Business Law Outcome 3

Aim of Session To explain the legal characteristics of different types of business organisations recognised by Scots Law

Objectives of Session By end of session students will be able to: Distinguish between sole traders, partnerships and incorporated bodies Describe the legal formalities to set up different types of business organisations Outline the legal authority of sole traders and partners Explain the advantages and disadvantages of different types of business organisations in a legal context

Main types of business organisation recognised by Scots law Sole trader Partnership Limited company

Legal formalities to set up different types of business organisations

Legal Formalities – Sole Trader Most simple type of organisation to set up No legal formalities required No agreements needed with other people No documents need to be registered with Companies House

Legal Formalities – Partnership Partners can use a Deed of Partnership (Partnership Agreement) to set out duties, responsibilities and authority of partners If no Partnership Agreement drawn up partnership governed by Partnership Act 1890 – treats all partners as equal in running the firm

Legal Formalities – Limited Companies Extensive legal requirements Form IN01 Memorandum and Articles of Association Relevant fees Documents and fees submitted to Companies House for company to be registered http://www.companieshouse.gov.uk/infoA ndGuide/companyRegistrationPaper.shtml

Legal authority of sole traders and partners

Legal authority of sole trader Owner makes all key business decisions Decides how business is run Has authority to enter into contracts If business successful takes all profits If business fails responsible for all business debts

Legal authority of partners Authority of partners set out in the Partnership Act 1890 All partners have equal say in running business and in decision making

Legal authority of partners Partners have implied authority - power to enter transactions connected with usual business of firm Partners are agents of the firm and of the other partners – the acts of one partner binds the firm and the other partners in any transaction connected with usual business of firm

Legal authority of partners Partnership agreement can expressly define or limit the authority of partners If one partner’s authority is limited other partners must tell customers/3rd parties or actions of partner will bind the firm and the other partners

Group Activities

Activity 1 Describe the key advantages and disadvantages of setting up in business as a sole trader

Sole trader - Advantages Simplest form of business organisation recognised by Scots Law Basic legal requirements e.g. Submission of income tax returns to the Inland Revenue If person not trading under own name must ensure own name displayed on premises and on business stationery to comply with Business Names Act 1985

Sole trader - Advantages Owner makes all business decisions Owner has total control over business - no need to take account of opinions of shareholders or partners Generally owner will have personal contact with customers Owner gets profits if business successful

Sole trader - Disadvantages Sole trader indistinguishable in law from the business Unlimited liability for any debts or obligations owed to third parties If business fails personal assets can be taken and used to settle business debts May be difficult to fund expansion - cannot offer shares to other parties to raise funds (lack of finance)

Sole trader - Disadvantages Business growth would require major capital injection that might entail a loss of control Inclusion of new partners or members would force change in the nature of the business operation i.e. conversion to partnership or some other form of corporate body e.g. public/private company or a limited liability partnership

Activity 2 Identify the advantages and the disadvantages of setting up a partnership

Advantages of traditional partnership More finance available Partners may have complimentary skills Costs can be shared between partners Unincorporated business No need to register with Registrar of Companies No need to supply formal documents Regulated by the Partnership Act 1890, however, partners may agree otherwise

Disadvantages of traditional partnership Decisions need to be agreed by all partners – may result in disagreements Cannot issue shares to fund growth Partners have unlimited liability for all partnership debts and liabilities Partners jointly and severally liable for all partnership debts Partnership generally sued first for debts but if partnership does not pay its debts then individual partners can be sued for debts Partners bound by each others actions

Activity 3 Define the term “limited company” What are the advantages and the disadvantages of setting up a limited company

What is a limited company? A limited company is a business organisation that has been incorporated under the Companies Act 2006 Extensive legal requirements to set up this type of organisation

Limited Companies - Advantages Limited liability - main advantage. A member’s liability is limited to amount of shares held Risk minimised Shareholders don’t need to contribute additional finance Company debts are not member (shareholder) debts

Limited Companies - Advantages Separate legal identity (separate corporate personality) - company has legal existence separate from management and members (the shareholders). Company can: Own property Sue and be sued Enter into contracts as it has legal capacity Case Law Salomon v Salomon & Co Ltd (1897)

Limited Companies - Advantages Continuity Once formed, a company has everlasting life. Directors, management and employees act as agents of the company. If they leave, retire, die - the company remains in existence Taxation Sole traders and partnerships pay income tax whereas companies pay Corporation tax on their taxable profits A wider range of allowances and tax- deductible costs can be offset against a company's profits The current level of Corporation Tax is lower than the higher income tax rate

Limited Companies - Advantages Protection of Company Name Use of company name is restricted Provided a chosen name complies with the rules, nobody else can use it The only protection for sole traders and partnerships is trademark legislation.

Limited Companies - Disadvantages Shares in private limited company can’t be listed or traded on stock exchange Audited accounts of private limited company must be published within 10 months of financial year end Legal requirements to set up business e.g. need a Certificate of Incorporation from Registrar of Companies before business starts trading Must comply with Companies Act 2006

Any questions?