Legal Forms of Business
Raising Finance
4 main ways:
- Owner investment
- Outside investors making capital contribution for share of future profits
- Borrowing
- Profit retention & reinvestment
Considerations when forming business
- Cost
- Risk
- Structure
- Formalities
- Privacy
- Finance
Sole traders: key characteristics
- No set up costs - can trade w/o formalities
- Not separate legal entity - contracts formed w/ individual themselves & third party
- Unlimited personal liability - sole trader’s personal assets potentially liable to be sold to
meet debts of business
- No formal structure
- No CH filing/procedural requirements for running business
- Complete privacy - no need for publicly filed accounts etc
Partnerships: Key characteristics
- No set up costs - can trade w/o formalities
- Partnerships can be formed w/o any formal agreement or even intention
- Not a separate legal entity - third parties & partners as individuals form contracts
- Unlimited personal liability - joint (in contract) or joint & several (in tort) liability for debts
& obligations of partnership incurred while they are partners
- No CH filing / procedural requirements for running business
- Total privacy - no requirement for publicly filed accounts etc
- Governed by provisions of Partnership Act 1890
- In reality: important that partners create agreement to deal with issues like profit share
etc
Partnership: Formation
- Partnership (PA 1890): ‘the relation which subsists between persons carrying on a
business in common with a view to profit’
- Partnerships can therefore be created without any formalities
- Factors determining whether a partnership exiss:
, - Whether profits/losses are shared
- Whether loan is made from one partner to another
- Whether property is held jointly
- Evidence of profit sharing = prima facie evidence of a partnership but not
necessarily conclusive evidence
- Loan from one party to another does not of itself create a partnership
Does a partnership exist?
- Northern Sales Limited v Ministry of National Revenue [1973]: if there is an agreement to
share losses + profits, this makes existence of a partnership more likely
Terms of Partnership
- Parnership agreement is advisable - otherwise partnership will be governed by default
provisions of PA 1890
- S24(1): profits & losses shared equally, regardless of contribution to capital - therefore
should be express provision in agreement setting out profit sharing ratio
Partnership Act 1890
S24
- (1) profits & losses: partners are entitled to share equally in profits of business & must
share equally in losses, even where parties have contributed to capital unequally
- (6) remuneration: partners not entitled to a salary
- (8) decision making: decisions arising during ordinary course of business are decided by
a majority, except for any change to nature of partnership business which requires
unanimity
S25:
- Expulsion: a partner cannot be expelled by majority vote unless all of the partners have
previously expressly agreed that a majority can do this
Partnership Agreements
- Partners’ mutual rights & obligations can be varied at any time by unanimous consent
- Partners will wish to vary default provisions of PA 1890 as they’re not suitable for
modern business
- Any express agreement will override default provisions of PA 1890, partners should
ensure they draw up written express Partnership Agreement to regulate their partnership
as they require which will provide for certainty
Partnership Agreement principles (typically):
- Profit sharing ratio
- Salaries
- Decision-making
- Partner leaving partnership
- New partners appointed & partner removal
,Limited Partnerships LP: Key characteristics
- LP: 2 different types of partners:
- Limited partners w/ limited liability: must not be involved in management of
business (‘sleeping partners’ - passive investors)
- If do become involved, they lose limited status & become general
partners w/ unlimited personal liability
- General partners who run business & have unlimited liability
- LPs governed by Limited Partnership Act 1907: must be registered at CH but no
requirement to file accounts
- Rarely used for general business - more investment vehicles
- Investor (limited partner) puts money into business run by general partner
- 6/4/2017: new sub-category of limited partnership - private fund limited partnership -
commonly used for investment vehicles
Limited Liability Partnership (LLP): Key Characteristics
- Introduced by LLP Act 2000
- Key difference: separate legal personality - can own property & enter into contracts on
its own behalf
- Tax purposes: treated as partnership - members taxed as partners - each liable
