BUSINESS ORGANISATIONS Businesses come in many different forms.

It is likely that many of you will in your first professional positions join large partnerships or companies. However, you may later wish to set up in business on your own account, or may be invited to join the partnership of a firm. Therefore, it is necessary for you to appreciate the different types of business entity and the ways in which they function. SOLE TRADERS A person in business on his own. It requires no formal documentation to set up. A sole trader can use his own name or a business name. If using a business name he must comply with The Business Names Act 1985. Advantages 1. 2. 3. 4. Control Profits No formalities Finances private.

Disadvantages 1. 2. 3. 4. Unlimited liability Difficult to finance Work alone Vicarious liability

When sole traders cease tradingSell as a going concern If insolvent a sole trader can be declared bankrupt Or he could enter a voluntary arrangement. PARTNERSHIPS A partnership is a type of unincorporated association (organisation without legal personality distinct from its members). There are many types of unincorporated associations (sports clubs, pressure groups etc), but what makes a partnership different is the Partners motivation/aims. They have got together to carry on a business with a view to sharing the profits. Partners often raise contributions via a bank loan, and are also personally liable for business debts. Defined in the Partnership Act 1890 s1 as the relationship which subsists between persons carrying on business in common with a view to profit Therefore, a partnership is a relationship between persons, and is not a separate legal entity in the same way as you will see that a company is. Business This is defined by s45 of the Partnership Act and includes every trade, occupation or profession. However, it should be noted that some professionals (e.g. Barristers) may have their own professional rules which prevent members of that profession from forming a partnership. Moreover, it is worth noting that even if the business exists for a short time, or for one transaction, this is enough to create a partnership.

Mann v DArcy [1968] The minimum number of partners is two, and the maximum number is 20, (S.716 Companies Act 1985) except for certain professional partnerships, for example accountants and solicitors or members of a recognised stock exchange where there is no maximum. The partners may trade collectively under a group or firm name. Note that in law the words `partnership' and `firm' are interchangeable. Whenever the firm wishes to use a name consisting of names other than the surname of all the partners, the true surnames of all partners must be displayed on letter headings and other office stationary, and displayed prominently at the firm's place of business. S.4 Business Names Act (1985) Formation of Partnership A partnership can be started with no formalities, though in practice this is not advisable, and a formal partnership agreement should be drawn up. There are no statutory provisions, which require a partnership agreement to be in writing. Although for practical reasons writing is usually used. In practice it is common, certainly in professional partnerships, to make this agreement by deed. A partnership agreement may be oral, and can even be inferred from conduct. Quite often persons in business together will be partners as far as the law is concerned, even though they do not realise it themselves. Reid v Hollinshead (1825) A partnership deed covers the rights and duties of each partner, and should usually include Names of the partners Name and address of the business Nature of the business Start date Capital Profit share Bankers Accounts Who is to manage the business Holidays New partners Death /Retirement Decisions Dispute resolution Expulsion Deed may also cover ownership of partnership property, pensions, limits on partners outside interests. The agreement can be altered by the unanimous consent of all the partners. If the partnership agreement does not cover a relevant point whatever the Partnership Act 1890 states will prevail. See page 315 of MacIntyre for an example of a Partnership Deed. Pros and Cons of Partnership

Advantages 1. No Formalities 2. Share skills 3. Management

4. Flexibility 5. Capital 6. Finances private Disadvantages 1. Not a legal entity 2. Unlimited liability 3. Lack of continuity 4. Difficult to get funds 5. Bound by co-partners contracts - agents Characteristics Unlimited Liability Partnerships are not legal personalities with their own legal identity. Each partner is personally liable, to the extent of his/her own personal assets for the firms debts and liabilities. This means that if a court judgement is not paid the creditor can sue any or all or just one of the partners. To avoid this, it is possible to set up partnerships with limited liability Limited Liability Partnership Act 2000 An LLP is a legal person; its members will not be personally liable to third parties. Aimed mainly at the accountancy and legal professions as an alternative to the traditional partnership structure. Over 2,000 LLPs have been formed (2002). The main aim of LLPs is to guard against Armageddon legal claims, capable of bankrupting an entire partnership because of the negligence of one partner. Available to two or more persons carrying on a business with a view of profit. Formalities There must be an incorporation document to which two people have subscribed. It must state the name and address of each member and state the designated members. It must state the address of the registered office. The name must end with the words LLP or limited liability partnership. The incorporation document has to be registered with the Registrar of Companies. Members rights are agreed between themselves and every member will be the agent of the LLP. The members are not liable for the debts of the firm and will only lose what money they invested. Pros and Cons of Limited Liability Partnership Advantages Separate legal personality Limited liability of its members Unlimited capacity Flexible management structure Not covered by company law rules on capital maintenance Taxed like a partnership rather than a company Disadvantages Disclosure must file annual reports and accounts When a partnership ceases trading-

All assets have to be sold to pay the creditors if the assets are not sufficient the partners have to pay out of their own personal finances, which could result in bankruptcy. Termination by agreement of the members or where it is insolvent creditors can start winding up proceedings. The procedures are similar to those of a company.

