Consolidation Notes
Company 1
How do businesses raise money?
1. The owners can invest money
2. Outside investors can invest money
3. Take loans from financial institutions
4. Redistribute profits rather than transfer to owners
Comparison of different business models
Model Structure Advantages Disadvantages
Sole trader • The sole trader • Can start trading • Unlimited
is the exclusive immediately personal liability
owner of the • There are no setup • Contracts are
business. costs/formalities formed between
• It is not a • Can keep all the the sole trader
separate legal profits and third parties
entity. • Full control over
decision making
• Complete privacy
as no disclosure
requirements
Partnership • 2 or more • Can start trading • Partners have
persons own immediately unlimited
the business • There are no setup personal liability
and share the costs/formalities • Contracts are
profits. • Full control over formed between
• The partnership decision making the partners and
is not a separate • Complete privacy third parties
legal entity as no disclosure • A partnership
requirements agreement will
be required
otherwise the
Partnership Act
1890 will apply in
default
Limited liability • 2 or more • All partners have • There are set-up
partnership persons carrying limited liability costs and
on a business. • The partnership can formalities as an
• The partnership enter contracts LLP must be
is a separate with third parties registered at
legal entity
, • Flexible Companies
management House
procedures • Must file annual
accounts and has
disclosure
obligations
• A members’
agreement will
be required
otherwise the
provisions of the
Limited Liability
Partnership
Regulations 2001
will apply in
default.
Private limited • A company is a • Limited liability as • There are set-up
company separate legal shareholders are costs and
entity distinct only liable to pay formalities as a
from its owners any amount unpaid company must be
on their shares. registered at
• Minimum of 1 Companies
person required to House
incorporate a • Extensive
company disclosure
• Easier to raise obligations
finance • The Companies
Act 2006 imposes
strict
requirements on
how companies
are run.
S1(1) PA 1890 (Partnerships Act) – “the relation which subsits between persons carrying on
a business in common with a view to profit.” This is why one does not need formalities to
set up a partnership.
Northern Sales (1963) vs. Ministry of National Revenue (1973): “If there is an agreement to
share losses as well as profits, this makes the existence of a partnership more likely”
Walker v Hirsch: Case law also heled out that if the person is not being “held out” as a
partner, this makes the existence of the partnership less likely.
PA 1890:
, • Section 24(1) Profits and losses: Partners are entitled to share equally in the profits
of the business, and must share equally in the losses of the business, even where the
parties have contributed to the capital unequally. There should therefore be an
express provision in the agreement setting out a profit sharing ratio, otherwise both
profits and losses are shared equally.
• Section 24(6) Remuneration: Partners are not entitled to a salary.
• Section 24(8) Decision Making: Decisions arising during the ordinary course of the
business are decided by a majority, except for any change to the nature of the
partnership business which requires unanimity.
• Section 25 Expulsion: A partner cannot be expelled by majority vote unless all of the
partners have previously expressly agreed that a majority can do this.
S19PA 1890 – Partners’ mutual obligations can be varied at any time by unanimous consent.
A Limited Partnership (LP) has two different types of partners:
- Limited Partners – who have limited liability. These limited partners must not be
involved in the management of the business (they are often called “sleeping
partners” eg passive investors). If they do become involved in the management,
they lost their limited status and become general partners with unlimited personal
liability.
- General Partners – Who run the business and have an unlimited liability ( as in a
traditional partnership)
LPs are governed by the Limited Partnership Act 1907. LPs must be registered at Companies
House but have no requirement to file accounts.
These are not common for general partnerships, but are commonly used as investment
vehicles.
** Limited Liability Partnerships
LLPs were introduced in the Limited Liability Partnership Act 2000
S2(1)(a) LLPA 2000 states that two or more persons associated for carrying ona. Lawful
business with a view to a profit can incorporate an LLP.
Is an LLP a separate legal entity?
Yes.
All partners have a “limited liability.” This limited liability is the amount they have agreed to
pay under the terms of their partnerships agreement.
Where does an LLP have to register?
