1 Forms of business organization 2 Sole trader 3 Partnership 4 Non profit-making organization 5 Classification of company 6 Significance of separate corporate existence 7 Limitations on separate corporate existence 8 Corporate capacity

1 Forms of business organization (1) Sole traders, sole proprietorship (2) Partnerships: general, limited partnership (3) Company: unlimited, limited, stock (4) Non profit-making organization

2 Sole trader (1) Unlimited liability: owner (2) No separate existence, not legal person (3) No formality is required for its formation

3 Partnership

3.1Definition The relationship subsisting between persons carrying on business in common with a view to profit (1) Relationship subsisting between persons: no new legal person (2) Business: every trade, occupation or profession (3) In common: jointly carry on business,for the benefit of all partners (4) View to profit

3.2 Characteristics (1) Agency: Each partner is the agent of the firm and fellow partners (2) Unlimited liability: partners (3) Joint and several liability: serious consequence (4) Maximum partners: 20

3.3 Disadvantage (1) Disagreement leads to stalemates (2) Dishonesty or incompetence of one partner leads to heavy losses suffered by fellow partners (3) Time consuming in the aspects of major decisions 3.4 Does partnership have separate personality?

Semi-legal person? (1) Firm’s creditors call against firm assets first (2) Deceased partner’s personal creditors have first call against personal assets of his estate (3) Partnership may hold real property (3) Own name: may sue and be sued by such name (4) Accounting perspective: separate entity with its own assets, liabilities and financial statements

3.5 Limited partnership (1) Limited partners: passive role in firm management (2) Unlimited partners: active role in management (3) Legal person status: UK

4 Non profit-making organization

(1) Unincorporated associations: tennis club, no separate personality; trade unions: legal person (2) Government department: DTI, FCO, legal person (3) Local authorities like local council: legal person

(4) Quango (quasi-autonomous, non- governmental organizations): further education colleges, health authorities trust, training and enterprise council, local police authorities (5) Charities: if registered as company, usually limited by guarantee; else, trustees assume unlimited liability

5 Classification of company

5.1 Public companies and private companies (1) Public companies: broadly held company, 1% (2) Private companies: closely held companies,99% Shares transfer is restricted in some manner Maximum shareholders: 50 Invitation to the public to buy shares is prohibited

5.2 Limited and unlimited companies (1) Limited company: 95% Limited by shares: 93%, vast majority, owners pay any unpaid shares. If they are paid in full, no more liability. Limited by guarantee: 2%, owners pay the agreed amount in the event of liquidation

(2) Unlimited company: 4% Public company may not register as unlimited company Must not use “limited’, “Ltd” Legal personality Unlimited liability No publicity requirement

Public companies Private companies Minimum:2 membersMinimum: 1 member End with PLCEnd with Ltd, excluding UC ￡ 50000alloted, 1/4 paid up No share capital limit Quoted on Stock Exchange Cannot be quoted Minimum director:2Minimum director:1 Shares must be paid in cashShares can be given away

6 Significance of separate corporate existence 6.1 Case study (1) Salomon V Salomon & Co Ltd(1897)

Liquidation: remaining assets ￡ 6000 Salomon took all the remaining assets. What shall the unsecured creditors do? House of Lords: No more obligation to pay.

(2) Macaura V Northern Assurance Co Ltd (1925 ） Macaura and nominees owned all shares. Owed no debt to others. Macaura insured corporate timber in his name. Timber was destroyed by fire. Can he claim compensation? House of Lords: No. He wasn’t owner of timber.

(3) Tunstall v Steigmann (1962) Mrs Steigmann ran pork shop, leased her next door shop to Mrs Tunstall. She wanted to occupy the shop herself. She could do so if she intended to occupy it herself. Before lawsuit, she incorporated a company, and owned all but 2 shares. Can she end the lease? Court of appeal decision: No. It is the company instead of her wanting to occupy the premises.

6.2 Features (1) Limited liability: shareholders (2) Continuous existence (3) Ownership of property (4) Contractual capacity (5) Professional management, since 1840’s (6) Less loyalty: shareholders (7) Separation of ownership and management (8) Criminal liability: danwei fanzui in China

7 Limitations on separate corporate existence 7.1 Lifting corporate veil: prevent the abuse of limited liability 7.2 Situations of lifting corporate veil (1) Formed for fraudulent purpose

GMC Ltd v Horne (1933) Mr. Horne, MD of GMC. Non-competition clause in the employment contract. After termination, he solicited GMC’s customer order. In order to avoid liability, he formed a company whose sole purpose was to solicit GMC’s customers. GMC sued him. He claimed that the clause was not binding on the company. Court of appeal: Mr. Horne was laible. Injunction: he and the company.

(2) If it can be characterized as enemy in time of war Daimler Ltd v Continental Tyre & Rubber Co Ltd (1916) Continental Tyre Co registered in UK, sued Daimler for recovering debt. German owned all but one shares of Continental Tyre Co. House of Lords: Continental Tyre Co could not sue on the debt.

(3) Economic unit: groups of companies DHN Ltd v London Borough of TH (1976) DHN had two wholly owned subsidiaries. Bronze is one, whose only asset was the premises where DHN carried on business. The second owned vehicles used by DHN. Local authority compulsorily purchased Bronze’s premises, leading to the closure of DHN’s Business. DHN claimed for damages. Local authority argued the matter had nothing to do with DHN. Court of appeal: Bronze and DHN could be treated as one economic enterprise.

(4) Other situations at court’s discretion Goodwin v Birmingham City FC(1980) Mr. Goodwin, manager of Birmingham City Football Club, five-year contract. He used his company to supply the services to the Club. The Club sacked him in year 3. He found a better job soon. His company sued the Club for full damages. Court decision: His company was only entitled to nominal damages. He and the company could be regarded as same person.

8 Corporate capacity 8.1 Same capacity as human being Municipal corporations, and corporation formed by memorandum of association are usually strictly restricted in their capacity. 8.2 Ultra vires doctrine: abolished for third party protection