Company Law
Revision Notes
FORMS OF BUSINESS ORGANISATION
______________________________________________________________________________________________
A) INTRODUCTION
What is a business organisation?
Business organisation are an effective combination of three things :
(i) You need capital (money) so a key question in evaluating a form of business organisation is,
does it facilitate investment in the business?
(ii) No business venture is guaranteed to succeed, so the second question is whether the form of
business organisation mitigates or minimises the risk involved in the venture.
(iii) Wherever you have money, risk and people combined there is potential risk for disagreement,
so does the form of business organisation provide a clear organisational structure?
! The purpose of this chapter is to help determine which form is more effective at facilitating
investment, minimising risk, flexibility and providing an organisational structure. This is important
because the first question when starting a business is determining its form.
Types of business organisations
There are various different types of business organisation (sole traders, partnerships, private
companies and public limited companies; within these categories, there are further forms, such as
limited liability partnerships, i.e. LLPs).
______________________________________________________________________________________________
B) SOLE TRADER
Definition
A sole trader is an independent (one) contractor. Very often, they offer goods/services in exchange
for some form of payment. For example, an independent corner shop owner would be a sole trader.
Key features
Context: there is no creation of an artificial legal person, in other words, there are no other
legal filing requirements. The sole trader is personally responsible for the contracts they enter into
and their obligations. For example, if there is an unpaid creditor, they can reach into the personal
assets (i.e. a car or house) of the sole trader. Their business is also taxed as personal income tax.
Key limitations of being a sole trader:
have to raise additional financing, which usually means relying on a personal loan and putting
their savings at risk;
unlimited liability, which means their personal assets are put at risk (there is no difference
between the sole trading business and the sole trader himself. The profits of the business
belong to the sole trader but so do the losses);
,Company Law
Revision Notes
no perpetuity: in a company, there is perpetuity (i.e. if a shareholder dies, their shares can be
transmitted to another individual), whereas the death of a sole trader terminates the business
entirely.
! For these reasons, the sole trader is adequate for a single person with capital but it is unsuitable for
large scale investment.
Key advantages of being a sole trader:
in control of their businesses, as one will not have to put up with disagreements and will get to
make all the decisions;
no legal filing requirements or fees and no professional advice needed to set it up. One can
literally go into business on his/her own and the law will recognise it as having legal form
Simplicity as one person does not need a complex organisational structure.
______________________________________________________________________________________________
C) PARTNERSHIPS
Contextualisation
Based on the law of agency with each partner becoming an agent of the other.
Is it right to say partnerships are limited to small numbers? There was a Victorian attempt to
segregate the two forms according to the number of people involved. However, now there is no
longer a 20-partner limit (abolished in 2002). Moreover, since Salomon small numbers of people
wishing to form a business have had a choice between partnership and corporate forms.
Types of partnerships
There are three types of partnership structures:
(1) General Partnership
(2) Limited Partnership
(3) Limited Liability Partnership
I. GENERAL PARTNERSHIP:
Definition: according to section 1 of the Partnership Act 1980, a partnership consists of “two or
more persons carrying on a business in common with a view of profits” (this is perceived as a
statutory test). This is a very broad definition; therefore, a partnership can about by oral
agreement, it can be inferred by conduct, or it can be a formal written agreement.
! The relationship between members of a company is not a partnership by virtue of s. 1(2).
Khan v Miah (2000): There is no formal process of becoming partners – if you behave as partners
the law will deem you are partners, even if you have no idea what a partnership is.
! This definition could also apply to a company but partnerships specifically need to consist of two or
more individuals, whereas companies can consist of a single member.
Key features
(i) The assets of the firm are owned by the partners.
, Company Law
Revision Notes
(ii) A partnership agreement which does not expressly exclude the Partnership Act of 1980
will be governed by it. This can be a problem for those who are unaware that they are partners,
as under the Act, each partner is entitled to: (1) participate in the management and who can
take certain decisions (s. 24) (2) set out the input of capital and corporate shareholding of the
partnership. Usually, the general rule is that the partners will contribute equally and take out
equally.
