
• Costs are the same regardless of the business chosen, but incoporated businesses usually cost more to run due to the extra legal burdens.

Status

• Many businesses/individuals would prefer trading with a company because companies are often used by large, successful businesses.
• They may be reassured by the information publicly available.

Finance

• Both, companies and LLPs have an additional form of security called the floating charge, which is a charge over all business assets, and is not available to partnerships/sole traders.
• This makes companies more desirable clients for lenders like banks.

The Limited Company

• Unless otherwise stated, chapter 2 focuses on private companies limited by shares, which account for over 96% of corporate bodies registered at Companies House.
• Private limited companies are popular, and a key feature is their separate legal personality from their owners.
• This chapter will focus on how to set up a company and discuss the main features of the company's constitution.

Forming a Company

• To incorporate, the applicant must submit Companies House form IN01, a memorandum of association, and possibly the articles of association with the applicable fee, either electronically or on paper.
• The Economic Crime and Corporate Transparency Act 2023 introduces wide-ranging changes to companies' obligations to keep and file documents at Companies House, and extends the powers of the Registrar of Companies.

Who Will Make the Application?

• Applications can be made online, by post, or through suitable software that is provided by Companies House.
• Some applicants ask their solicitor, accountant, or a company formation agent to apply on their behalf.
• Although the application is addressed to the Registrar of Companies, it is a team of people that actually process the applications and check that requirements have been met.
• The person processing the application must be satisfied that the requirements have been met to incorporate the company and issue a certificate of incorporation.
• The certificate of incorporation must state the name/registered number, date of incorporation, whether it is a limited/unlimited company, and where the company's registered office is.
• The certificate is conclusive evidence the requirements of the Companies Act 2006 as to registration have been complied with and that the company has been registered.
• All companies must be registered with HMRC for corporation tax.

Decisions to be made

• For a company to be set up, there is certain information that must be provided to Companies House by using the form Companies House form IN01.
• The individuals setting up the company will have to make certain decisions about their proposed company so that they can fill in the IN01.

Company name

• The IN01 requires the applicant to insert the company name, but there are some restrictions on the words that can be used.
• Private companies must end in Limited or Ltd, or cyfyngedig or cyf in Wales.
• Public companies must end in plc or public limited company or the Welsh equivalent.
• The company name must not be the same as an existing company: ensure that the proposed name does not already exist using the name availability checker.
• Under the Names Regs 2015, an applicant can only register a 'same as' name if the proposed new company will be part of the same group and the applicant has written confirmation that the company or Limited Liability Partnership (LLP) has no objection to the applicant using the name.
• A company may not use a name which is a criminal offence or offensive.
• The approval of the Secretary of State is needed to register a company which suggests a connection with a government department or authority.
• Under ECCTA 2023, Companies House can now reject an application to register a name where it believes the name to facilitate fraud, is comprised of or contains a computer code, or is likely to give the false impression the company is connected to a foreign government or an international organization whose members include two or more countries or territories
• If a company fails to change its name within 28 days, Companies House can change the company name to its registered company number.
• It is an offence if a company does not respond to a direction to change.
• Names Tribunal, not Companies House, considers objections to the use of a company name which is the same as an existing name in which another person has goodwill.

Trading names

• Companies can trade using a different name from their registered name.
• The Names Regs 2015 and the Companies Act 2006 have restrictions governing choice of company name.
• The form IN01 does not refer to a company's trading name, which can be decided once the company is incorporated.
• There is no need to register business names.

Trademark infringement and passing off

• If a company / trading name is too similar to another company's trademark and the owner makes a complaint, the name may have to be changed: it is wise to carry out a trademark search.
• Sometimes a client's proposed name is very similar to an existing company's name, in which the tortoise of passing off applies.

Registered Office

• The company will need to provide a registered office for correspondence from Companies House and also any official documents.
• The registered office address is publicly available and cannot be kept private, and it must be in the same part of the UK as the company is registered.
• Section 86 Companies Act 2006 now provides that companies must ensure that their registered office is an 'appropriate' address where documents could be seen by persons acting on behalf of on behalf of the company, in which P.O. boxes are now permitted.
• A board resolution is required to change the company's registered office, and the company must file forms AD01 at Companies House: board of directors are also guilty of an offence.
• The registered office is also where records must be kept.

Email address

• Under new provisions under Economic Crime and Corporate Transparency Act (ECCTA) 2023 the company must give an appropriate email address that is sent from the registrar.

