55cec8d7-e867-492b-b6f4-2568b82dedeb_Business_Law__Practice.pdf

🐚 Business Law & Practice Learning Outcomes By the end of this chapter, you will be able to: Identify and compare the different types of incorporated and unincorporated businesses operating in England...

🐚 Business Law & Practice Learning Outcomes By the end of this chapter, you will be able to: Identify and compare the different types of incorporated and unincorporated businesses operating in England and Wales. Provide basic advice on the appropriate type of business for a particular client. Identify the documents required to create a new company. Advise on the decisions an applicant must make before applying to register a new company. Understand the role of solicitors, company formation agents, and the Registrar of Companies in setting up a company. Understand the significance of a company’s constitution, especially the articles of association and their key provisions. 1.1 Introduction Businesses are essential to our daily lives. Almost everything we own, eat, or use is produced, sold, or transported by a business. The UK creates economic wealth through businesses, so it’s not surprising that most solicitors will engage with businesses in practice. Corporate Lawyers: Spend their careers representing businesses. Other Practice Areas: Even solicitors in areas like divorce or criminal law may need knowledge of business law. For example: Divorce: Understanding business law can help in cases where assets are hidden through a company structure. Business Law & Practice 1  Fraud Cases: Knowledge of business and accounts is crucial in criminal cases involving financial fraud. Therefore, a good grounding in business law is important for solicitors in all fields. Setting up a Business Clients looking to set up a business face a wide range of options. This chapter explains the main types of business and why a client might choose one form over another. It also covers the process of setting up a company and explores the company’s constitution. Part 1: Types of Business 1.2 Incorporated and Unincorporated Businesses Incorporated Business: A separate legal entity from its owners and managers. Owners generally aren’t personally liable for business debts. Example: Limited company (covered later in the chapter). Unincorporated Business: Business Law & Practice 2  Run by individuals without forming a separate legal entity, meaning the owners have full personal liability for business debts. The shareholders and directors of a company, who own its shares and run the business, are usually not liable for the company’s debts or actions. They are protected by the "corporate veil." However, in some cases, the court can pierce the veil and hold the controllers (usually the shareholders) liable. Below, we discuss the main types of business medium, starting with unincorporated businesses (sole traders, partnerships and limited partnerships) and then moving to incorporated businesses. 1.3 Sole Traders Definition: A sole trader is someone who runs an unincorporated business alone as a self-employed person. This is the most common type of business in the UK. Examples: From dog walkers to architects. Business Law & Practice 3  Professionals like solicitors who operate alone are known as sole practitioners. Key Features: A sole trader owns the business, benefits from its profits, and is personally liable for its losses. They can have employees, but the sole trader bears all the risks and rewards of the business. They earn income from customers, pay expenses, and keep the profits. Sole traders pay income tax as self-employed individuals. Unlimited Liability: If a sole trader cannot pay their business debts, creditors can claim from both business and personal assets. For example, if a sole trader operates a café and cannot pay suppliers, legal action may result in personal assets being seized to cover debts. In the worst case, the sole trader could be declared bankrupt. Legislation: There is no single law governing sole traders, but their activities are regulated by general laws (e.g., tax law, sale of goods law). 1.4 Partnerships A partnership exists when two or more people run and own a business together. It is formed based on the definition in the Partnership Act 1890 (PA 1890), which states a partnership is when two or more people are "carrying on a business in common with a view of profit." A partnership is an unincorporated business, differing from a sole trader as it involves more than one person. Business Law & Practice 4  Key Features of Partnerships: Partnerships can operate in any trade or profession. They range from small businesses (e.g. two people running a gardening service) to large multinational law firms. Partnerships that meet the PA 1890 definition are typically called general partnerships, to distinguish them from limited partnerships (LPs) and limited liability partnerships (LLPs). Partnership Agreement: The PA 1890 provides a default partnership agreement. Partners can choose to create their own agreement, disapplying some provisions of the PA 1890. If no agreement is made, the default provisions apply. Legal and Financial Structure: A partnership is not a separate legal entity. Partnership assets are owned by the partners, not the partnership itself. Personal liability: Partners are personally liable for all partnership debts. If the business cannot pay creditors, personal assets are at risk. Business Law & Practice 5  Profits and losses are divided between the partners. Taxation: Partners are taxed as self-employed individuals and pay income tax on their share of the profits. If a partner is a company, they may be liable for corporation tax on their share. Roles within the Partnership: Partners are not employees; they own the business. Partners usually work in the business, but there can be sleeping partners who only make major decisions and do not handle day-to-day operations. For more details, Chapter 6 covers the law on partnerships. 