Due to the nature of partnerships, it is normal for those who are aware they are entering such
an association to modify the Partnership Act and draft a complex partnership agreement. Law
firms in particular have very complex partnership agreements governing their operation. This
means that the management structure, profit sharing, and the life of the partnership can be
made to fit the situation.
(iii) What cannot be achieved through a partnership agreement is limited liability, because under
the Partnership Act each partner is jointly and severally liable for the debts and
obligations of the partnership incurred while he or she is a partner. Partnership, is
therefore, an unincorporated association.
(iv) Partnerships tend to use a trust instrument to hold trust property (see below as to how this
is set up). On this regards, partners are fiduciaries and must in good faith and for the common
good of the partnership.
(v) Partnership cannot enter into contracts. Contrasts, even those, which appear to be with
partnership because the firm is named as a party, are in fact with the individuals who are the
partners. However, in default, partners have the authority to bind the other partners of the
partnerships to contracts (agents).
(vi) Partnerships are not subject to public disclosure.
(vii) A partnership will end on the death of a partner.
(viii) When a partner leaves the firm, they can be released from liability for the debts of
the partnership. However, this charge only occurs after notice is given to all creditors/client
(PA 1980, section 17).
(ix) A partnership can be wound up by an agreement of partners. The partners will release
the firm’s assets and discharge its debts (or appoint an insolvency practitioner to do so).
Key limitations of entering a partnership: Like sole traders, partnerships do not have a separate
legal entity. This gives rise to various disadvantages, as seen below.
Perpetuity: Usually a partnership will dissolve every time a partner enters or exits;
demanding the need for a new agreement to be made. But this problem can be avoided if a
partnership agreement can provide for continuance (known as automatic novation).
! In practice, note that however, tax rules and appropriate rules in partnership agreements can mean
that a change in partners would not mean that the partnership is wound up and the business continues
largely as before.
If property is purchased for the business, it will constitute partnership property and will be
used to satisfy debts if the partnership fails. However, if these assets are inadequate,
creditors can look to the partners’ personal assets.
! There is a weak form of ‘entity shielding’ however: personal creditors take precedence over
partnership creditors.
Revision Notes
FORMS OF BUSINESS ORGANISATION
______________________________________________________________________________________________
A) INTRODUCTION
What is a business organisation?
Business organisation are an effective combination of three things :
(i) You need capital (money) so a key question in evaluating a form of business organisation is,
does it facilitate investment in the business?
(ii) No business venture is guaranteed to succeed, so the second question is whether the form of
business organisation mitigates or minimises the risk involved in the venture.
(iii) Wherever you have money, risk and people combined there is potential risk for disagreement,
so does the form of business organisation provide a clear organisational structure?
! The purpose of this chapter is to help determine which form is more effective at facilitating
investment, minimising risk, flexibility and providing an organisational structure. This is important
because the first question when starting a business is determining its form.
Types of business organisations
There are various different types of business organisation (sole traders, partnerships, private
companies and public limited companies; within these categories, there are further forms, such as
limited liability partnerships, i.e. LLPs).
______________________________________________________________________________________________
B) SOLE TRADER
Definition
A sole trader is an independent (one) contractor. Very often, they offer goods/services in exchange
for some form of payment. For example, an independent corner shop owner would be a sole trader.
Key features
Context: there is no creation of an artificial legal person, in other words, there are no other
legal filing requirements. The sole trader is personally responsible for the contracts they enter into
and their obligations. For example, if there is an unpaid creditor, they can reach into the personal
assets (i.e. a car or house) of the sole trader. Their business is also taxed as personal income tax.
Key limitations of being a sole trader:
have to raise additional financing, which usually means relying on a personal loan and putting
their savings at risk;
unlimited liability, which means their personal assets are put at risk (there is no difference
between the sole trading business and the sole trader himself. The profits of the business
belong to the sole trader but so do the losses);
,Company Law
Revision Notes
no perpetuity: in a company, there is perpetuity (i.e. if a shareholder dies, their shares can be
transmitted to another individual), whereas the death of a sole trader terminates the business
entirely.
! For these reasons, the sole trader is adequate for a single person with capital but it is unsuitable for
large scale investment.
