UNIT 18

COMPANY LAW
I Greg Bradley is a UK solicitor who specialises in setting up businesses. He has a client who
needs advice on the most appropriate legal structure for the business he intends to start. What
information do you think Greg Bradley needs from his client before he can explain more about
different types of business structures in the UK and select the most advantageous one for the
client.

II Which characteristics of a business entity do you expect to interest a client most when setting
up a business? Put the following in order of importance from 1 to 8.

__ liability __ distribution of profits

__ ownership structure __ keeping records and accounts
__ management __ minimum amount of capital
__ registration procedure (costs, paperwork ...) __ tax responsibilities (income /
corporation tax, VAT ...)

Part One

Setting up a Business in the UK

III Greg Bradley informs his client about different forms of business organisation in the UK
and their legal characteristics. Read about the six most common business entities and decide
which is described in which of the following paragraphs. Add to each paragraph the name of
the business organisation it describes.

private limited company (Ltd.) limited partnership (LP) sole trader

limited company (Ltd. or PLC) limited liability partnership (LLP)

‘ordinary’ (general) partnership public limited company (PLC)

 1.

is the simplest and most common form of business ownership which does not need to comply with
complicated rules and regulations apart from those referring to tax. Since it is owned and managed
by one person, who has unlimited control over the business, it is the most suitable type of business
entity for operating a small-profit business such as a self-employed photographer, hairdresser,
computer consultant... It differs from incorporated businesses because its legal existence is not
separate from its owner’s, that is, it is a natural person. The owner keeps all of the profits of the
business but, by having unlimited liability, he/she is also personally responsible for all of its debts
and losses. Therefore, if the business fails, any business debt will be met from the owner’s
personal assets. Keeping accounts and records showing income and expenses is rather simple.
The profits are taxed as income by Her Majesty’s Revenue & Customs (HMRC), and the owner
needs to send a self-assessment tax return each year. There may be a few or no employees.

2.

is a common structure for small businesses formed when two or more individuals or legal entities
become co-owners of a business venture. This way more capital can be contributed and skills
and expertise, as well as the workload, can be shared. The partners manage the business and
personally share (equally or as specified in the partnership agreement) responsibilities and the
business’s profits. Since a partnership is not considered to be a separate legal entity from its
owners, partners are unlimitedly liable for all debts and obligations and the business may cease
to exist when one of the partners dies. The registration procedure is rather straightforward and
requires registering the name of the business with HMRC. Based on an annual self-assessment tax
return each partner pays income tax on his/her share of the profits. If its takings are expected to
be more than £82,000 a year, a partnership needs to register for VAT. Partnerships are usually set
up by drawing up partnership agreements (or deeds of partnership) – binding contracts between
the partners setting out the important details such as the names of the individual partners, the
purpose for which the partnership is established, the principal place of business, the capital each
partner invests, the liability and profit share of each partner, and steps outlining what happens if
the partnership is dissolved.... Setting up partnerships is particularly common in professional
services such as accountants, doctors, dentists, solicitors.
 3.

is a business association of one or more ‘general partners’ alongside one or more ‘limited partners’.
It is not a separate legal entity (it is a natural person), but, since it has some of its features, it must
be registered with Companies House. The two classes of partners have different roles,
responsibilities and levels of liability for the partnership debts. The general partner/s manage the
business, controlling day to day operations and making the necessary decisions. They are
personally liable for all the partnership’s debts (unlimited liability). The limited partners are
prohibited from taking part in the management, but enjoy limited liability and are only liable up
to the amount they initially invested. Their share of profits depends on their capital
contributions. Although not generally treated as a taxable entity, on an annual basis the
partnership must send a partnership tax return to HMRC. In addition, each of the partners needs to
account for their own share of the partnership profits, which they do by completing a personal self
assessment tax return for the tax year.