1.5 Limited Partnerships (LPs) Limited Partnerships (LPs) are less common but there are currently over 50,000 LPs in existence. LPs vs General Partnerships: Must have at least one general partner with unlimited liability. An LP can have a limited partner whose liability is limited to their initial investment. Conditions for Limited Partners: A limited partner must not: 1. Control or manage the LP. 2. Make binding decisions on behalf of the LP. 3. Withdraw their contribution while the LP is in business. If these rules are breached, the limited partner will lose limited liability and be treated as a general partner with unlimited liability. Legal Framework Business Law & Practice 6  LPs were designed to reduce the risks of unlimited liability, encouraging entrepreneurship. LPs are governed by the Limited Partnerships Act 1907 (LPA 1907). Current Use of LPs Although LPs became less popular with the rise of limited companies, they are now commonly used in specialist financial sectors such as investment funds and venture capital funds. Registration LPs must be registered with the Registrar of Companies before trading can begin. Note: LPs are not covered in Chapter 6 due to their limited significance in modern business practices. 1.6 Companies Companies come in various forms, such as private or public, and can be limited by shares or guarantee. This book focuses on two types: 1. Private companies limited by shares 2. Unlisted public companies limited by shares Key characteristics of a company CO Ltd v TJ Graham and Sons Ltd 1957 "A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company [the employees are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does." Per Lord Denning in HL Bolton (Engineering) Co Ltd v TJ Graham and Sons Ltd 1 QB 159. Private Companies Limited by Shares Business Law & Practice 7  When we think of businesses, we often picture a company. In the UK, a company is formed by registering specific documents with the Registrar of Companies, in line with the Companies Act 2006 (CA 2006). Unlike sole traders and partnerships, which can start operating immediately, companies must follow certain steps before trading. Companies can range from large corporations to small businesses with just a few employees. One key advantage of a company is separate legal personality, meaning the company is a distinct legal entity from its owners and directors. This separation limits the liability of shareholders, who are typically only responsible for the amount they have invested in the company's shares. In the UK, a company is created by registering documents with the Registrar of Companies, according to the Companies Act 2006 (CA 2006). Unlike sole traders and partnerships, which can start right away, companies must complete certain steps before they can begin trading. Companies can be large or small, from big corporations to small businesses with a few employees. A key benefit is that a company has a separate legal personality, meaning the company is a distinct legal entity from its owners and directors. This means shareholders' liability is limited to the amount they have invested in the company’s shares. Separate Legal Personality The case of Salomon v A Salomon and Co Ltd AC 22 cemented the principle of separate legal personality. The court ruled that, once incorporated, a company is legally considered a separate person, regardless of how much control an individual has over it. Attempts to "pierce the corporate veil," or hold individuals behind the company liable for its actions, have been rare. The Prest v Petrodel Resources Ltd UKSC 34 case established that this can only happen if an individual deliberately uses the company to evade legal obligations. Decision-Making in Companies Business Law & Practice 8  As a legal entity, a company requires decision-makers. These are typically the directors, who run the company, and the shareholders, who provide capital in return for shares. Directors focus on the company's day-to-day operations, while shareholders weigh in on significant decisions. Though often the same individuals, they act in different capacities when making decisions. The Companies Act 2006 refers to shareholders as "members" in certain contexts, but this book will use the term "shareholders." Public Companies Limited by Shares (plc) A public limited company (plc) is a company that meets the CA 2006 requirements for public registration. Some of the largest UK companies are public companies. To qualify as a plc, a company must: 1. Have a constitution stating it is a public company. 2. Include "public limited company" or "plc" in its name. 3. Have at least £50,000 in allotted share capital, with at least a quarter of each share's nominal value paid up (ss 761, 763, 586 CA 2006). Advantages of a plc Public companies can raise money by offering shares to the public, unlike private companies, which are restricted from doing so (s 755 CA 2006). Public companies can also join stock markets, such as the London Stock Exchange's Main Market or AIM, enabling them to raise large sums of money. Regulation and Listing Public companies are subject to stricter regulations than private companies because they can raise money from the public. Fewer than a quarter of public companies are listed on the stock market, and unlisted public companies may find it difficult to attract buyers for their shares. 1.7 Limited Liability Partnerships (LLPs) An LLP is a hybrid between a partnership and a limited company, formed under the Limited Liability Partnerships Act 2000 (LLPA 2000). Like a company, it Business Law & Practice 9  has a separate legal personality and offers its members limited liability. However, LLPs are operated more flexibly, like partnerships, and their partners are taxed as individuals. LLPs formation LLPs are formed by filing the necessary documents with the Registrar of Companies and paying a registration fee. Members must also register with HMRC as self-employed. Many law firms operate as LLPs due to the flexibility and protection they offer. 