Types of business entity
Brief overview of different structures
Type What is it? Advantages Disadvantages
Sole trader Someone who runs a business on his own as an → Easy to form → Unlimited liability for
employed person. They are: → Freedom to run as business debts: personal ones
✓ Right to make all the decisions affecting the owner sees fit may be used to repay debts
business; → Sole decision-maker → Lacks status of incorporated
✓ Owns all the assets of the business; → All profits belong to forms
✓ Is responsible for paying income tax on all the owner → No day-to-day support
profits of the business; and
✓ Has unlimited liability for the debts of the
business.
Partnership Governed principally by the Partnership Act 1890: see → Very easy to form → Unlimited liability for firm’s
below for more detail. (only require two debts
✓ Occurs where two or more persons run and own people) → Decision making can be
a business together with a view to make a profit. → Freedom to run as cumbersome
✓ Is unincorporated – NOT a body corporate owners see fit → Lack of written agreement
→ Support of joint lead to uncertainty
decision making → Lack status of incorporated
→ All profits belong to forms
owners – the partners → Leaving partner must be
brought out by remaining
partners (may not be
favourable)
Limited ✓ A company in the UK is formed by registering → Limited liability for → Must register to set up
company certain documents with a public official, in business debts → Extra formality and costs to
accordance with the Companies Act 2006. → Greater status than run
✓ Has separate legal personality other forms → Extra legal duties and
✓ Decisions are made either by the company’s → Potentially larger pool potential liability for directors
directors or shareholders. of investors → Information (inc finances)
o Directors run the company. made public
o Shareholders are the owners. → Profits earned by company,
✓ Not subject to income tax, but corporation tax not owners directly
✓ Liability is limited to its constitution – CA 2006,
s3(1). Can be: Limited by shares (more usual) or
guarantee
LLP A form of unincorporated business is established → Limited liability for → Must register to set up
under the Limited Partnerships Act 1907. business debts → Information (inc finances)
✓ Similar to partnership in that there must be at → Freedom to run as made public
least one general partner who has unlimited business owners see fit → Some extra formalities and
liability. → Support of joint costs to run
✓ However, an LP is permitted to have a limited decision-making
partner whose liability is limited to the amount
he initially invested, providing:
▪ Not controlling or managing the LP
▪ Not having the power to take binding
decisions; and
▪ Not removing his contribution to the LP
for as long as he is in business.
✓ Unlike ordinary partnerships, LPs must be
registered with the Registrar of Companies.
1
, Partnerships - Introduction
What is a ❖ A partnership is where two or more people run and own a business together.
Partnership? ❖ It is created when the definition in s1 of the Partnership Act 1890 is satisfied. There are no
further formalities required.
❖ This means that:
➢ There is no requirement for a written agreement (although it may be advisable to have
one).
➢ If the component elements are satisfied, a partnership will exist even when the
individuals involved are unaware of what they have created legally.
Definition ❖ s1 Partnership Act 1890: “Partnership is the relation which subsists:
➢ Between persons
➢ Carrying on a business in common.
➢ With a view of profit”
“Between ❖ Partners can be individuals or companies.
Persons”
“Carrying on ❖ “Business” “includes every trade, occupation or profession” (s45 PA 1890)
a Business in ➢ Virtually any activity of a commercial nature is capable of giving rise
Common” to a partnership (but not a charity; see below).
❖ The business must be “carried on”. This means that:
➢ There must be more than “mere agreement” (Illot v Williams &
Others
➢ However, there is no requirement that the parties need to have
actually commenced trading for a partnership to be formed:
▪ Khan v Miah [2000] “There is no rule of law that the parties
to a joint venture do not become partners until actual
trading commences. The rule is that persons who agree to
carry on a business activity as a joint venture do not become
partners until they actually embark on the activity in
question”.
▪ In Khan, a partnership was held to exist where the parties
had agreed to open a restaurant together. Whilst they had
not traded, they had taken steps to pursue the venture,
including opening a joint bank account, obtaining a bank
loan, and acquiring premises, furniture and equipment.
“With a view ❖ The purpose of the business must be to make money.
of profit” ❖ Charitable motives are unable to constitute partnerships.
s. 2: guidance ▪ In determining whether partnership exists, regard should be had to:
(1) Joint Tenancy, Tenant in Common etc do not of themselves create
partnership – whether they do or do not share in the profits made from
the use of that property
(2) Sharing of gross returns not of itself create a partnership
❖ Receipt of share of profits = prima facie evidence of partnership, but not
conclusive
Effect of ❖ A partnership is unincorporated; it has no separate legal personality.
Creation - No ❖ This means that:
Separate Legal ➢ “Partnership assets” are not owned by the partnership itself (because it is not a legal
Personality entity); they are owned by the partners.
➢ Partners will be personally liable for any debts, and their personal assets are at risk.
2
, ❖ As compared with a company, the benefits of a partnership are:
➢ Lack of formality; partners to not have to go through any of the extensive
administrative and accounting requirements of a company. Partners are able to focus
on the business itself.