First Directors

• The applicant will need to decide who the company Directors will be
• Information must be included on the IN01.
• Directors will run the company Day to day
• The shareholders will be involved in key decisions.
• Every company must have at least one director
• Director must be a natural person greater than 16, and identities will need verification from ECCTA 2023.

Director's residential and service addresses

• A director's service address is the address to which any official documents for that director must be sent, and this address must be inserted on the IN01 for each director, as well as their residential address.
• The Director can choose to use registered offices as service address rater than their residential home address and not put on the public register. The residential addresses are shared with (SPAs)/ Credit Reference Agencies (CRAs). If director doesn't wont it, for risk of harm can make applications and provide evidence.
• Registar now can have service listed for address if set.

Company Secretary

• Private, companies may have one, and their service address must be inserted on the IN01
• The director will also be responsible for filling out documents/ minutes.
• Secretary fails to carry out or failed to carry out duties- New Director must be appointed

First share holders

• Information will go the IN01
• It's common for companies to be incorporated with 2 shareholders or one for liability, there's no max # limit.
• When the company is running more shares can be issued for existing/new shareholders

Statement of capital

• Applicants registering need to proved info on shares to IN01

• to shares/the company's share capital

• Names and addresses of all the current shareholders.

Shares

• Have normal value means the amount which is paid for them. Shares preform well, and holders of the shares are sold at a higher rate.
• The director once incorporated will hold the first board meeting, for a decision allotted shares, and in addition or instead of subs. The company will pay money for providing shareholders to run the business.

The Company's Constitution

• The company's governing documents:
• memorandum of association
• articles of association
• certificate of incorporation, current statement of capital
• copies of any court orders and legislation altering the company's constitution
• shareholder resolutions + any agreements affecting constitution
• Articles are documents which addresses notice period during bored meetings,minimum director in a board meeting and etc
• Consists the statement which shares wants
• the memorandum was simplified. Now it includes a statement from subscribers who agree to the company, signed bye subscribers.
• Because it may not know what included in the Articles, the (MOdel Articles):Schedule 1 for private companies limited and schedule 3 for publics.

Amending

• Shrewders/ % 25 CA 2006
• Is a decision made of 75 % agreement between the holders. They can have a copy of the article amended at companies homes in 15 days
• It should state the rules or obligations it subjected In short
• Apply to adopt the model, with out filing copy.
• . Adopt the models some amendment stating, and change existing provisions
• Supply bespoke articles
• • Applicant indicates when to do so, after having articles must be sent.

People with Significant Control

• Should control >25 percentage of voting shares in the conoany, can by body and or individual
• the in01 form requires the applicant to state whether, on incorporation, there will be someone who will count as a person with significant control. This can be an individual, or it can be a corporate body or a firm that is a legal person under the law by which it is governed (s 790C CA 2006). Control is deemed significant if the person: 18 • holds more than 25% of the shares in the company; or • holds more than 25% of the voting rights in the company; or • holds the right to appoint or remove a majority of the board of directors of the company.

Control

The applicant must tick the relevant box on the form to show that the person holds: • more than 25% but not more than 50% of the company's shares/voting rights; • more than 50% but less than 75% of the company's shares/voting rights; or • 75% or more of the company's shares/voting rights. The reason for Companies House requesting information about persons with significant control is that shareholders with significant shareholdings may exert a great deal of influence over the company, usually because of their voting power. This may be something that third parties would like to know, just as they may be interested in the identity of the company's directors so that they can make informed decisions about whether to do business with the company. The thresholds for each of the three categories of persons with significant control have been chosen because they reflect the percentage of shares needed to block or pass ordinary or special resolutions (although do not forget that not all persons with significant control will have the power to vote - they may instead have non-voting shares)

Lawful purposes

• The applicant must indicate with the completion of 10 form requirements. Is when applied and houses is issued that companies exists

Registration

A full registration appears in 1.10-11 of public or public application of articles 407

• Must get registered approved for form SH 50

Converting public company

• Must have passed a special resolution for that re registration that suitable
• With that time show a condition met to get certificate to trade

What are shelf companies

• This is a company that has been set up but not trading, it’s like a company set on the shelf and will use quick. They put the main people for filling documents.

Post incorporation

• With approval or formation the directors takes steps put company in position to operate the items are shown in the list
• What they must do by Board decision Chair - 13 the chairperson on board, what be controlled not decision,
• 2 bank
• No obligation
• Decision on how to use money
• Know authorization for what should happen
• 3seal
• To perform and put it in the resolution: 2004 What needs to signature . They needs approval

Changing

• Change special resolution to make a 37 under, new certificate under section 80-81
• For companies for what board member show approve.