Professional Documents
Culture Documents
Business Types
Learning Objectives
Business ownership
Introduction
In England, there are three general ways of owning and operating a business
as an individual as a partnership as a limited company
Individuals
The situation with an individual is fairly straightforward as only one person is involved That person is the business That person is often called a sole trader S/he enters contracts in his/her own name in order to do business The general rules on contract and tort apply
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Partnership
The basic framework of law for partnerships is in the Partnership Act 1890 It defines a partnership as the relation which subsists between two or more persons carrying on a business in common with a view to profit
Definition of Partnership
There must be at least 2 people on a partnership and not more than 20 (except in law, medicine and accountancy) A limited company cannot be a partnership, although it can be one partner in a partnership The relationship between partners is based in contract
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Formation of a Partnership
There are no special legal rules for forming a partnership It is an agreement between individuals It may be made orally, in writing, or implied from the behaviour of the individuals
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Liability of Partners
Each partner is liable for the full amount of the firms debts and other liabilities A third party can sue the firm or the partners individually Where the third party receives payment from one partner, then the other partners must contribute equally to the amount paid by him (indemnify that partner)
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What is a Company?
A company is a body corporate or corporation There are 4 types of corporation. Those created 1. by Royal Charter This was the earliest way of creating corporations.
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by special Act of Parliament Again, this is an old way of creating corporations which is no longer used Bank of Scotland was created in 1695 by and Act of the old Scots Parliament
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Consequences
This concept of separate legal personality has several consequences Limited liability Perpetual succession Business property Court actions Liability in tort and crime The rule in Foss v Harbottle
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Limited Liability
The liability of the members of a company for its debts is limited Under the Companies Act 1985
a member of a company limited by shares is only liable to pay the full amount of his shares, and a member of a company limited by guarantee is only liable to pay the amount which he guarantees to pay if the company is wound up
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Perpetual Succession
Changes in the membership of a company have no effect on the continuation of that company Unlike a partnership, the death or bankruptcy of a member does not end the company In public limited companies, members are free to sell their shares on the stock exchange
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Business Property
Business property is owned by the company and not its shareholders That means a creditor cannot take action against company assets in respect of a debt due by a member of that company
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Court Actions
A company can sue and be sued in its own name It can also enter contracts in its own name The companys liability for contractual debts is unlimited
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Foss v Harbottle
This case gives us the idea of majority rule in a company If a company suffers injury then the majority of members must agree to raise a court action A single member cannot take action against the wrongdoer
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Types of Company
Companies can be classified in several ways Limited and Unlimited Limited by Shares or by Guarantee Public and Private
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The liability of members is to pay an agreed amount if the company is wound up Usually, the amounts are small, so the risk is low
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Comparison of Ownership
It is useful to compare the advantages and disadvantages of the three forms of business
Sole trader Partnership Company
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Partnership - Advantages
No formal legal filing requirement involved in becoming a partnership beyond the minimum requirement that there be two members of the partnership. Easier to obtain capital as there can be up to 20 members of the partnership, all of whom could pool their investment within the partnership.
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Partnership - Disadvantages
A partnership will end on the death of a partner. If you are unaware of this when the partnership is formed, the Act may not reflect the intention of the partners. The partners are jointly and severally liable for the debts of the partnership. This means that each partner can be sued for the total debts of the partnership
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Company - Advantages
Companies are designed as to make it easy to raise capital. Companies have the ability to subdivide their capital into small amounts, allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment. Limited liability also minimises the risk for investors and is said to encourage investment.
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Company - Disadvantages
Forming a company and complying with company law is expensive and time consuming. It also appears to be an very complex organisational form for small businesses, where the Board of Directors and the shareholders are often the same people
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Summary
In England, there are three general ways of owning and operating a business
as an individual as a partnership as a limited company
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Summary (cont.)
The Partnership Act 1890 defines a partnership as the relationship between two or more persons carrying on a business in common with a view to profit
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Summary (cont)
A partnership does not have a separate legal identity from its partners The partners are jointly and severally liable for the debts of the partnership. This means that each partner can be sued for the total debts of the partnership Partners are agents for their firm and the other partners, so the rules from the law of agency apply
Summary (cont.)
Most companies nowadays are formed under the Companies Act 1985 The law regards a company as a legal person It has a separate identity from its owners (ie its shareholders) A company is liable for its own debts Its shareholders are not liable for its debts. They are only liable to pay for their shares
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