4.

is a hybrid legal form between a partnership and a company whose legal identity is separate from
its members. This type of partnership is an incorporated business and must be registered with
Companies House. It is recommended to set it up by a partnership agreement. There is limited
personal liability for individual partners (limited to their contributions to the assets of the
partnership). The partnership may have two or more members, who also act as managers.
Additionally, there may be a sleeping partner*, who contributes capital to the partnership,
receives a share of the partnership profits, but does not take part in the management. Each
partner is responsible for his/her own tax affairs and filing of self-assessment forms. As with an
ordinary partnership it must be registered for VAT if the business’s takings exceed £82,000 a year.
*also a dormant or a silent partner

5.

is an incorporated business, an artificial or legal person that is separate in law from its owners
and has its own separate personality or legal entity. This is significant, as it allows the company
to sue or own assets in its own name and have perpetual life despite changes in ownership. The
ownership of this type of business entity is divided up into equal parts called shares and owned
by members or shareholders. The shareholders’ responsibilities for the company’s debts are
limited to the value of shares that they own/hold. Such limited liability is the major advantage of
this type of business legal structure. Company directors are personally responsible for the debts of
the business only if they have broken the law. The business is run by the board of directors whose
members do not necessarily have to be the owners. The main documents required for incorporation
are the articles of association, prescribing regulations for the internal management of the company
such as shareholders’ annual general meetings (AGMs), the board of directors, corporate
contracts and loans, the number and type of shares, and the memorandum of association,
comprising information about the company and its authorised capital. Every financial year each
company has to submit its financial accounts (profit-and-loss account and balance sheet) to
Companies House, and an annual tax return giving details of its share capital and shareholders to
HMRC. The company is liable for corporation tax, however directors are obliged to fill in a self-
assessment tax return and pay income tax. Registration for VAT is necessary in the same case as
a partnership. Limited companies are suitable for high-risk projects.

5. A _________________________________________

cannot offer its shares to the general public for sale. It is typically smaller than other companies
and may have one (a single-member company) or more shareholders. There is no minimum share
capital requirement. It must be registered (incorporated) with Companies House and is managed
through its board of directors. Each company must appoint a professionally qualified company
secretary. The company may employ one or more persons.

5. B _________________________________________

can raise additional capital by issuing shares to the general public on a stock exchange. That
way large amounts of capital can be raised in a short time. However, if large quantities of shares
are purchased (as in a takeover bid) the original shareholders, the founders of the company, may
lose control of the business. The company must have one or more shareholders whose liability is
limited to their contributions. The management of the company is carried out by the board of
directors and a qualified company secretary. The minimum authorised share capital required by
law is £50,000.
IV Read the text on business structures in the UK, thoroughly study their legal characteristics
and fill in the following table.

TYPE OF OWNERSHIP MANAGE LIABILITY TAXATION

ENTITY/ MENT OF OWNERS
REGISTRA
TION

Sole trader unincorporate income tax

d business;
HMRC;
natural person

Ordinary
(general)
partnership

Limited
partnership
(LP)

Limited limited liability

liability
partnership
(LLP

Private
limited
company
(Ltd.)

Public
limited
company
(PLC)
V Read the following definitions of some legal terms from the text. Fill each gap with the correct
word from the box to complete the definitions.

shareholder business venture self-assessment form corporation tax

co-owner income tax management incorporation
liability asset stock exchange artificial person takeover bid

1. A _____________________________ is a form that a sole trader or a partner needs to

complete and send to the tax authority. It contains all financial details and a calculation
of the amount of tax that must be paid.
2. The amount of income that is paid in tax is called ________________________ .
3. ________________________ is the way in which a business is run on a day-to-day
basis.
4. __________________________ is the condition of being actually or potentially
subject to a legal obligation.
5. Any property owned by a person or firm that has financial value is called
_____________________.
6. An _______________________ is an entity other than a natural person (human being)
created by law and recognized as a legal entity having distinct identity, legal
personality, and duties and rights. (juristic, juridical or legal person)
7. A __________________________ is an individual, or organisation that owns one or
more shares in a company, and in whose name a share certificate is issued (US
stockholder)
8. An individual or group that shares ownership with another individual or group is
referred to as a
____________________...................................................................................
9. __________________________ is the process of legally declaring a corporate entity
as separate from its owners.
10. __________________________ is the amount of money payable on a company’s
income (eg. from investment in shares) or gains (eg. from sale of assets) at the statutory
rate. It must be paid by a company (US corporation) based on the amount of profit the
company has made.
11. ____________________________ is an organized financial market where shares and
other securities are bought and sold.
12. A _____________________ is a business entity developed with the intent to make
financial profits.
13. An offer or an attempt to take control of a company by buying enough of its shares is
called __________________________.
VI Study the text once again and find the advantages and disadvantages of each business
structure. Fill in the table.