to pay tax on shares of income/gains: ‘tax transparency’
- All partners in LLP have limited liability to the amount they’ve agreed to pay under terms
of partnership agreement
- Registered at CH in same way as companies - required to file annual accounts & other
info
- In effect - a hybrid between traditional partnership (procedural flexibility) &
company (limited liability)
- LLP: structure allows partners to have tax transparency & procedural flexibility of a
traditional partnership w/o personal liability
- Can prescribe own management structure & set out how they want profits shared
- decide salaries of all partners/staff etc
- Negative: need to ensure that annual accounts & other prescribed ino are filed at
CH in accordance w/ provisions of LLPA 2000
- Organisational structure = flexible: should be decided between partners in formal written
Members Agreement
- Default provisions in Regs 7 & 8 of LLP Regs
Summary
- Key considerations in choosing business model: costs, risk, structure, formalities,
privacy & finance
- Possibilities: sole trader, partnership, limited partnership, LLP, private limited company &
public limited company
, - + & - should be carefully considered - also need to carefuly consider finnacial issues of
choosing a particular business model - like tax implications
Key Characteristics of Companies
- Separate legal entity: distinct from owners - can enter into contracts, sue/be sued in its
own name
- Profits & losses belong to company, not shareholders - therefore company is liable for
debts, not shareholders
- Limited liability: liability of shareholders is limited to amount unpaid on their shares (if
any)- protects shareholders & facilitates investment
Companies Act 2006
- Key legislation - many changes (from CA 1985), was to simplify the law for private
companies, e.g.
- Removal of requirement for private companies to hold AGM/submit Annual
Returns (replaced with simpler annual Confirmation Statement)
- Codification of directors’ duties so that directors of small private companies can
more easily understand obligations
- Private companies allowed to pass shareholder resolutions in writing (not
meetings)
Alternative business structures
- Sole trader
- Partnership
- Limited partnership
- Limited liability partnership
Private Companies
- Private companies limited by shares (Ltd)
- Most common type: no minimum share capital requirements
- Prohibited from offering shares to public
- Can be formed by one person
- Private companies limited by guarantee
- No share capital
- Liability of members = limited to amount they agreed to contribute in event of
winding up
- Membership not transferable
- Relatively rare
- Unlimited companies
- Liability of members = unlimited
- Rare
Raising Finance
4 main ways:
- Owner investment
- Outside investors making capital contribution for share of future profits
- Borrowing
- Profit retention & reinvestment
Considerations when forming business
- Cost
- Risk
- Structure
- Formalities
- Privacy
- Finance
Sole traders: key characteristics
- No set up costs - can trade w/o formalities
- Not separate legal entity - contracts formed w/ individual themselves & third party
- Unlimited personal liability - sole trader’s personal assets potentially liable to be sold to
meet debts of business
- No formal structure
- No CH filing/procedural requirements for running business
- Complete privacy - no need for publicly filed accounts etc
Partnerships: Key characteristics
- No set up costs - can trade w/o formalities
- Partnerships can be formed w/o any formal agreement or even intention
- Not a separate legal entity - third parties & partners as individuals form contracts
- Unlimited personal liability - joint (in contract) or joint & several (in tort) liability for debts
& obligations of partnership incurred while they are partners
- No CH filing / procedural requirements for running business
- Total privacy - no requirement for publicly filed accounts etc
- Governed by provisions of Partnership Act 1890
- In reality: important that partners create agreement to deal with issues like profit share
etc
Partnership: Formation
- Partnership (PA 1890): ‘the relation which subsists between persons carrying on a
business in common with a view to profit’
- Partnerships can therefore be created without any formalities
- Factors determining whether a partnership exiss:
, - Whether profits/losses are shared
- Whether loan is made from one partner to another
- Whether property is held jointly
- Evidence of profit sharing = prima facie evidence of a partnership but not
necessarily conclusive evidence
- Loan from one party to another does not of itself create a partnership
Does a partnership exist?
