1. Business Law
Outcome 3

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

3. 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

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

5. Legal formalities to set up different types of business organisations

6. 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

7. 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

8. 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
ndGuide/companyRegistrationPaper.shtml

9. Legal authority of sole traders and partners

10. 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

11. 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

12. 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

13. 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

14. Group Activities

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

16. 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

17. 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

18. 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)

19. 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

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

21. 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

22. 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

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

24. 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

25. 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

26. 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)

27. 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

28. 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.

29. 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

30. Any questions?