Legal structure Advantage Disadvantage

Sole trader low cost, easy to set up; control

retained;
little financial reporting
Ordinary (general)
partnership

Limited partnership
(LP)

Limited liability
partnership (LLP)

Private limited
company (Ltd.)

Public limited
company (PLC)

VII Read the following text about off-the-shelf companies in the UK and fill in the gaps with
the terms given below.

formed registered incur purchaser

registration investors certified
business entity incorporation drafted
Off-The-Shelf Companies
A shelf company or off-the-shelf company is a company which has been legally
_________________ with Companies House at an earlier date and is available for a
_________________ who wants to bypass the lengthy registration or _________________
process. Although the majority of _________________who intend to start a limited
__________________decide to set-up a brand new company, that is, one which does not exist
until the time they choose to register it themselves, shelf companies might be very popular in
specific situations. They are usually _________________ and sold by accounting or law firms.
Since they _________________ some additional costs, buying such companies is generally more
expensive than registering a new entity.
Making use of the benefits of pre-registered companies is a very simple process. On the market
there is a large number of ready-made company names with suitably __________________
business documents ready for immediate ___________________ in a purchaser's name. Each
company is ___________________to have not been traded, and to have the ability to trade in any
business area preferred. Before listing, all company names must be verified with Companies
House, and must comply with governing legislation, i.e. the Companies Act(s).

DISCUSSION

VIII A new client wants some expert advice on what business he should set up. Read the details
of the business, discuss it with a partner and decide, based on your knowledge of different types
of business structure, what is the most suitable type of business for him.
Give a thorough answer in writing to show your understanding of the legal characteristics of
different types of business entities and your ability to use the correct legal terms.

Paul Bradley is a specialist in immigration assistance. After being an employee of the Law Firm
Limited for more than 10 years, he decided to form a business of his own and finally become
his own boss. However, since the capital of £ 15,000 that he can invest might not be enough to
set up the business in central London, he is considering inviting a colleague, who is a commercial
property expert, to join him in his venture and bring additional capital investment. He owns a
house but wants to avoid the risk of losing it in case something goes wrong. He doesn’t mind
sharing the control and profits as long as it also means sharing the responsibility and possible
debts.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

RESEARCH

IX Research on the US business entities. Study the information in the table about the main types
of US business entities, covering the aspects of liability of owners, capital, and management.
Decide which entity 1-5 is being described.
1. S corporation*
2. Sole proprietorship
3. General partnership
4. C corporation*
5. Limited partnership
*C and S refer to subchapters of the US Internal Revenue Code

Entity Liability of owners Capital Management

Unlimited personal Capital is contributed by Business is managed by

liability sole proprietor sole proprietor

Unlimited personal All partners contribute All partners have equal

liability of partners money or services and management rights
share profits and losses (unless they agree
otherwise)

Unlimited personal All partners contribute General partner(s)

liability of general money or services and manage(s) the business
partner(s); no personal share profits and losses
liability of limited
partner(s)
 Shareholders liable to Capital contributed by Managing director or
the extent of their shareholders; usually no board of directors
investment minimum share capital manage the business

Liability limited to Share capital is raised Business is managed by

shareholders through issuance of shares board of directors
contributions to the public

X Study the Croatian forms of business organisation and their characteristics in the Croatian
Companies Act (Zakon o trgovačkim društvima 2010) and compare them with the types of
businesses in the UK and USA. Which of them share some or all of the characteristics?
Complete the table below.