CORPORATIONS Entities, which have full legal recognition, and separate legal personality are called corporations. We are concerned in this course with companies registered under the Companies Act (1985), but briefly the other types of corporation are:

Companies Incorporated by Royal Charter - these were the first companies, such as the East India Company, and the Hudson Bay Co. Modern examples are the BBC, the Chartered Institute of Secretaries, the Chartered Institute of Bankers, and other similar organisations. Companies Incorporated by Statute - These include the `rump' of the nationalised industries, for example the nuclear electricity industry, and many of the newer Universities.

Companies range in size, and importance from the `one man band', who has formed a company to gain the advantages of incorporation, to the very large public limited companies, employing thousands of employees. It is possible to form a private company with one shareholder. However, since a sole director cannot also act as company secretary, two people are needed to act as officers. Such companies are of particular interest to the sole trader wishing to incorporate and subsidiaries. The advantages of forming a company have traditionally been balanced by the strict rules set out for the running, and administration of a company. However the Companies Act 1989 has introduced a greatly simplified administrative procedure for the small private limited company. The trend is to `deregulate' small companies. Company law is to be found in six major Acts of Parliament, and the decisions of many cases. The Consequences of Incorporation The two `key' consequences of incorporation are that a company is treated as a separate legal person, and its members have limited liability. (Provided the company is not an `unlimited' company) The second of these advantages of incorporation flows from the first. Separate Legal Personality The main characteristic that a corporation has is that it is a separate `legal personality' from its members. It is the support on which the whole of company law rests. The company stands or falls by itself. The members of the company are not liable for the company's debts, no matter how many shares they own. They are treated as being entirely separate from the company. The concept of a company having a separate legal personality from its members is known as The Veil of Incorporation This principle was established in the case of: Salomon v A. Salomon & Co Ltd (1896) However, this vital principle does not always work in favour of the principal shareholder. Macaura v Northern Assurance [1925] 1 ALL ER 51 Further, there are circumstances when the veil may be lifted and the members lose protection These are:Where the company was formed for a fraudulent purpose.

Gilford Motor Co ltd v Horne (1933) Jones v Lipman (1962) Fraudulent Trading under s213 Insolvency At 1986 Directors can be personally liable if it appears during the course of winding up a company that the directors knowingly carried on business with a view to defrauding its creditors. Wrongful Trading s214 I.A 1986 A director may be personally liable where he knew there was no reasonable prospect the company could avoid going into insolvent liquidation and didnt take steps to minimise the loss to creditors. S 349 Companies Act 1985 Where a director signs a cheque or an order for goods on which the companys name is written incorrectly the director will be personally liable unless paid by the company. Hendon v Adelman (1973) The main consequence that follows from the concept of separate legal personality is that of:Limited Liability A company has unlimited liability, and is fully liable for `its' debts. However, its members the shareholders in the company have limited liability. This means that their liability is limited to the amount unpaid on their shares. In the nineteenth century it was common for shares not to be `fully paid up', however the modern practice is for shares to be fully paid, which means a shareholder has no further liability if the company goes bust. N.B., This important advantage of forming a limited company is often of little help in practice. Since banks will often require `personal guarantees' from directors of limited companies before lending them money. There are two types of company - Public and Private The importance of the distinction lies in the fact that the two types of company are treated differently for many purposes under the CA (1985). Private Companies Prior to the Companies Act (1980) there was a definition of a private company, and any company not falling within that definition was a public company. The 1980 Act (now contained in the 1985 Act), by implementing the EC Second Company Law Directive, reversed the position in that there is now a definition of a public company, and any company not falling within that definition is private. The result is that only some 11,100 companies are now registered as public ones, while there are over 998,700 private companies. (1990) Some of the latter are large both in financial terms, and in numbers of members. (approx. 300,000 independent companies) The minimum membership of a private company is one. (from 15/7/1992) It is now possible to form a private company with only one shareholder. This avoids the administrative problems associated with two shareholders. Such companies will be of particular interest to the sole trader wishing to incorporate, and subsidiaries. The differences in the legal rules relating to public and private companies have grown since 1980, and seem likely to become greater in the future.

