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Business Types2Learning ObjectivesBusiness ownershipIndividualsPartnershipsCompanies (corporations)Comparison of Ownership TypesFriday, January 31, 2014EEIM3IntroductionThere are three general ways of owning and operating a businessas an individualas a partnershipas a limited companyFriday, January 31, 2014EEIM4IndividualsThe situation with an individual is fairly straightforward as only one person is involvedThat person is the businessThat person is often called a sole traderS/he enters contracts in his/her own name in order to do businessFriday, January 31, 2014EEIM5PartnershipIt defines a partnership as the relation which subsists between two or more persons carrying on a business in common with a view to profitFriday, January 31, 2014EEIM6Definition of PartnershipThere must be at least 2 people on a partnership and not more than 20 (except in law, medicine and accountancy)A limited company cannot be a partnership, although it can be one partner in a partnershipThe relationship between partners is based on the contractie the terms of their partnership agreementFriday, January 31, 2014EEIM7Definition of Partnership (cont.)To qualify as a partnership, the people must be carrying on a businessBusiness means any trade, profession or occupationHowever, simply sharing in the profits of a business does not make you a partner in that businessFriday, January 31, 2014EEIM8Definition of Partnership (cont.)The business must be carried out in commonA partnership does not have a separate legal personality from the people who run the businessA partnership is simply a group of people who carry on a business togetherFriday, January 31, 2014EEIM9Definition of Partnership (cont.)Partnerships are not only for carrying on business over a period of time, it is possible to create a partnership for a single event or business ventureThe business must be run with the aim of making a profitHowever, simply sharing in the gross profits of a business does not make you a partnerFriday, January 31, 2014EEIM10Legal Status of a PartnershipThe partnership does not have a separate legal identity from the partners (ie the owners)As you will see, a limited company does have a separate legal identity from its ownersBecause there is no separate legal identity, partners care self-employed and not employees

Friday, January 31, 2014EEIM11Formation of a PartnershipThere are no special legal rules for forming a partnershipIt is an agreement between individualsIt may be made orally, in writing, or implied from the behaviour of the individualsFriday, January 31, 2014EEIM12Formation of a Partnership (cont)However, it is common to have a written partnership agreement which sets outthe name of the firm the nature of its businessthe method for sharing profitsthe amount of capital to be contributed by each partnerthe reasons and method for ending the partnershipThis helps to avoid arguments laterFriday, January 31, 2014EEIM13Liability of PartnersEach partner is liable for the full amount of the firms debts and other liabilitiesA third party can sue the firm or the partners individuallyWhere the third party receives payment from one partner, then the other partners must contribute equally to the amount paid by him (indemnify that partner)Friday, January 31, 2014EEIM14Liability of Partners (cont.)In order for a firm to be liable in tort, the wrongful act must have been done by a partner in the course of the firms business or with the approval of the other partnersFriday, January 31, 2014EEIM15What is a Company?A company is a body corporate or corporationFriday, January 31, 2014EEIM16Separate Legal PersonalityAs companies are a kind of corporation, they have their own separate identityIn law, they are regarded as a personAlthough a company is not a natural person (like you or me) the law treats it in the same way in many areasFriday, January 31, 2014EEIM17Perpetual SuccessionChanges in the membership of a company have no effect on the continuation of that companyUnlike a partnership, the death or bankruptcy of a member does not end the companyIn public limited companies, members are free to sell their shares on the stock exchangeFriday, January 31, 2014EEIM18Business PropertyBusiness property is owned by the company and not its shareholdersThat means a creditor cannot take action against company assets in respect of a debt due by a member of that companyFriday, January 31, 2014EEIM19Court ActionsA company can sue and be sued in its own nameIt can also enter contracts in its own nameThe companys liability for contractual debts is unlimitedIt is only the members liability which is limitedFriday, January 31, 2014EEIM20Liability in Tort and CrimeCompanies are vicariously liable for the torts of their employeesCompanies can be guilty of crimes which do not require a mental element (eg intention or recklessness)However, it has been more difficult to prosecute companies where the crime has such an element as it has to be shown that one of the directors of the company had the required mental elementThis can be very difficult in a large company where the directors are not involved in the day to day operation of the businessFriday, January 31, 2014EEIM21Types of CompanyCompanies can be classified in several waysLimited and UnlimitedLimited by Shares or by GuaranteePublic and PrivateFriday, January 31, 2014EEIM22Limited and Unlimited CompaniesCompanies are usually formed because of the limited liability for their membersHowever, it is possible to create a company without limited liabilitySuch companies do not have disclose their accounts as limited companies doFriday, January 31, 2014EEIM23Limited by Shares or GuaranteeThe most common kind of limited company is one limited by sharesOnce the shareholder has paid the full value on his shares then he has no further liabilityThis is true even if the company does not have enough money to pay its debtsFriday, January 31, 2014EEIM24Limited by Shares or Guarantee (cont)A company limited by guarantee is usually created for charitable, educational or professional purposesie it is not a trading companyThe liability of members is to pay an agreed amount if the company is wound upUsually, the amounts are small, so the risk is lowFriday, January 31, 2014EEIM25Public and Private CompaniesThe main difference between public and private companies is that the shares in a public company may be bought and sold on a stock exchangePublic companies must have at least two directors, whereas a private company can have oneFriday, January 31, 2014EEIM26Public and Private Companies (cont.)Private companies may purchase their own shares out of capital, whereas public companies cannotFriday, January 31, 2014EEIM27Comparison of OwnershipIt is useful to compare the advantages and disadvantages of the three forms of businessSole traderPartnershipCompanyFriday, January 31, 2014EEIM28Sole Trader - AdvantagesNo legal filing requirements or fees and no professional advice is needed to set it up. You just literally go into business on your own.Simplicity one person does not need a complex organisational structure.Friday, January 31, 2014EEIM29Sole Trader - DisadvantagesThe disadvantages are that it is not a particularly useful business form for raising capital (money). For most sole traders the capital will be provided by personal savings or a bank loan.Unlimited liability the most important point to note in terms of comparing this form to the company in that there is no difference between the sole trading business and the sole trader himself. The profits of the business belong to the sole trader but so do the losses. As a result he has personal liability for all the debts of the business. Friday, January 31, 2014EEIM30Partnership - AdvantagesNo formal legal filing requirement involved in becoming a partnership beyond the minimum requirement that there be two members of the partnership.Easier to obtain capital as there can be up to 20 members of the partnership, all of whom could pool their investment within the partnership.Friday, January 31, 2014EEIM31Partnership Advantages (cont.)If you are aware of the problems the Partnership Act can cause (see disadvantages) then you can draft a partnership agreement to vary these terms of the Act The partnership agreement can therefore be used to provide a very flexible organisational structure although this usually involves having to pay for legal advice.Friday, January 31, 2014EEIM32Partnership - DisadvantagesA partnership will end on the death of a partner. The partners are jointly and severally liable for the debts of the partnership. This means that each partner can be sued for the total debts of the partnershipFriday, January 31, 2014EEIM33Company - AdvantagesCompanies are designed as to make it easy to raise capital. Companies have the ability to subdivide their capital into small amounts, allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment.Limited liability also minimises the risk for investors and is said to encourage investment. Friday, January 31, 2014EEIM34Company Advantages (cont.)It is also said to allow managers to take greater risk in the knowledge that the shareholders will not lose everything.The constitution of the company provides a clear organisational structure which is essential in a business venture where you have large numbers of participants.Friday, January 31, 2014EEIM35Company - DisadvantagesForming a company and complying with company law is expensive and time consuming.It also appears to be an very complex organisational form for small businesses, where the Board of Directors and the shareholders are often the same peopleFriday, January 31, 2014EEIM36Summary (cont.)Most companies nowadays are formed under the Companies Act 1985The law regards a company as a legal personIt has a separate identity from its owners (ie its shareholders)A company is liable for its own debtsIts shareholders are not liable for its debts. They are only liable to pay for their sharesFriday, January 31, 2014EEIM