UK entity USA entity Croatian entity

Sole trader

General partnership Javno trgovačko društvo

Limited partnership

Private limited company

(Ltd.)

C corporation

XI Find out more about a Croatian legal entity of your choice and prepare a short presentation
based on the provisions of the Croatian Companies Act. Cover the aspects of liability of owners,
capital contributions, management, taxation and registration.

Legal entity Your notes

 Part Two
A Partnership Agreement
I An agreement between partners to form a partnership can be created orally, in writing, or may
be implied by conduct. What are the advantages of an oral or implied agreement on the one
hand, and of a written agreement on the other? Discuss with a partner. Make notes in the table.

ORAL or IMPLIED WRITTEN

PARTNERSHIP AGREEMENT PARTNERSHIP AGREEMENT

II Skim the following sample partnership agreement from the USA. Decide whether it sets up
an American equivalent for a British “ordinary” or limited partnership. Underline in the
agreement the phrases which prove this.
 PARTNERSHIP AGREEMENT

This PARTNERSHIP AGREEMENT is made and entered into on ____________, 20 __

between

A) __________________________________________________________________ and

B) _________________________________________________________________ who
wish to associate themselves as partners in a business.

This Agreement sets out the terms and conditions that govern the Partners within the
Partnership.

1. NAME AND BUSINESS. The parties hereby form a Partnership under the name of
__________________________________________ .

The purpose of the Partnership shall be

______________________________________________.

The principal office of the business shall be in

________________________________________.

2. TERM. The Partnership shall begin on ________________, 20____, and shall continue
until terminated as provided in the Agreement.

3. CAPITAL CONTRIBUTIONS. The capital of the Partnership shall be contributed in

cash by the Partners as follows:

PARTNER CONTRIBUTION AMOUNT

All Partners shall contribute their respective capital contributions fully.

An individual capital account shall be maintained for each Partner and their initial capital
contributions shall be credited to this account. Neither Partner shall withdraw any portion
of their capital contribution without the express written consent of the other Partner.

4. PROFIT AND LOSS. Subject to any other provisions of the agreement the net profits
and losses of the Partnership, for both accounting and tax purposes, shall be divided and
born by the Partners in equal portions. A separate income account shall be maintained for
each Partner. Partnership profits and losses shall be charged or credited to the separate
III Read the statements below, compare them with the clauses of the partnership agreement and
correct what is wrong.

1. The capital of the partnership will be in money, property and assets.

2. The partners will have a joint capital account.
3. Both partners will be liable up to the amount they initially invested.
4. The partners will receive equal salaries for services provided to the partnership.
5. The management rights belong to the older partner.
6. Each partner has the right to borrow or lend money on behalf of the partnership without
the consent of the other partner.
7. The partnership may be terminated at the request of one partner only.
8. The death of either partner has the termination and liquidation of the partnership as a
consequence.

IV Your client has some second thoughts about creating a partnership agreement. E-mail her
and explain what a partnership agreement regulates and what its advantages and disadvantages
are. Follow the email structure given in the box.
 Dear Ms Swindale,

Thank you for your enquiry regarding ….

I understand from your enquiry that you wish to set up ….

Individual partnerships agreements can be created between partners to ….

However, the main disadvantages are …

Therefore, ….., I think …

I will be very pleased to draft ….

I look forward to hearing from you.

Yours sincerely,

References
Partington, Martin. 2008. Introduction to the English Legal System. Oxford: Oxford University
Press.

Internet links
https://www.gov.uk/business-legal-structures/limited-partnership-and-limited-liability-
partnership
https://www.justice.gov.uk/courts/rcj-rolls-building/bankruptcy-and-companies-court
http://www.businessdictionary.com/
The Companies Act 2006
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf
Partnership Act 1890
http://www.legislation.gov.uk/ukpga/Vict/53-54/39/contents
https://www.ilrg.com/forms/partnership-agreement.html