Choosing a

business legal
structure
Lisa Bebbington

Objectives for today:

1.

Explain different business legal structures

2.

Evaluate the advantages and disadvantages

of different business legal structures

3.

Apply your knowledge to a scenario

4.

Justify your choice of business legal

structure

What type of business

structure?
Sole trader
Partnership
Limited Liability Partnership
Limited company - public and private

Activity..
1. Individually research a type of business
legal structure and how it is formed using the
following website:
https://www.gov.uk/business-legal-structures
2. In small groups prepare a poster. The
challenge is to summarise the main points of
your research using only 15 words!

Partnership
Defined in section 1(i) Partnership Act 1890:
The relation which subsists between
persons carrying on a business in common
with a view to profit
It is a relationship not a legal entity
separate from the partners
With a view to profit a partnership only
requires an intention to make money it is
still a partnership if you do not!

What is important about

partnerships?
1. Unlimited liability
Because a partnership is not a separate legal
person every partner is liable for the
business debts
2. Agency
Each partner is the agent of his/her fellow
partners
So a partner would be jointly liable for any
fraud committed by another partner which
he/she has carefully concealed from them

What is important about

partnerships
Contracts made by individual partners can
become binding on all the partners
If an individual partner commits a civil
wrong (a tort), other partners can become
liable for this
Liability is restricted to where the partners
tort is either committed in the firms
ordinary course of business or the other
partners authorised the tort

Implication
Know your partners!

Partnership agreements
The 1890 Act makes the mere
carrying on of the business in
common for profit a partnership
Partners might or might not enter into
a written partnership agreement
usually called a partnership deed

Practical formation of
partnerships
No limitation now on the number of partners
The partnership should not be for an illegal
purpose

Practical formation of
partnerships
Partnerships do not need to register the
names under which they trade
Partners cannot use the words limited,
LLP or Ltd but otherwise can trade under
any name they like so long as the Companies
Act 2006 is complied with and the name is not
designed to confuse the public
Under Companies Act 2006 partnerships must
follow rules if the partnership name is not the
surnames of all the partners i.e. a business
name

Practical formation of
partnerships
Firms must display the names of all partners
and on all business documents
Documents include business letters, written
orders for goods or services, receipts and
written demands for payment of debt.
The information must also be displayed at
premises to which customers or suppliers
have access
Non compliance is a criminal offence

Limited partners
One or more partners may have limited
liability under the Limited Partnership Act
1907
But there must always be one general
partner in a partnership
The limited partner must register with the
registrar of Companies
The general partners manage the business
and have unlimited liability
Limited partners cannot take part in
management of the firm and are not its
agents

Limited Liability Partnerships

Act 2000
Since April 2000 two or more persons can
trade together as a limited liability partnership
It is a separate legal entity
Participants are members of the LLP and not
partners
LLPs have some of the features of
partnerships and some of those of companies
An LLP is a corporate body like a limited
company

Limited Liability Partnership

LLPs do not have directors or shareholders
They have members and designated
members
Being member of an LLP is similar to being a
partner in an ordinary partnership
Designated members sign the accounts and
the annual return and inform Registrar of
companies of the names of the designated
members

Limited Liability Partnership

Every member is an agent of the LLP and can
contract on its behalf.
The LLP is bound in contract not the members
The LLP is liable for the torts of its members
committed in ordinary course of business or
authorised by the LLP
LLPs are like partnerships in that members
manage the business and are agents for it
Members pay income tax rather than the
business paying corporation tax

Limited Liability Partnership

Members of an LLP can always leave the
business by giving notice
This does not automatically dissolve the LLP
but note requirement for at least two members
for LLP to continue!
Since April 2014 some members are taxed as
employees rather than taxed as self employed,
see link below for details and conditions:
http://
www.lawsociety.org.uk/support-services/advice/
practice-notes/llp-tax-changes/

Companies
Companies are legal persons with their own
legal rights and obligations
All companies are governed by the
Companies Act 2006
The Act has made registering a new
company easier and quicker
Running a company has also been made
simpler
Directors of a company are elected by the
shareholders the members to run the
company
The 2006 Act seeks to make directors more
accountable to shareholders

Forming a company
A company is created by registration under
the 2006 Act
Those who want to create the company the
promoters must send certain documents to
the Registrar of Companies
The Registrar (if the papers are in order)
issues a certificate of incorporation and the
company then exists as a corporate body
The company is then a separate legal entity
to its owners (the shareholders)
There need only be one member of a
company

Limited liability
Those with shares in a company only have a
commitment to pay the price of the shares
The company is liable for its debts even if
this means selling all of its assets and going
into liquidation
Companies can own property so it can
borrow money using its assets as security
The company alone is responsible for the
contracts that its owners make
It can also sue and be sued in tort

Pros and cons to each type of

business legal structure
In pairs, research the advantages and
disadvantages of each type of structure.

Private companies
Name must end with Limited or Ltd
No limit on share capital
Shares cannot be listed on stock exchange or
advertised for sale
Need only have one director
No need for a company secretary and if
there is one - no need for a qualified one
No Annual General Meeting unless decide to
have one

Public companies
Public companies must have at the end of
their names Public Limited Company or
plc
There must be 50,000 allotted share capital
one quarter of which must be paid up
Must have two directors
Must have a suitably qualified company
secretary
Must hold Annual General meeting every
calendar year

New legislation!
The Small Business, Enterprise and
Employment Act 2015 will open up new
opportunities for businesses in relation to
growth, competing and gaining finance.