Key advantages of being a sole trader:
in control of their businesses, as one will not have to put up with disagreements and will get to
make all the decisions;
no legal filing requirements or fees and no professional advice needed to set it up. One can
literally go into business on his/her own and the law will recognise it as having legal form
Simplicity as one person does not need a complex organisational structure.
______________________________________________________________________________________________
C) PARTNERSHIPS
Contextualisation
Based on the law of agency with each partner becoming an agent of the other.
Is it right to say partnerships are limited to small numbers? There was a Victorian attempt to
segregate the two forms according to the number of people involved. However, now there is no
longer a 20-partner limit (abolished in 2002). Moreover, since Salomon small numbers of people
wishing to form a business have had a choice between partnership and corporate forms.
Types of partnerships
There are three types of partnership structures:
(1) General Partnership
(2) Limited Partnership
(3) Limited Liability Partnership
I. GENERAL PARTNERSHIP:
Definition: according to section 1 of the Partnership Act 1980, a partnership consists of “two or
more persons carrying on a business in common with a view of profits” (this is perceived as a
statutory test). This is a very broad definition; therefore, a partnership can about by oral
agreement, it can be inferred by conduct, or it can be a formal written agreement.
! The relationship between members of a company is not a partnership by virtue of s. 1(2).
Khan v Miah (2000): There is no formal process of becoming partners – if you behave as partners
the law will deem you are partners, even if you have no idea what a partnership is.
! This definition could also apply to a company but partnerships specifically need to consist of two or
more individuals, whereas companies can consist of a single member.
Key features
(i) The assets of the firm are owned by the partners.
, Company Law
Revision Notes
(ii) A partnership agreement which does not expressly exclude the Partnership Act of 1980
will be governed by it. This can be a problem for those who are unaware that they are partners,
as under the Act, each partner is entitled to: (1) participate in the management and who can
take certain decisions (s. 24) (2) set out the input of capital and corporate shareholding of the
partnership. Usually, the general rule is that the partners will contribute equally and take out
equally.
Due to the nature of partnerships, it is normal for those who are aware they are entering such
an association to modify the Partnership Act and draft a complex partnership agreement. Law
firms in particular have very complex partnership agreements governing their operation. This
means that the management structure, profit sharing, and the life of the partnership can be
made to fit the situation.
(iii) What cannot be achieved through a partnership agreement is limited liability, because under
the Partnership Act each partner is jointly and severally liable for the debts and
obligations of the partnership incurred while he or she is a partner. Partnership, is
therefore, an unincorporated association.
(iv) Partnerships tend to use a trust instrument to hold trust property (see below as to how this
is set up). On this regards, partners are fiduciaries and must in good faith and for the common
good of the partnership.
(v) Partnership cannot enter into contracts. Contrasts, even those, which appear to be with
partnership because the firm is named as a party, are in fact with the individuals who are the
partners. However, in default, partners have the authority to bind the other partners of the
partnerships to contracts (agents).
(vi) Partnerships are not subject to public disclosure.
(vii) A partnership will end on the death of a partner.
(viii) When a partner leaves the firm, they can be released from liability for the debts of
the partnership. However, this charge only occurs after notice is given to all creditors/client
(PA 1980, section 17).
(ix) A partnership can be wound up by an agreement of partners. The partners will release
the firm’s assets and discharge its debts (or appoint an insolvency practitioner to do so).
Key limitations of entering a partnership: Like sole traders, partnerships do not have a separate
legal entity. This gives rise to various disadvantages, as seen below.
Perpetuity: Usually a partnership will dissolve every time a partner enters or exits;
demanding the need for a new agreement to be made. But this problem can be avoided if a
partnership agreement can provide for continuance (known as automatic novation).
! In practice, note that however, tax rules and appropriate rules in partnership agreements can mean
that a change in partners would not mean that the partnership is wound up and the business continues
largely as before.
If property is purchased for the business, it will constitute partnership property and will be
used to satisfy debts if the partnership fails. However, if these assets are inadequate,
creditors can look to the partners’ personal assets.
! There is a weak form of ‘entity shielding’ however: personal creditors take precedence over
partnership creditors.
