Business Organisations Flashcards
What types of business are available to someone who doesn’t wish to enter into a partnership
- A sole trader - where you start and operate a business alone, being the owner and operator of the business = you are the business. You and business are one and the same meaning you own all assets and are personally liable for all debts
- The Companies Act 2006 now allows for the formation and operation of a private limited company with only one shareholder who can also be the sole director of the company - so can set up a business as a private company
Give two advantages of a Sole Trader
- Not much legal formality to commence and operate as a sole trader - so quick and cheap to commence and operate
- there is no need to lodge accounts or other documentation with any public register - and so competitors and traders cannot access this documentation - meaning private business affairs
explain Seperate Legal Personality
- when a company is in accordance with the law (mainly contained in the Companies Act 2006) the law recognises that it has a separate legal existence and is a separate legal person to its members and directors
- a company owns its own assets, it is the company with whom the creditors contract and it is therefore the company which is solely responsible for its debts
- the company is basically a barrier/veil between the members and director of the company and the creditors of the company
- provided the company was set up and operates within the law the creditors of the company can look only to the company for paymet of the debts due to them and not to the members/directors
- the company being a separate legal person to the members and directors means it is not affected by changes in members/directors as it has its own life
- the fact of a company is a separate legal person was first established in the case of Salomon v Salomon & Co Ltd
Explain the case of Salomon v Salomon & Co Ltd
- Mr Salomon had been operating as a sole trader running a boot and shoe manufacturing business for a number of years
- he then formed a company to take over his business and sold the assets of the business for £32,000
- the price was payed by the company issuing him with 20,000 shares at £1 each (7 other shares were issued - 1 to his wife and each of his 6 children)
- for the balance of £12,000 Mr Salomon made a loan to the company to pay this and in security for repayment of the loan was granted a debenture (security) over the assets of the company
- mr Salomon was the main director of the company and obviously the majority shareholder
- approximately 18 months later the company went into liquidation with assets of around £6,000 and in addition to mr Salomons secured loan there were unsecured debts due to the trade creditors amounting to around £7,000
- Mr Salomon sought to claim the assets under phis security
- trade creditors argued that his security, as it was a contract, was invalid in that there needed to be 2 people to have a contract and that Mr Salomon (who effectively owned almost all the shares and who was the main director and controller of the company) and the company were the same person
- the court held that where a company is formed and operates within the law it is a separate legal person to its members and directors and enters into contracts in its own name
- therefore mr Salomon was one person and the company was another and the security was a valid and binding contract
In what other cases since Salomon v Salomon & Co Ltd has separate personality/corporate veil been confirmed?
- Henry Brown v Smith
- Macaura v Northern Assurance Co Ltd
- Lee v Lee’s Airfarming Ltd
Explain the veil of incorporation
- means that there is something between the members (shareholders) and directors of the company and the creditors - this being the company.
- this being so, the creditors of the company can normally only look to that company for payment of the debts due to them and cannot sue the members/directors
- the veil is an expression of the determination by the courts that a company has a separate legal personality of its own, distinct from its members and directors
- this was first established in the case of Salomon V Salomon & Co Ltd* explain
- the company therefore owns its assets, contracts in its own name and is liable for its debts
- the shareholders have no liability for debts of the company and have a limit to their liability to the amount the have agreed to invest by way of their shares
Explain when the veil can be lifted
In various situation has the veil can be lifted including;
A) fraudulent training
B) misdescription of the company. Under the Companies Act 2006 the correct company (or business) name must appear on certain documentation. If the wrong name appears the creditor affected may be able to sue the officer of the company who issued the wrong documentation. See British Airways Board v Parish and Hendon v Adelman
C) nationality - in times of war - the corporate veil can be lifted to see who ‘owns’ the company in order to avoid trading with enemies. Case - Daimler Company Ltd v Continental Tyre and Rubber Company Ltd
What are the formation requirements of a private limited company?
- the relevant legislation is the Companies Act 2006 and registration process for a private limited company is as follows;
Those seeking to have the company formed must submit to the Register of Companies along with the appropriate registration fee (if the registered office is to be in Scotland and if in England or Wales send to Cardiff) :
A) a memorandum of association - a simple document stating the name of the company and signed by all those agreeing to take shares in the new company (subscribers)
B) form IN01
C) articles of association have to be submitted but only if the company does not wish to avail itself to the default Table A articles (see the Companies (Model Articles) Regulations 2008) - the articles are often referred to as the company’s internal rule book and govern such matters as meeting of the company, powers and duties of directors and voting.
The Registrar must be satisfied that the proposed name of the company is not too similar to any other business, nor does it contain any prohibited words such as Bank, Royal or Insurance.
Once the registrar is satisfied they shall issue a certificate of incorporation as a company which is conclusive evidence of the existence of the company. If the company is a private company they can now commence training from the date shown on the certificate. If the company were to be a public company then the company would require to obtain a section 761 certificate (which relates to the company having issued sufficient shares) from the registrar before it can commence trading.
What must be included in a form IN01 relating to formation of a private limited company
1) the proposed name of the company (must end Limited/ltd (private) or Public Limited Company (Plc)
2) whether the members have limited liability
3) the fact that the company is a private limited company
4) details of the registered office
5) a statement setting out the number of shares, their aggregate nominal value and how much has been paid up
6) the details of the first directors (and company secretary, if applicable) and their consent to act
7) a statement of compliance provides confirmation that all processes have been complied with and is signed either by a subscriber or by a solicitor acting in the formation of the company
Give 2 advantages of running a private limited company compared to a sole trader
-