Company 1
How do businesses raise money?
1. The owners can invest money
2. Outside investors can invest money
3. Take loans from financial institutions
4. Redistribute profits rather than transfer to owners
Comparison of different business models
Model Structure Advantages Disadvantages
Sole trader • The sole trader • Can start trading • Unlimited
is the exclusive immediately personal liability
owner of the • There are no setup • Contracts are
business. costs/formalities formed between
• It is not a • Can keep all the the sole trader
separate legal profits and third parties
entity. • Full control over
decision making
• Complete privacy
as no disclosure
requirements
Partnership • 2 or more • Can start trading • Partners have
persons own immediately unlimited
the business • There are no setup personal liability
and share the costs/formalities • Contracts are
profits. • Full control over formed between
• The partnership decision making the partners and
is not a separate • Complete privacy third parties
legal entity as no disclosure • A partnership
requirements agreement will
be required
otherwise the
Partnership Act
1890 will apply in
default
Limited liability • 2 or more • All partners have • There are set-up
partnership persons carrying limited liability costs and
on a business. • The partnership can formalities as an
• The partnership enter contracts LLP must be
is a separate with third parties registered at
legal entity
, • Flexible Companies
management House
procedures • Must file annual
accounts and has
disclosure
obligations
• A members’
agreement will
be required
otherwise the
provisions of the
Limited Liability
Partnership
Regulations 2001
will apply in
default.
Private limited • A company is a • Limited liability as • There are set-up
company separate legal shareholders are costs and
entity distinct only liable to pay formalities as a
from its owners any amount unpaid company must be
on their shares. registered at
• Minimum of 1 Companies
person required to House
incorporate a • Extensive
company disclosure
• Easier to raise obligations
finance • The Companies
Act 2006 imposes
strict
requirements on
how companies
are run.
S1(1) PA 1890 (Partnerships Act) – “the relation which subsits between persons carrying on
a business in common with a view to profit.” This is why one does not need formalities to
set up a partnership.
Northern Sales (1963) vs. Ministry of National Revenue (1973): “If there is an agreement to
share losses as well as profits, this makes the existence of a partnership more likely”
Walker v Hirsch: Case law also heled out that if the person is not being “held out” as a
partner, this makes the existence of the partnership less likely.
PA 1890:
, • Section 24(1) Profits and losses: Partners are entitled to share equally in the profits
of the business, and must share equally in the losses of the business, even where the
parties have contributed to the capital unequally. There should therefore be an
express provision in the agreement setting out a profit sharing ratio, otherwise both
profits and losses are shared equally.
• Section 24(6) Remuneration: Partners are not entitled to a salary.
• Section 24(8) Decision Making: Decisions arising during the ordinary course of the
business are decided by a majority, except for any change to the nature of the
partnership business which requires unanimity.
• Section 25 Expulsion: A partner cannot be expelled by majority vote unless all of the
partners have previously expressly agreed that a majority can do this.
S19PA 1890 – Partners’ mutual obligations can be varied at any time by unanimous consent.
A Limited Partnership (LP) has two different types of partners:
- Limited Partners – who have limited liability. These limited partners must not be
involved in the management of the business (they are often called “sleeping
partners” eg passive investors). If they do become involved in the management,
they lost their limited status and become general partners with unlimited personal
liability.
- General Partners – Who run the business and have an unlimited liability ( as in a
traditional partnership)
LPs are governed by the Limited Partnership Act 1907. LPs must be registered at Companies
House but have no requirement to file accounts.
These are not common for general partnerships, but are commonly used as investment
vehicles.
** Limited Liability Partnerships
LLPs were introduced in the Limited Liability Partnership Act 2000
S2(1)(a) LLPA 2000 states that two or more persons associated for carrying ona. Lawful
business with a view to a profit can incorporate an LLP.
Is an LLP a separate legal entity?
Yes.
All partners have a “limited liability.” This limited liability is the amount they have agreed to
pay under the terms of their partnerships agreement.
Where does an LLP have to register?