A private company's name must end with the word `limited'. A private company must not invite members of the public to purchase its shares. A private company may be unlimited or limited by shares or guarantee. Public Companies Can only be limited by shares. A public company must have satisfied the statutory registration provisions or re-registration provisions in the case of an `old public company'. The amount of share capital stated in the memorandum of association to be that with which the company proposes to be registered must be not less than the authorised minimum. (at present 50,000, of which a quarter must be paid up.) Public companies can offer their shares, and debentures to the public, particularly where the company manages to obtain a stock market listing. The name of the company must end with the words public limited company or p.l.c, or in the case of a company whose registered office is to be situated in Wales the words Cwmni Cyfyngedig Cyhoeddus or C.C.C. may be used. The company's memorandum of association must state that it is a public limited company. The minimum number of persons, who may form a public company, is 2. (S.24 of the CA 1985) A public company must have at least 2 directors. A number of other important regulations apply to public companies, in particular a public company cannot commence business or exercise its borrowing powers until it has obtained a certificate to do so from the Registrar of companies. (CA S.117) The purpose of obtaining the certificate is to make certain that the company satisfies the minimum capital requirements by forbidding it from carrying out any trading activity or borrowing money until it has received such a certificate. Forming a company in practice There are two options; to buy a ready-made company, or have one tailor-made. The Ready-made company http://www.jordans.co.uk Organisations known as `company registration agents' are in the business of forming `ready-made' or `off-the-peg' companies to sell on to people wanting to trade as limited companies. The companies the agents form are named, and registered with the Companies Registration office, but these companies do not trade. It is extremely quick, and cheap to buy a ready-made-company. All you do is contact a companies registration agent tell him the type of business you intend to start, and he will look through his files for a company with a suitable memorandum. (i.e with a suitable objects clause) Tailor-made companies

Setting up a company from scratch gives you the advantage of selecting the name you want, and getting the exact specifications for your company laid down at the beginning. However, because of the complexity of company law and procedure professional help will be required. This can take time, and is expensive. Constitution of a company

Memorandum of Association Articles of Association Form 10 Form 12 Fee 20

Under the Companies Act (1985) the two basic documents, which make up a company's constitution are the memorandum, and the articles of association. Both these documents are of crucial importance to an understanding of company law. The purpose of the memorandum, and articles of association is to define what a company is, and how its business affairs are to be conducted. The memorandum sets out the basic elements. The articles are mainly internal rules. A company must make certain that exactly the right powers, and procedures, which will be needed are in its constitution. Memorandum of Association S.2 of the Companies Act (1985) provides that the memorandum of every company must state: Its name. Whether the registered office of the company is to be situated in England and Wales, or Scotland. The objects of the company (its powers). Note that Section 2 of the 1985 Act is not amended by the Companies Act 1989 so that it remains a requirement that the memorandum of association should include an objects clause. That the liability of the members is limited, if the company is limited by shares or by guarantee. In the case of a limited company having a share capital, the amount of share capital with which the company proposes to be registered, and the division into shares of a fixed amount. No subscriber to the memorandum may take less than one share. The number of shares each subscriber takes must also be shown in the memorandum. In the case of a company limited by guarantee the memorandum must also state that each member undertakes to contribute to the assets of the company in the event of its being wound up whilst he is a member, or within one year, after he ceases to be a member, such amount as may be required, not exceeding a specified amount. Two or more persons must subscribe their names to the memorandum. Finally, the memorandum must state the desire of the subscribers to be formed into a company, and the agreement of each to take a specified number of shares in the company. Generally the memorandum can be changed by a special resolution 21 days notice and 75% majority of the vote. Articles of Association

The articles provide detailed regulations for the internal management of the company's affairs. A company limited by shares has a number of choices, it may: File its own articles, and exclude Table A completely. Table A is a model form of articles. (Table A is set out in the schedule to the Companies Regulations 1985) File no articles, and allow Table A to apply in its entirety; or File articles adopting certain (usually the majority) of the provisions of Table A, but excluding Table A, and substituting its own provisions on any matters the promoters may wish. Procedure Articles must be printed, divided into paragraphs numbered consequently, and signed by each subscriber to the memorandum in the presence of at least one witness, who must attest (witness) the signature. Contents Table A is basically divided as follows: Articles: 2-35 shares and share capital: 36-63 general meetings: 64-101 directors and company secretary: 102-110 dividends, accounts and capitalisation of profits: 111-116 notice of meetings: 117118 winding-up and indemnity. Some of these articles merely repeat the regulations contained in the Companies Act (1985), while others set out the detailed rules by which the various provisions of the Act are to be carried out, or make provision for matters not otherwise covered in the Act. Alteration of the Articles 1) A company has the freedom to alter its articles if it wishes. However, it must follow the procedure laid down in the CA 1985. 2) The articles and memorandum form a contract between the company and its members. Interestingly despite this a company is able to unilaterally alter the terms of this contract. Compare this situation with the usual contract law rules. A special resolution is also needed to alter the articles. Advantages of a registered company 1. 2. 3. 4. 5. Separate legal identity Limited liability Perpetual existence Floating charges Transfer of shares

Disadvantages 1. 2. 3. 4. Has to register before start trading Compliance with Companies Act 1985 File accounts Shareholders no part in management

5. No right to share of profits. When a company ceases to trade A company can be wound up by three meansMembers voluntary winding up Creditors voluntary winding up Compulsory winding up

In October 2009 the process of registering a company has changed. In order to register you now need:-Form IN01 - Memorandum of Association - Articles of Association - Fee 20

Please visit the Companies House Website. http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml