1.

“Company law”, Alan Dignam and John Lowry, 11th

FORMS OF BUSINESS ORGANISATION
edition, chapter 1

2. Mason, French & Ryan on Company Law, Derek

French, 37th edition, Oxford University Press
 FORMS OF BUSINESS ORGANISATION
Breakdown of slides:

• Money, risk and organisational structure

• The sole trader
• The partnership
• The Company (Company limited by shares, Company limited by guarantee,
Community interest company)
• Unlimited Companies
• Private and public companies
• Advantages and disadvantages of companies
 FORMS OF BUSINESS ORGANISATION
The form a business organisation will take depends on
the combination of three things:

1. Money (capital)
2. Risk
3. Organizational structure
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1. Money: Does the money (capital) facilitate investment in the
business? How much money is needed for the venture?

2. Risk: does the chosen form of business organization minimise the

risk involved in the venture for the persons concerned?

3. Organizational structure: where you have money, risk and people

combined, there is the potential for disagreement, so does the form
of business organization provide a clear organizational structure?
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Bearing in mind the above factors, we will discuss three types of
business organizations.

1. The sole trader

2. Partnerships
3. The company

How do they differ in the three factors of: money, risk and business
structure?
1. THE SOLE TRADER
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THE SOLE TRADER
• A form of business organization where one operates on their own.

• No legal filling requirements

• They provide the capital through their personal savings or a loan

• They contract in their own name

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• The sole trader has personal liability for the debts of the business – no
distinction between the sole trader’s personal and business assets.

• As the person in charge of the business is only one, there is no need

for an organizational structure

• This type of business organization would be unsuitable for large scale

investment
2. THE PARTNERSHIP
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THE PARTNERSHIP

S. 1 of the Partnership Act (1890) describes a partnership as:

“The relationship which subsists between persons carrying on a business in

common with a view of profit”

• A partnership can come about through an oral agreement, through

conduct or through a written agreement specifying its terms and
conditions.
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• No formal process of becoming partners. If you
behave like partners then the law will treat you as
such even if you have no idea you have entered into a
partnership! (Khan v Miah (2000))

• The minimum number of persons to form a

partnership is 2 and there is no maximum.
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• The assets of the firm are directly owned by the
partners.

• A partnership which does not directly exclude the

Partnership Act will be governed by it.

• A partnership ends on the death of a partner

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• Those entering a partnership knowingly can choose
which provisions of the Partnership Act will apply to
them. This can be done through the partnership
agreement drafted by their solicitors.

• What cannot be achieved through a partnership

agreement though is limited liability.
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Other than the traditional partnership model discussed above,
however, there are, certain types of partnerships, that do allow
limitation of liability:

1. Limited Partnerships

2. Private Fund Limited Partnerships

3. Limited Liability Partnerships

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The Limited Partnership

 A Limited Partnership (LP) is created under the Limited Partnership Act (1907).

 This type of partnership consists of at least one general partner who manages the
business and bears unlimited liability to creditors, and at least one limited
partner.

 The limited partner must contribute a specified amount of capital on joining the
partnership. Their liability to creditors or their fellow partners cannot exceed that
amount.
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 The limited partner may not bind the firm and may not take part in the
management of the firm’s business, even if they do not agree with
management decisions. If they do, they lose their limited liability.

 The general and limited partner(s) may be natural persons (humans) or

legal persons (companies).

 A limited partnership must register with Companies House/Registrar of

Companies. Failure to register deprives it of its limited liability.
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 LPs have been used for a variety of purposes, ranging from informal
business structures composed of two or three partners to multi-
partnered complex structures, and operate in various industries,
including oil and gas, pensions and real estate.

 LPs are advantageous because they have fewer reporting

requirements than limited companies and do not need to be
managed from the UK, which is an attractive feature for global
investors.
The Azerbaijani laundromat
 The Azerbaijani laundromat
• The UK government has been concerned that LPs have been
used for money laundering.

• From 2012 – 2014 the UK limited partnership as well as shell

companies were used by the Azerbaijani government to
launder billions to the West to pay off Western politicians
and journalists to turn a blind eye to human rights violations
in Azerbaijan and praise the Azerbaijani government to
UNESCO.
 The Azerbaijani laundromat
• As a response, in September 2022, the UK government
announced the new Economic Crime and Corporate
Transparency Bill (the ECCT Bill) which aims to reform the
current LP regime and crack down on the misuse of these
entities.

