The Legal Function – Starting a New Business: Getting the Legal Structure Right Enterprise and its Business Environment © Goodfellow Publishers 2016

Contents The lecture looks at different legal forms in which you can set up a business, the circumstances in which each might be appropriate, and what the differences are. It then focuses in the important legal concept s of legal personality and limited liability and their importance for business Enterprise and its Business Environment © Goodfellow Publishers 2016

The Legal Forms the Business Might Use Sole trader business Business organised collectively Partnerships Companies Characteristics May move between these forms Enterprise and its Business Environment © Goodfellow Publishers 2016

Relevant Statutes Partnership Act 1890 Limited Partnership Act 1907 Limited Liability Partnerships Act 2000 Companies Act 2006 Insolvency Act 1986 Enterprise and its Business Environment © Goodfellow Publishers 2016

Sole Trader Business Basically ‘self-employed’ He /she works individually He / she can involve other people, either as workers or employees Personal assets may be at risk if the business fails Enterprise and its Business Environment © Goodfellow Publishers 2016

Why Organise Business Collectively? Working with others Economies of scale Partnership Company Enterprise and its Business Environment © Goodfellow Publishers 2016

Getting Together with others: Partnership There are 3 kinds of partnership: Partnership Limited Partnership Limited Liability Partnership Enterprise and its Business Environment © Goodfellow Publishers 2016

Partnership – PA 1890 A relationship between the partners, who carry on a business together –s.1 PA 1890 The business must be carried out for the benefit of all of the partners They must intend to make a profit Partnership has legal personality in Scotland, but incomplete (quasi-legal personality) – s.4 Partners may be liable for partnership debts – joint and several liability (unlimited) with right of relief All partners may take part in management, and may make the normal contracts of that partnership even without authority –s.5 Enterprise and its Business Environment © Goodfellow Publishers 2016

Partners’ Implied Authority: s.5 Mercantile Credit Co Ltd v Garrod [1925] AC 619 CONTRAST WITH Paterson Brothers v Gladstone (1891) 18R 403 Enterprise and its Business Environment © Goodfellow Publishers 2016

Partnerships with Limited Liability There are two forms under different statutes: Limited Partnership – Limited Partnerships Act 1907 Limited Liability Partnership – Limited Liability Partnerships Act 2000 Enterprise and its Business Environment © Goodfellow Publishers 2016

1. Limited Partnership has legal personality in Scotland some partners can have limited liability, provided at least one partner has unlimited liability limited partners cannot take part in management – or face joint and several liability –s.6 LPA 1907 formed by agreement – but must be registered at Companies House Enterprise and its Business Environment © Goodfellow Publishers 2016

2. Limited Liability Partnership All partners have limited liability, and can take part in management. The LLP has legal personality in UK. This form of partnership is incorporated similarly to a company. Used particularly by professionals eg accountants and solicitors Subject to some company law, eg must file accounts Can use the floating charge Partners pay income tax, as for other partnership forms Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies Companies are formed by an act of law known as incorporation at Companies House CLASSIFICATIONS: (1) All companies are limited by shares, limited by guarantee, or unlimited (rare) and (2) Companies are either private or public Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies – Limited or Unlimited? Unlimited companies must be formed as private companies Unlimited companies are unpopular as all members face unlimited liability if the business is liquidated Limited companies: limited by shares or limited by guarantee? Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies – Private or Public? Private companies: can be limited or unlimited if limited, name ends in ‘limited’ no minimum issued capital less paperwork than public company only needs one director cannot use the Stock Exchange Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies – Private or Public? Public companies: can only be limited companies name ends in ‘plc’ minimum issued capital of £50,000 needs AGM, needs audit needs 2 directors may use Stock Exchange – but need not Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies – Members and Directors Companies have a board of directors Companies have members, who in a company limited by shares are shareholders Unlike partnerships, company members have no automatic right to take part in management Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies – Legal Personality and Limited Liability A company is legal person, separate from its members and directors A legal person has rights and obligations in the same way that a natural person does The members will normally also have limited liability The corporate form is very useful for business, in enabling members to limit their risks of loss of capital, and is used by both large and small business, and by charities Enterprise and its Business Environment © Goodfellow Publishers 2016

The Company as a Legal Entity The company is a separate legal person from its members and directors – Salomon v Salomon & Co Ltd (1897) (veil of incorporation) Some attributes: * Make contracts * Has perpetual succession * Sue and be sued * Own property * Commit (some) crimes * Have (some) human rights * Commit delicts (through agents) Enterprise and its Business Environment © Goodfellow Publishers 2016

Other Cases on Legal Personality Macaura v Northern Assurance Co Ltd [1925] AC 619 Lee v Lee’s Air Farming Ltd [1961] AC 12 Enterprise and its Business Environment © Goodfellow Publishers 2016

Piercing the Veil of Incorporation Legal personality may be disregarded by statute where necessary – eg personal liability of directors under s.214 Insolvency Act 1986 (wrongful trading) The courts have also done so, though increasingly rarely – other solutions are preferred: Done where a sham company is used to evade contractual obligations as in Gilford Motor Co v Horne (1933) Or to evade the operation of law. Prest v Petrodel Resources Ltd (2013) Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies v Partnerships 1 Companies are formed by incorporation – partnerships by agreement. Companies involve more expense and paperwork. Both are legal persons, but the legal personality of partnership is incomplete. A partnership cannot have one member only, while single member companies (both public and private) are permissible. Company shares are normally freely transferable, while partners need the consent of their fellow partners to transfer their interest in the partnership Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies v Partnerships 2 Partners normally have a right to take part in management; members of a company do not. Members of companies may have limited liability. Unless it is a limited partnership, or limited liability partnership, partners are jointly and severally liable to an unlimited extent for partnership obligations. There are disclosure requirements on companies, but not on partnerships (other than limited liability partnerships). A company can grant a floating charge; a partnership cannot, except for the limited liability partnership. A partnership can normally be dissolved by any partner, but this is not normally the case in a company. There are more than double the number of companies over the number of partnerships. Enterprise and its Business Environment © Goodfellow Publishers 2016

Companies v Partnerships 3 Who runs the business? Partners are also those in charge of the business In companies, shareholders and directors are, usually, separate ( The shareholders are basically the “owners” and directors are professionals) Partners pay income tax, whereas companies pay corporation tax on profits Enterprise and its Business Environment © Goodfellow Publishers 2016

Summary Can operate as a sole trader, if operating alone, and can cope with potential legal liability More than one person? Form a partnership, but partners can still face unlimited liability for firm’s obligations 2 forms of limited partnership – offer limited liabiity Registered company – offers limited liability Enterprise and its Business Environment © Goodfellow Publishers 2016

Further Reading Companies House (2014) Companies Register Activities attachment_data/file/380779/CompaniesRegiste rActivities pdf attachment_data/file/380779/CompaniesRegiste rActivities pdf Black, G.,et al (2015) Business Law in Scotland 3 rd edition Edinburgh: W Green, chapters 3, 15, 16 and 17. Enterprise and its Business Environment © Goodfellow Publishers 2016

QUESTION – talk to your neighbour Bill has an idea for software development which he is convinced has great potential for business success. At present he is working from his bedroom at home and prefers to work alone. Of the various business forms discussed, which might suit him best, and why? What further questions might you need to ask him? Enterprise and its Business Environment © Goodfellow Publishers 2016