Introduction to Business Structures Flashcards
A Key Distinction
2 points about an unincorporated legal structure
4 points about an incorporated legal structure
An unincorporated legal structure
- It has no separate legal identity/ personality from its participants/ members
- Its participants/ members have unlimited personal liability for the business’s debts and liabilities
An incorporated legal structure
- It has a legal identity/ personality of its own
- It is legally separate from its participants/ members
- It has its own rights and assets, debts and liabilities
- Its participants/members have limited – and often no – liability for the business’s debts and liabilities
Understanding the impact of a business structure having a ‘legal personality of its own’
What does every person have?
What does this mean?
What are business structure such as a company (the most popular such structure – the other one is the LLP)?
What happens when a business structure is incorporated?
What does this mean for a business structure?
- Every person (adult) has legal personality
- That means that they can enter contracts, sue and be sued, they can be liable in a civil or criminal law action, they can own property, they can own debt, etc…
- A business structure such as a company (the most popular such structure – the other one is the LLP) are artificial legal things
- When a business structure is incorporated, it acquires a separate legal personality from its members (e.g. shareholders, directors, etc…)
- This means that a business structure can do anything a natural legal person can do
Understanding the impact of a business structure having a ‘legal personality of its own’
What can they do? (7)
What doesn’t extend to its members and what is this called?
What established the principle of separate legal personality?
What is another example of the implications of the separate legal personality?
- They can enter contracts, sue and be sued, they can be liable in a civil or criminal law action, they can own property, they can own debt, etc…
- That liability does not extend to its members. This is called the ‘veil of incorporation’.
- The landmark ruling of Salomon v Salomon (1897) established the principle of ‘separate legal personality’
- Another example of the implications of the ‘separate legal personality’ principle is Macaura v Northern Assurance Co Ltd (1925)
Lifting the ‘veil of incorporation’
What is this?’
What are the few exceptions to this rule? (2)
*Where companies are part of a group of companies they are usually treated as ___________ ________. The corporate veil of ____________companies is only raised in limited circumstances such as when it is acting as an ________ of the ________ ____________, if the corporate structure is a ______, or if legislation requires for a group to be treated as ___________ ______ ________.
The principle of a company having its own legal entity separate from that of its shareholders means that only the company is responsible for its liabilities and its shareholders are said to be protected by the ‘veil of incorporation’
There are a few exceptions to this rule:
- when the company is established as sham. For example, to commit some fraud (Jones v Lipman (1962))
- when the company is established as a sham to avoid contractual or other obligations (Gilford Motor Co v Horne Ltd (1933))
*Where companies are part of a group of companies they are usually treated as separate entities. The corporate veil of subsidiary companies is only raised in limited circumstances such as when it is acting as an agent of the parent company, if the corporate structure is a sham, or if legislation requires for a group to be treated as separate legal entity.
The Sole Trader (2 adv/3disadv)
Advantages?
- Convenience/informality (very few requirements)/privacy
- Control
- no need for public disclosures
Disadvantages?
- Unlimited personal liability
- It can be hard to raise finance
- Not suitable for a business that requires major inputs from more than one individual
The general partnership
6 features?
What is the definition
Features
- No separate legal identity/ personality Sadler v Whiteman (1910) But note that in Scotland it does.
- The partners share ownership of the business assets
- The partners share profits AND losses
- Generally known as “a firm”
- Partners are AGENTS for each other
- Each partner has unlimited personal liability (partners are joint and severally liable)
Definition
“The relation which subsists between persons carrying on a business in common with a view of profit”
The general partnership
Formation (2)
Operation (2)
Regulation (3)
Formation
- By agreement - to share in the profits of a business
- The agreement may be informal or formal (e.g. a partnership deed)
Operation
- The partners collectively manage the firm
- The partnership agreement governs its operation
Regulation
- The Partnership Act 1890, which generally takes a permissive approach
- Regulation is relatively light
- But, like any business, a firm may be subject to other forms of regulation – e.g. employment law, consumer protection regulation etc.
Forming a Partnership
Formal (1)
Informal (4)
Formal
- Written Partnership Agreement/Partnership Deed/Articles of Partnership
Informal
- Oral agreement
But:
- Parties may have different aims/understandings
- What actually agreed upon may not be clear (e.g. dispute)
- If no written agreement, then by default the rights are subject to section 24 of the Partnership Act (e.g.p&l)
Commencement of a Partnership
When does a partnership begin?
What are the 2 rules of the partnership?
Case Law?
- A partnership begins once the parties have reached an agreement in accordance with the legal definition.
- Parties must intend to enter into a partnership and that intention must be clear (Valencia v Llupar (2012)
- It does not matter if the firm has not yet started trading.
See Khan v Miah (2000)
- A partnership had come into existence when property was purchased with a view to opening a restaurant
- It did not matter that they had not started trading when their agreement had come to an end.
- Joint venture with a view to profit
Commencement of a Partnership (3 types of partner, 2 case law)
Equity partner – share of profits after all expenses are met
Salaried Partner - (Stekel v Ellice)
- Stekel was appointed by an accountant as a salaried partner with an agreement that they would become a partner in 7 months but because
Sleeping partner - ( M Young Legal Associates)
- M Young Legal Associates brought in a man that didn’t share in the profits but was brought in for their name to help form the firm.
Name of Partnership
What may a partnership be collectively known as?
What happens if the firm is found liable in court action?
What is the name subject to?
What can the partnership include?
What cannot they not trade under?
Who can be a partner? (1)
A partnership may be collectively known as a “firm”
Business can be carried under firm’s name and so can legal proceedings. But if the firm is found liable in a court action, then judgment is made against PARTNERS (Remember! unlimited liability)
Name is subject to the Companies Act 2006
Partnership can include the name of the partners followed by ‘co’ or ‘company’
Cannot trade under ‘Limited’ or ‘Ltd’
Who can be a Partner?
Natural persons
Artificial persons (companies etc.)
How Many?
At least two
Duties of partners to each other
- General duty of care and act honestly and in good faith.
- Duty of disclosure - Law v Law (one of the brothers did not disclose the assets which could have changed the decision of the other one selling their shares)
- Duty to account - personal profit out of business connection or partnership name
- Duty not to compete - liable for profits made in the course of the competing business, only if not disclosed.
Rights of partners
Management? (1)
Financial Matters (2)
Disputes (2)
Partners (3)
These default rules can be set aside by an agreement
Management
- All can participate
Financial Matters
- Profits and losses shared equally
- No additional remuneration
Disputes
- Majority voting for ordinary matters
- Unanimity to change the firm’s business
Partners
- All must consent to new partner
- No power to expel member
- Partnership terminates on death/bankruptcy of partner
Partnership agreement
A partnership agreement or deed is advisable
This should cover (6)
- Management
- Sharing of profits and losses
- Any additional remuneration
- Valuing their contributions to the firm’s capital/ assets
- Termination (e.g. the procedure for ending the partnership; the procedure for allowing a partner to retire/resign; the effect of death or bankruptcy of a partner)
- Expulsion
Otherwise, the provisions of s.24 of the PA 1890 apply by default
Legal Nature of a General Partnership
What does the firm not have?
What do the partners have?
What are the partners for the firms business?
What can each partner incur?
What are the partners to the firm (2)?
The firm has no separate legal personality
- The partners have unlimited personal liability
Partners are mutual agents for the firm’s business
- Each partner can incur liabilities that are binding on the other partner(s)
- Each partner is jointly and severally liable for the firm’s debts and liabilities
Partners are both owners and managers of the firm