- Northern Sales Limited v Ministry of National Revenue [1973]: if there is an agreement to
share losses + profits, this makes existence of a partnership more likely
Terms of Partnership
- Parnership agreement is advisable - otherwise partnership will be governed by default
provisions of PA 1890
- S24(1): profits & losses shared equally, regardless of contribution to capital - therefore
should be express provision in agreement setting out profit sharing ratio
Partnership Act 1890
S24
- (1) profits & losses: partners are entitled to share equally in profits of business & must
share equally in losses, even where parties have contributed to capital unequally
- (6) remuneration: partners not entitled to a salary
- (8) decision making: decisions arising during ordinary course of business are decided by
a majority, except for any change to nature of partnership business which requires
unanimity
S25:
- Expulsion: a partner cannot be expelled by majority vote unless all of the partners have
previously expressly agreed that a majority can do this
Partnership Agreements
- Partners’ mutual rights & obligations can be varied at any time by unanimous consent
- Partners will wish to vary default provisions of PA 1890 as they’re not suitable for
modern business
- Any express agreement will override default provisions of PA 1890, partners should
ensure they draw up written express Partnership Agreement to regulate their partnership
as they require which will provide for certainty
Partnership Agreement principles (typically):
- Profit sharing ratio
- Salaries
- Decision-making
- Partner leaving partnership
- New partners appointed & partner removal
,Limited Partnerships LP: Key characteristics
- LP: 2 different types of partners:
- Limited partners w/ limited liability: must not be involved in management of
business (‘sleeping partners’ - passive investors)
- If do become involved, they lose limited status & become general
partners w/ unlimited personal liability
- General partners who run business & have unlimited liability
- LPs governed by Limited Partnership Act 1907: must be registered at CH but no
requirement to file accounts
- Rarely used for general business - more investment vehicles
- Investor (limited partner) puts money into business run by general partner
- 6/4/2017: new sub-category of limited partnership - private fund limited partnership -
commonly used for investment vehicles
Limited Liability Partnership (LLP): Key Characteristics
- Introduced by LLP Act 2000
- Key difference: separate legal personality - can own property & enter into contracts on
its own behalf
- Tax purposes: treated as partnership - members taxed as partners - each liable
to pay tax on shares of income/gains: ‘tax transparency’
- All partners in LLP have limited liability to the amount they’ve agreed to pay under terms
of partnership agreement
- Registered at CH in same way as companies - required to file annual accounts & other
info
- In effect - a hybrid between traditional partnership (procedural flexibility) &
company (limited liability)
- LLP: structure allows partners to have tax transparency & procedural flexibility of a
traditional partnership w/o personal liability
- Can prescribe own management structure & set out how they want profits shared
- decide salaries of all partners/staff etc
- Negative: need to ensure that annual accounts & other prescribed ino are filed at
CH in accordance w/ provisions of LLPA 2000
- Organisational structure = flexible: should be decided between partners in formal written
Members Agreement
- Default provisions in Regs 7 & 8 of LLP Regs
Summary
- Key considerations in choosing business model: costs, risk, structure, formalities,
privacy & finance
- Possibilities: sole trader, partnership, limited partnership, LLP, private limited company &
public limited company
, - + & - should be carefully considered - also need to carefuly consider finnacial issues of
choosing a particular business model - like tax implications
Key Characteristics of Companies
- Separate legal entity: distinct from owners - can enter into contracts, sue/be sued in its
own name
- Profits & losses belong to company, not shareholders - therefore company is liable for
debts, not shareholders
- Limited liability: liability of shareholders is limited to amount unpaid on their shares (if
any)- protects shareholders & facilitates investment
Companies Act 2006
- Key legislation - many changes (from CA 1985), was to simplify the law for private
companies, e.g.
- Removal of requirement for private companies to hold AGM/submit Annual
Returns (replaced with simpler annual Confirmation Statement)
- Codification of directors’ duties so that directors of small private companies can
more easily understand obligations
- Private companies allowed to pass shareholder resolutions in writing (not
meetings)
Alternative business structures
- Sole trader
- Partnership
- Limited partnership
- Limited liability partnership
Private Companies
- Private companies limited by shares (Ltd)
- Most common type: no minimum share capital requirements
- Prohibited from offering shares to public
- Can be formed by one person
- Private companies limited by guarantee
- No share capital
- Liability of members = limited to amount they agreed to contribute in event of
winding up
- Membership not transferable
- Relatively rare
- Unlimited companies
- Liability of members = unlimited
- Rare