1.8 Other Types of Business Mediums Other business structures, while less common, serve specific purposes. Some include: Companies limited by guarantee Used for non-profit organizations like professional societies, where shareholders guarantee the company's debts rather than holding shares. Unlimited companies Rare in practice since they offer unlimited liability for the owners, who might prefer sole traders or partnerships instead. Charitable incorporated organizations Offer the advantages of limited liability without the dual regulation of Companies House and the Charity Commission. Overseas companies Foreign companies that establish a branch in the UK must register certain details with the Registrar within one month. Companies formed by Act of Parliament or Royal Charter Historically used for public utilities or banks. While rare, some companies, such as the Royal Bank of Scotland, still operate under this structure. Joint ventures Business Law & Practice 10  Commercial projects shared between two or more parties, pooling resources without forming a separate legal entity. 1.9 Choosing the Right Business Structure When starting a business, selecting the best business structure is a critical decision. The right choice depends on various factors, as explained below. 1. Liability Liability is often the most crucial factor for those establishing a business. Here's how it works for different business formats: Limited Companies Shareholders have limited liability, meaning they are not personally responsible for the company's debts. Their liability is limited to the amount they have invested. Partnerships Partners are personally liable for the debts of the partnership. This means they could lose personal assets if the business incurs debt. Example: In a law firm, the biggest risk might be a professional negligence claim, which is often covered by insurance. This reduces the concern over liability. Many law firms have historically operated as partnerships, but some have transitioned to a safer model like a Limited Liability Partnership (LLP). 2. Taxation Tax considerations are also important when choosing a business structure. The tax advantages vary depending on the business structure and the financial situation of the owners: Incorporated Businesses (e.g., Limited Companies): These businesses might offer tax benefits, depending on how profits are distributed (through salaries or dividends). Unincorporated Businesses (e.g., Partnerships, Sole Proprietorships): These are taxed differently, and which is more Business Law & Practice 11  favorable depends on the individual financial circumstances of the owners. In conclusion, the best business structure depends on the level of liability you are willing to accept and the tax implications based on your financial situation. Consulting a legal or financial advisor can help you make the right decision. Formalities and Business Types Sole Traders & Partnerships No formal setup needed. Optional partnership agreement: Recommended but requires legal advice and costs. Few ongoing requirements: Only tax-related filings with HMRC. Companies More complex setup: Requires legal/accountancy advice and costs. Ongoing formalities: Must file documents with Companies House, maintain registers, and often file audited accounts. Governed by the Companies Act 2006: Strict rules on decision- making. Limited Liability Partnerships (LLPs) Fewer filings than companies. Flexible decision-making, similar to partnerships. Publicity of Information Sole Traders & Partnerships: Minimal disclosure (identity and service address). Companies & LLPs: Must disclose financials, director/shareholder info, and key decisions to the public. Business Law & Practice 12  Cost Sole Traders & Partnerships: No setup costs, but a partnership agreement incurs fees. Companies & LLPs: Require setup fees and incur ongoing administrative costs due to legal requirements. Summary Sole traders and partnerships are simple and cost-effective with fewer formalities. Companies and LLPs involve more setup, legal obligations, and ongoing administrative costs, but offer more structure and liability protection. Publicity of Information: Sole traders and partnerships must disclose the identity of the owner(s) and an address for service of documents, but no other details. Companies and LLPs, however, must make public certain financial information and details about directors and shareholders by filing documents with the Registrar of Companies. Those seeking privacy often prefer sole traders or partnerships due to fewer publicity requirements. Cost: Sole traders and partnerships have minimal setup costs, while forming a company or LLP involves fees and potentially legal advice. Running a company or LLP also incurs higher administrative costs due to legal obligations. Status: Many prefer dealing with companies over sole traders or partnerships due to the perception of greater reliability and the availability of public information about companies. Finance: Companies and LLPs can offer floating charges as security for loans, which partnerships and sole traders cannot, making them more appealing to lenders. Client Example: Business Law & Practice 13  Amal and Dev, surveyors, decide to start a partnership. They don't expect significant liabilities beyond what their insurance covers, dislike paperwork, and don’t see the need for limited liability, so they prefer a partnership over forming a company. Research Law Trove Westlaw Lexis+UK Elite Blackboard Outlook Business Law & Practice 14