UK Business Structures Overview

Aims of the Topic

• Provide background information on UK business structures.
• Introduce key legal structures for UK businesses.
• Highlight features and differences between legal structures.
• Evaluate advantages and disadvantages for different businesses.
• Offer context for studying company law.

Overview of the Topic

• General background information.
• Legal business structures in the UK:
  • Sole traders.
  • Partnerships.
  • Companies.
• The rise of the corporate economy and company theory's significance.

Relevant Government Departments

• Department of Business and Trade (DBT) - current (Feb 2023).
• Various previous iterations with differing names (DBEIS, DBIS, DBERR, DTI).

The Registrar of Companies (Companies House)

• Executive agency under the DBT.
• Separate Registrars for England & Wales, Scotland, and Northern Ireland.
• Duties include:
  • New company formation.
  • Maintaining company records.
  • Receiving annual accounts.
  • Publicly accessible company files.

Impact of Brexit

• Common UK Company Law for England & Wales, Scotland, and Northern Ireland.
• EU harmonisation, especially for listed companies.
• Differences from other European systems, particularly regarding board structure and director appointment.

Three Generic Business Structures

• Sole trader (most common).
• Partnership.
• Company.
• Types exist within these structures (e.g., limited liability partnerships).
• Fewer other notable legal structures.

Legal Structures in the UK

• The three main types: sole traders (56%), partnerships (6%), and companies (37%).
• Figures are 2022 DBEIS estimates.
• One business could consist of multiple companies.

Business Names

• Freedom in choosing names, apart from a few restrictions.
• Disclose name on stationary and premises.
• Restrictions on identical/similar names; some words may require permission.

Deciding on a Legal Structure - Key Considerations

• Ease of management: administrative requirements, staff, costs.
• Ease of raising finance: market conditions & ability to scale.
• Risk protection: personal liability exposure.

A. The Sole Trader

• Owner is the business; includes freelancers & self-employed contractors.
• Advantages: Convenience and control, potential tax/NI benefits.
• Disadvantages: Unlimited personal liability; difficulty expanding.

B. The Partnership

• Two or more individuals sharing business profits.

• Features: firm structure without separate legal personality; shared assets, profits, losses. All partners are agents of each other and have unlimited liability.

• Formation: Agreement to share business profits.

• Operation: Collective management; governed by partnership agreement.

• Regulation: Partnership Act 1890 (generally permissive).

• Advantages: Additional capital/expertise, shared management. Easy to set up (arises automatically).

• Disadvantages: Lack of separate legal personality; potential organizational/practical difficulties. Partner death/bankruptcy can terminate. Unlimited joint/several partner liability; harder to raise finance.

• Special types: Limited Partnership (LP) and Limited Liability Partnership (LLP).

C. The Company

• Separate legal personality, distinct from owners.
• Purpose: Shield owners from personal liability for company debts.
• Management: Directors appointed by shareholders.
• Ownership: Members (or shareholders) share profits.
• Liability: Limited liability for shareholders (up to their investment).
• Distinction: Shareholders own, directors manage.

Forming and Operating a Company

• Registration is necessary to form a company.
• Key players: Shareholders, directors, employees, creditors, customers, community.
• Operation: Directed by directors, governed by constitution (Articles of Association).

Company Regulation

• Main source: Companies Act 2006.
• Other legislation: Insolvency Act 1986, Directors Disqualification Act 1986.
• Common law, contractual agreements (e.g., Articles of Association, shareholders' agreements, directors' service contracts).
• Codes of conduct.

Directors of a Company

• Appointed/removed by shareholders.
• Agents of the company, manage for shareholder benefit (s.172 CA 2006).
• Codified director duties in Companies Act 2006, Part X.

Company Constitution (Articles of Association)

• Sets out directors' and shareholder powers, regulates company affairs.
• Public document; crucial for transparency.
• Shareholders can amend the Articles (special resolution - 75% majority).

Financing a Company

• Loan: Company pays interest, potentially secured.
• Equity: Company issues shares, shareholders receive dividends.
• "Share capital" refers to the issued shares.

Shares and Shareholders

• Shareholders have voting rights, rights to profits.
• Shares' designated/nominal value; voting rights.
• Share classes exist.

Public and Private Companies

• Public Companies (plc): Shares traded publicly, stringent regulations (minimum share capital, directors).
• Private Companies (ltd): Shares not traded publicly, less regulation.

Advantages of Public Companies

• Easier share trading, potentially higher value.

Disadvantages of Public Companies

• Subject to greater regulatory scrutiny.

Public Company Financing and Listing

• Raise equity from initial public offerings (IPOs) or subsequent issues.
• Reasons for listing include raising capital and enabling shareholder sales.

Private Equity

• Growing trend of private investment in companies.
• Avoidance of public regulation.

Governance of Public Companies

• Subject to listed stock exchange rules, city codes on takeovers, and corporate governance codes (e.g., updated Cadbury Report).

Other Company Types

• Unregistered, unlimited, guarantee-limited, community interest companies.

Rise of the Company

• Dominant form of business organization, esp. large businesses.

Importance of Company Law

• Understanding the law and its potential development.
• Assessment of legal/economic policy effectiveness.

Company Theories

• Company as shareholders' property.
• Company as contracts nexus.

Corporate Governance Debates

• Director remuneration.
• Stakeholder vulnerability.
• Legitimate interests in company affairs (employees, community).

Corporate Social Responsibility

• Risk-taking, outsourcing and tax avoidance.
• Beyond profit maximization.
• Corporate citizenship.

S172 CA 2006

• Directors' duty to consider company impact on stakeholders beyond shareholders.