➢ There is no requirement to make as much information public.
Fundamental Partners will tend to have the following rights and responsibilities:
Characteristics
of a Partnership 1. To be involved in making decisions which affect the business (s24(5)).
2. To share in the profits of the business; (s2(3) provides that this will be prima facie evidence
Business Law & that an individual is a partner (s24(1)).
Practice, 13.2.2 3. To examine the accounts of the business;
4. To insist on openness and honesty from fellow partners;
5. To veto the introduction of a new partner; and (s24(7)).
6. Responsibility for sharing any losses made by the business (s24(1)).
Decision ❖ Partners make decisions by a majority vote (s24(8)).
Making ❖ However:
➢ A decision to change the nature of the partnership business can only be done
unanimously (s24(8)).
➢ New partners can only be introduced with the consent of all existing partners (s24(7)).
Advantages Disadvantages
❖ Allows commercial secrecy ❖ Can created fixed charges (but not floating)
❖ Informal in nature, very easy to start up ❖ Each partner is fully liable for all debts of
❖ Flexible – make own arrangement/rules business and any partner – unlimited liability
❖ Tax relief for start-up losses can be claimed ❖ Any partner may act in apparent authority
and bind the firm
3
, Partner’s Responsibilities
❖ Partners are under a duty of the utmost fairness and good faith to each other.
❖ s28 – s30 PA 1890 expands upon this duty, providing that partners are under the following duties:
s28 PA 1890 – ❖ Partners must divulge all relevant information connected with the business and their
Divulge Information relationship to the other partners.
to Other Partners ➢ E.g. if, when selling business premises to the partnership, a partner suppresses
information about the value of the premises.
s29 PA 1890 – ❖ Partners must account to the firm for any benefit derived without the consent of the other
Accounting for partners from a transaction concerning the partnership.
Benefits ➢ Has the partner derived a benefit?
➢ Was this with the other partner’s consent?
➢ E.g. if a partner is asked by a client of the firm to do some work in his spare time, the
money received from this will be cash of the partnership unless the other partners
consent to him keeping it.
s30 PA 1890 – ❖ If a partner runs a business “of the same nature” and competes with the firm, he must account
Account for profits for any profits made by this unless he has the consent of the other partners.
from competing ➢ This catches businesses in direct competition with the partnership.
businesses. ➢ This does not necessarily include similar, but non-competing businesses e.g. a business
in a different part of the supply chain.
4
Brief overview of different structures
Type What is it? Advantages Disadvantages
Sole trader Someone who runs a business on his own as an → Easy to form → Unlimited liability for
employed person. They are: → Freedom to run as business debts: personal ones
✓ Right to make all the decisions affecting the owner sees fit may be used to repay debts
business; → Sole decision-maker → Lacks status of incorporated
✓ Owns all the assets of the business; → All profits belong to forms
✓ Is responsible for paying income tax on all the owner → No day-to-day support
profits of the business; and
✓ Has unlimited liability for the debts of the
business.
Partnership Governed principally by the Partnership Act 1890: see → Very easy to form → Unlimited liability for firm’s
below for more detail. (only require two debts
✓ Occurs where two or more persons run and own people) → Decision making can be
a business together with a view to make a profit. → Freedom to run as cumbersome
✓ Is unincorporated – NOT a body corporate owners see fit → Lack of written agreement
→ Support of joint lead to uncertainty
decision making → Lack status of incorporated
→ All profits belong to forms
owners – the partners → Leaving partner must be
brought out by remaining
partners (may not be
favourable)
Limited ✓ A company in the UK is formed by registering → Limited liability for → Must register to set up
company certain documents with a public official, in business debts → Extra formality and costs to
accordance with the Companies Act 2006. → Greater status than run
✓ Has separate legal personality other forms → Extra legal duties and
✓ Decisions are made either by the company’s → Potentially larger pool potential liability for directors
directors or shareholders. of investors → Information (inc finances)
o Directors run the company. made public
o Shareholders are the owners. → Profits earned by company,
✓ Not subject to income tax, but corporation tax not owners directly
✓ Liability is limited to its constitution – CA 2006,
s3(1). Can be: Limited by shares (more usual) or
guarantee
LLP A form of unincorporated business is established → Limited liability for → Must register to set up
under the Limited Partnerships Act 1907. business debts → Information (inc finances)
✓ Similar to partnership in that there must be at → Freedom to run as made public
least one general partner who has unlimited business owners see fit → Some extra formalities and
liability. → Support of joint costs to run
✓ However, an LP is permitted to have a limited decision-making
partner whose liability is limited to the amount
he initially invested, providing:
▪ Not controlling or managing the LP
▪ Not having the power to take binding
decisions; and
▪ Not removing his contribution to the LP
for as long as he is in business.
✓ Unlike ordinary partnerships, LPs must be
registered with the Registrar of Companies.