NOTE!
Small Business, Enterprise and
Employment Act 2015
Act contains measures = significant change
for companies!
Measures change legal requirements on
companies, including what they file with
Companies House.
For details of measures and changes see:
https://www.gov.uk/government/news/the-small-business-ente
rprise-and-employment-bill-is-coming

Unlimited companies
Less than one per cent of registered companies
are unlimited companies
They do have a separate legal personality
distinct from their members for making contracts
and holding property
The members agree to assume unlimited
liability for the companys debts
They do not have to publish accounts or deliver
them to the Registrar of Companies

Companies limited by
guarantee
Most companies are limited by shares
Where companies are limited by guarantee
members liability is restricted to paying an
amount which they have agreed to pay in the
event of the company going into liquidation
The amount is usually small e.g. 5 and is set
out in the original application from registration
Most such companies are educational or
charitable not suitable for trading companies
Public companies cannot be limited by
guarantee

Forming the company

To register a company the Registrar should be
sent (in addition to a fee):
A new style memorandum of Association (i.e. a
statement that the subscribers wish to form a
company and be members by taking at least one
share each)
An application for registration
A set of documents such as a statement of the
share capital and the initial shareholdings
A statement of compliance (i.e. compliance with
the 2006 Act)

Articles of Association
These are the rules of the company
S18, Companies Act 2006 requires a
company to have Articles in one document
There are standard models of Articles and
one of these will apply if other Articles are not
registered

Directors
The first directors agree to become directors
when the company is registered
Unless the Articles say otherwise the
subsequent directors are appointed by an
ordinary resolution of members
In small companies the directors often own a
majority of the shares
However there is no requirement that a
director has to be a member of the company

Annual return
Every company is required to submit an annual
return to companies House
This gives basic information about the company at
a particular date the return date every year
Failing to do so within 28 days of the return date is
a criminal offence
But note changes June 2016 under the SBEE
Act 2015:
Confirmation statement
A requirement to check and confirm the company
information by filing a confirmation statement, and
notify changes if necessary at least once every 12
months. Will replace the current obligation to
file an annual return.

Which type of business to form?

Sole trader
Advantages
Your own boss!
Quick start and easy to start
Less paperwork?
Disadvantages
No support when you are ill; no holidays
Still paperwork to do
Solely responsible for keeping up with law
changes?
Finding security for loans may be difficult

Choice of legal status

Partnership
Advantages
Quick start up
No formalities
Privacy no requirement for public disclosure
of accounts
Credit may be more readily available
Disadvantages
Partners have unlimited liability
Possible liability for partners actions

Choice of legal status

Company
Advantages
Limited liability
For a Plc much more opportunity for
investment
Disadvantages
Paperwork associated with companies e.g.
returns to Companies House
(But private companies have fewer formalities
now (e.g. no need for formal meetings))

Choice of legal status

Company
disadvantages continued
Credit may be difficult for small companies
unless personal guarantees given (which
defeats the purpose!)
Shareholders do not have a right to manage
the company

Choice of legal status

Tax
There can be tax advantages in trading as a
company and taking dividends from the
company rather than taking a salary as a
director
But see proposed changes by HMRC!
https://
www.gov.uk/government/publications/divide
nd-allowance-factsheet/dividend-allowance
-factsheet?dm_i=YJL,3M0CB,KPSDH8,CZ60R,1

Case Study.
Handout read through the scenario and
answer question

Some other legislation to consider

when starting a new business.
Employment Rights Act 1996
Health and Safety at Work Act 1974
Sale of Goods Act 1979
New Consumer Rights Act 2015

Section 1, Employment Rights Act

1996 written statement of terms
The statement includes:
Names of employer and employee
Date employment began
Pay scale
When payment due (weekly etc.)
Terms as to hours of work
Terms a to holiday entitlement, sick pay or
pension
Length of notice

Section 1, Employment Rights Act

1996 written statement of terms
Job title
If not permanent, the period of work
Place of work
Trade union agreements affecting the
contract
Overseas working
If terms are varied the employee should
receive a revised statement within 1 month

Some terms are implied into

contracts by the courts
Imposed on the employee
To show mutual respect to the employer
To faithfully serve the employer
To obey lawful and reasonable orders
To use reasonable care and skill
Not to accept bribes
Not to reveal confidential information

Implied obligations of the

employer
To show mutual respect to the employee
To provide work or pay employee if no work
available
To pay wages
Not to reveal confidential information
To indemnify employees for expenses and
costs reasonably incurred
To insure the employee
To take reasonable care and skill in preparing
a reference (but no duty to provide a
reference)

Employer responsibilities:
https://
www.gov.uk/contract-types-and-employer-responsibilities

Business contracts
New legislation!
Consumer Rights Act 2015
For details see useful links below:
https://
www.gov.uk/consumer-protection-rights
https
://www.citizensadvice.org.uk/about-us/how
-citizens-advice-works/citizens-advice-co
nsumer-work/the-consumer-rights-act-2015
/

Test your knowledge!