• The bill plans in increasing the scope and reliability of

information that must be filed at Companies House and ensure
that a legitimate connection to the UK is maintained by the LP.
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Private Fund Limited Partnerships

• Private Fund Limited Partnerships were introduced by the Legislative

Reform (Private Fund Limited Partnership) Order (2017).

• PFLPs have some differences from the traditional model described above:
In an PFLP, the limited partner does not need to notify the Registrar of the
amount they have contributed to the PFLP (it is not a filing requirement).
Another difference is that there is a certain list of activities which the
limited partner is allowed to undertake while being a limited partner.
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•A new partnership can be registered as an PFLP to start with or an old partnership
under the Limited Liability Act can revert to PFLP status.

To register as an PFLP:

the PFLP is constituted by a written agreement; and

the partnership is a collective investment scheme (for purposes of s235 of the

Financial Services and Markets Act 2000).
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3. Limited Liability Partnerships (LLPs)

• These partnerships are created under the Limited Liability (Partnerships)

Act (2000).

• All partners have limited liability and their liability is limited to the amount
they put into the partnership.

• This type of partnership (LLP) is followed by large professional partnerships

e.g. accountants, lawyers but now also used outside of these fields too.
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• This kind of partnership is often described as a
halfway between a traditional partnership and a
limited liability company

• Unlike all other forms of partnerships, the LLP is

considered to be a separate legal entity (legal
personality).
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Partnerships generally

• Partnerships, facilitate investment, as they allow partners

to pool their funds.

• The risks to partners in a partnership, however, is higher

than those who form a limited liability company (although
reduced in the forms of partnership examined above).
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• Due to this, limited liability companies are far more
popular due to the possibility of limited liability in any
event and the positive reputation attached to them.

• The organizational structure of a partnership is very

flexible and this can be arranged in almost any way
through a partnership agreement.
3. THE COMPANY
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3. THE COMPANY

There are three types of companies, all of which are regulated by the
Companies Act (2006):

a) Company limited by shares

b) Company limited by guarantee
c) Community interest company (limited by shares or guarantee)
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a) Company limited by shares

• Is a commercial company

• The liability of the shareholders for the debts of the company is

limited to the amount unpaid on their shares.

• This is the normal type of company formed to pursue a

business venture.
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b) Company limited by guarantee

• Is designed for charitable public interest ventures and is non

– profit making e.g. schools, colleges, friends of museums, art
galleries.

• Such companies do not have up front capital or shares. Its

capital can be raised on a need basis and can be put together
through subscriptions or through the taking out of loans.
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• The guarantors promise to pay a guaranteed
amount in the event that the company goes into
liquidation.

• People forming part of them can leave by

agreement.
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c) Community interest company (CIC)

• Its aims are limited to the pursuit of community

interests.

• Can be a company limited by shares or guarantee.

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• Although, this company too is formed under the Companies
Act (2006), the Companies Act (Audit, Investigations and
Community Enterprise) Act (2004) provides a set of rules
which such Companies can adopt as they are ideal for its
goals and needs.
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Unlimited companies

• This is a rare form of private company with share capital but

the member’s liability is unlimited.

• Although the Companies Act (2006) applies to them they are

not as regulated as other Companies that the Act applies to.
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• Why would a promoter want to create a
company with unlimited liability when it seems
like such a risky venture..? The answer is that an
unlimited company would be attractive to
promoters who value their privacy and who wish
to have flexibility of their capital structure.
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Unincorporated associations
• Is an organisation set up through an agreement between a group of
people who come together for a reason other than to make a profit (for
example, a voluntary group or a sports club).

• You don’t need to register an unincorporated association, and it doesn’t

cost anything to set one up.

• Individual members are personally responsible for any debts and

contractual obligations
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Public and private companies

The Companies Act (2009) recognizes two different kinds of companies:

1. Private: here the investment is provided by the company’s

members, either through their savings or loans.

2. Public: the investment is provided by the public at large (larger

amounts of money)
 FORMS OF BUSINESS ORGANISATION
Private company

• This is the majority of the form companies take in the UK

• They cannot invite the general public to buy shares

• They have no minimum capital requirements like public companies

• The members only need to come up with a nominal amount.

 FORMS OF BUSINESS ORGANISATION
• The members of a company have limited liability and
so the letters “Ltd” must appear at the end of the
company’s name.