1
, Partnerships - Introduction
What is a ❖ A partnership is where two or more people run and own a business together.
Partnership? ❖ It is created when the definition in s1 of the Partnership Act 1890 is satisfied. There are no
further formalities required.
❖ This means that:
➢ There is no requirement for a written agreement (although it may be advisable to have
one).
➢ If the component elements are satisfied, a partnership will exist even when the
individuals involved are unaware of what they have created legally.
Definition ❖ s1 Partnership Act 1890: “Partnership is the relation which subsists:
➢ Between persons
➢ Carrying on a business in common.
➢ With a view of profit”
“Between ❖ Partners can be individuals or companies.
Persons”
“Carrying on ❖ “Business” “includes every trade, occupation or profession” (s45 PA 1890)
a Business in ➢ Virtually any activity of a commercial nature is capable of giving rise
Common” to a partnership (but not a charity; see below).
❖ The business must be “carried on”. This means that:
➢ There must be more than “mere agreement” (Illot v Williams &
Others
➢ However, there is no requirement that the parties need to have
actually commenced trading for a partnership to be formed:
▪ Khan v Miah [2000] “There is no rule of law that the parties
to a joint venture do not become partners until actual
trading commences. The rule is that persons who agree to
carry on a business activity as a joint venture do not become
partners until they actually embark on the activity in
question”.
▪ In Khan, a partnership was held to exist where the parties
had agreed to open a restaurant together. Whilst they had
not traded, they had taken steps to pursue the venture,
including opening a joint bank account, obtaining a bank
loan, and acquiring premises, furniture and equipment.
“With a view ❖ The purpose of the business must be to make money.
of profit” ❖ Charitable motives are unable to constitute partnerships.
s. 2: guidance ▪ In determining whether partnership exists, regard should be had to:
(1) Joint Tenancy, Tenant in Common etc do not of themselves create
partnership – whether they do or do not share in the profits made from
the use of that property
(2) Sharing of gross returns not of itself create a partnership
❖ Receipt of share of profits = prima facie evidence of partnership, but not
conclusive
Effect of ❖ A partnership is unincorporated; it has no separate legal personality.
Creation - No ❖ This means that:
Separate Legal ➢ “Partnership assets” are not owned by the partnership itself (because it is not a legal
Personality entity); they are owned by the partners.
➢ Partners will be personally liable for any debts, and their personal assets are at risk.
2
, ❖ As compared with a company, the benefits of a partnership are:
➢ Lack of formality; partners to not have to go through any of the extensive
administrative and accounting requirements of a company. Partners are able to focus
on the business itself.
➢ There is no requirement to make as much information public.
Fundamental Partners will tend to have the following rights and responsibilities:
Characteristics
of a Partnership 1. To be involved in making decisions which affect the business (s24(5)).
2. To share in the profits of the business; (s2(3) provides that this will be prima facie evidence
Business Law & that an individual is a partner (s24(1)).
Practice, 13.2.2 3. To examine the accounts of the business;
4. To insist on openness and honesty from fellow partners;
5. To veto the introduction of a new partner; and (s24(7)).
6. Responsibility for sharing any losses made by the business (s24(1)).
Decision ❖ Partners make decisions by a majority vote (s24(8)).
Making ❖ However:
➢ A decision to change the nature of the partnership business can only be done
unanimously (s24(8)).
➢ New partners can only be introduced with the consent of all existing partners (s24(7)).
Advantages Disadvantages
❖ Allows commercial secrecy ❖ Can created fixed charges (but not floating)
❖ Informal in nature, very easy to start up ❖ Each partner is fully liable for all debts of
❖ Flexible – make own arrangement/rules business and any partner – unlimited liability
❖ Tax relief for start-up losses can be claimed ❖ Any partner may act in apparent authority
and bind the firm
3
, Partner’s Responsibilities
❖ Partners are under a duty of the utmost fairness and good faith to each other.
❖ s28 – s30 PA 1890 expands upon this duty, providing that partners are under the following duties:
s28 PA 1890 – ❖ Partners must divulge all relevant information connected with the business and their
Divulge Information relationship to the other partners.
to Other Partners ➢ E.g. if, when selling business premises to the partnership, a partner suppresses
information about the value of the premises.
s29 PA 1890 – ❖ Partners must account to the firm for any benefit derived without the consent of the other
Accounting for partners from a transaction concerning the partnership.
Benefits ➢ Has the partner derived a benefit?
➢ Was this with the other partner’s consent?
➢ E.g. if a partner is asked by a client of the firm to do some work in his spare time, the
money received from this will be cash of the partnership unless the other partners
consent to him keeping it.
s30 PA 1890 – ❖ If a partner runs a business “of the same nature” and competes with the firm, he must account
Account for profits for any profits made by this unless he has the consent of the other partners.
from competing ➢ This catches businesses in direct competition with the partnership.
businesses. ➢ This does not necessarily include similar, but non-competing businesses e.g. a business
in a different part of the supply chain.
4