• This means that the members are only liable for the
sums that remain unpaid on their shares if the
company goes into liquidation.
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• The number of members can be restricted by the articles of
association

• If a member dies or wishes to sell their shares, the new

member has to be approved by the directors

• Some companies also require members who plan to sell their

shares, to offer them to the existing shareholders first (pre –
emption clause).
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PUBLIC COMPANY

• Secure their funding from the public and advertise the fact that they
are offering shares for sale.

• They are allowed to offer their shares for sale to the public, but they
are not obliged to. Some do and some chose not to. Either way, both
are subject to the Financial Services and Markets Act (2000) and the
rules made under it by the Financial Conduct Authority.
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• When offering their shares to the public, they must
issue a prospectus which gives details of the
company’s financial plans.

• Because the public is involved and must be protected,

the share capital requirements of public companies
start at £50,000 (the “authorized minimum”)
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• There are no restrictions on the transfer of shares in a public
company

• A listing on the stock exchange is a contractual arrangement

between the public company and the stock exchange.

• It should be noted, however, that not all public companies

are listed on the stock exchange (Amstrad Plc is such an
example).
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• When a public company applies for registration, it must state
that it will be a public company.

• When it becomes incorporated its name will have the letters

“plc” at the end – Public Limited Company. This will indicate
two things. That it is a public company, raising capital from
the public and that the liability of its members is (like a
limited company), limited.
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What are the advantages of a company?

• A company is a legal entity distinct from its members (Salomon v

Salomon (1897). In other words, it has legal personality. Therefore, it
can enjoy rights and be subject to duties which are different to those
of its members.

• It enjoys limited liability: its members (shareholders) are not

personally liable for the Company’s debts. They are only liable to pay
any sums left on their shares if these are due.
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• Facilitates investment/is a capital raising vehicle

• Clear organizational structure (in big companies).

This allows a company to pursue larger and
riskier endeavors by allowing many people to
participate.
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• The shares in a company are freely transferrable in
the absence of any express restrictions to the
contrary.

• The company has a perpetual existence and as long

as shares can be transferred it will live. The
death/incapacity of a member or its directors leaves
the company unmoved.
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• Increases entrepreneurial spirit of the directors
who are not worried that by them taking risks
the members would be at risk of losing their
personal assets if the venture fails.

• Is prestigious and shows legitimacy

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• Property: Due to its separate legal personality, the
property of the Company belongs solely to the
Company and members have no personal claim over
it.

• Legal action: Companies can sue and be sued in the

Company’s name and not in the name of any director
or member.
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• Borrowing: Companies are able to borrow a lot more than a
sole trader or a partnership could borrow because it is often
able to grant a more effective charge to secure the loan.
Moreover, if a company has no fixed assets (e.g. Land) which
can act as a security to a loan but has valuable stock –in –
trade, banks may place a “floating charge” over this.
Whether through a fixed or floating charge, companies are
still able to borrow more funds from lenders.
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Disadvantages of a Company

• The division of ownership and control only really works for large
private companies whereas 90% of companies are small private ones.

• Small companies have to employ costly professional advice to deal

with the statutory requirements.
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• The advantage of limited liability may be a fiction as
members of small private companies borrow the
money they intend to invest in the company through
bank loans. Banks will then ask them to put forward
their personal property as a guarantee.
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• It is costlier to set up a company than it is to be a sole trader or be in
a partnership. A sole trader already exists and a partnership comes
into being out of the facts of a relationship without the need of a
formal agreement, provided the parties are carrying on business in
common with a view to a profit. The Company must go through
expenses not only to become registered but also throughout its life
(preparation of annual statements to the Registrar of Companies,
preparation of accounts etc.). This form of transparency is not
required of the sole trader or the partnership. In addition, a company
has costs when it is to dissolve.
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• Publicity: Companies, unlike partnerships, are
required to make their accounts public, through
their filing at the Companies House. A company’s
directors, shareholders and persons with
significant control are also publicly visible
through the Companies House.
 QUESTIONS
By the end of this lecture you should be able to answer the following:
1. Which factors influence the form a business organization will take?
2. What is a sole trader?
3. What is a partnership and what types of partnerships exist?
4. What is a company?
5. What is a private company?
6. What is a public company?
7. What are the advantages and disadvantages of companies?