Business Law

Business Entities

Introduction to Business
Organizations
The way that a business is set up is
often as important as how it is run and
the choice of business entity often has
a huge influence on the eventual
success or failure of that business.

Sole Proprietorships
Sole proprietorships are both the oldest,
and simplest, form of business
structure.
In a sole proprietorship, there is a single
individual who conducts all aspects of
the business.

Legal Liability of Sole

Proprietors
If a sole proprietor is sued because of
some business disagreement, his
personal assets are in danger.
This is true because there is no legal
boundary between a sole proprietors
business assets and personal assets.

The Advantages of a Sole

Proprietorship
One of the most obvious advantages to
a sole proprietorship is the freedom
given to the owner to make business
decisions.

Tax Consequences of Sole

Proprietorship
One of the major advantages of a sole
proprietorship concerns income taxes.
When a sole proprietor sustains a major
income loss during the year, he can
pass this loss through on his personal
income tax return.

The Disadvantages of a Sole

Proprietorship
Because the business is so closely
associated with a single person, the
death or incapacity of that person
causes the business to fail. There is
usually no way for the business to
continue without the owner.

 Sole proprietors also frequently suffer

from undercapitalization.
With only their personal credit and
financial resources to rely on, many
sole proprietors find it difficult to expand
their businesses or to pay unexpected
bills.

General Partnerships
A partnership consists of two or more
people working together in a joint
business venture.

Forming a General
Partnership
The partners simply agree to be bound
to one another in a business and to
pledge their financial assets for the
business.
Although many partners write out a
General Partnership Agreement, in
most situations it is not required.

Advantages of General
Partnerships
The advantages of a partnership are
obvious: with two or more people, the
business can expand and serve more
customers.
Partners can also contribute more
financial resources than a single
individual.

Disadvantages of General
Partnerships
A general partners personal assets
could be seized to pay a judgment,
sometimes putting the general
partnership in a precarious situation.

Limited company
Business owned by shareholders
Run by directors (who may also be
shareholders
Liability is limited (important)

Setting up a limited company

Company has to register with Companies
House
Issued with a Certificate of Incorporation
Memorandum of Association-describes what
company has been formed to do
Articles of Association-internal rules covering:
What directors can do
Voting rights of shareholders

Controls of a company
Shareholders own company
Company employs directors to control
management of business
The directors may also be shareholders (most are)
Directors are responsible to Shareholders
Have a duty to act in best interests of shareholders
Have to account for their decisions and
performance (Accounts)

Importance of limited liability

Limited liability means that investors can only lose
money they have invested
Encourages people to finance company
Those who have a claim against company:
Limited liability means that they can only
recover money from existing assets of business
They cannot claim personal assets of
shareholders to recover amounts owed by
company

Separate ownership and

management of a company
Shareholders may have money
May not time or management skills to
run company
Day to day running of business is
entrusted to directors
Directors employed for their skills &
experience

Differences between a private

and public limited company
Shares in a plccan be traded on Stock Exchange
and can be bought by members of general public
Shares in a private limited company are not
available to general public
Issued share capital (initial value of shares put
on sale) must be greater than 50,000 in a plc
A private limited company may have a smaller
(or larger) capital

Limited Partnerships
In a limited partnership, there are two
classifications of partners. There are
general partners and limited partners

 General partners are responsible for the

day-to-day management of the
business in the same way that general
partners are in a regular partnership
arrangement.

 Limited partners, on the other hand,

have no right to control day-to-day
operations, but they also enjoy a
protection that the general partners do
not.

Limited Liability
Limited partners are protected by
limited liability.
This means that the extent of their
financial loss in the business is limited
to the extent of their financial
contribution.

Limited Liability Companies

A limited liability company is a cross
between partnership and a corporation
owned by members who may manage
the company directly or delegate to
officers or managers who are similar to
a corporations directors.

Forming a Limited Liability

Company
In order to form a limited liability
company, a company must file several
documents with the state.
One of the most important is the Articles
of Organization.

Articles of Organization
This document contains the basic
information about the company,
including the company name, registered
agent and the names of the persons
forming the company.

Naming a Limited Liability

Company
The name of a limited liability company
must contain the phrase "Limited
Liability Company" or some other easily
recognizable abbreviation, such as
LLC.

Advantages of Limited Liability

Companies
LLCs can take advantage of the
protection of limited liability, as well as
enjoying some of the flexibility of a
partnership and the financial
advantages of spreading investment
over a larger pool of individuals.

 LLCs also allow individual owners to

pass through losses on their personal
income tax returns.

Organization of a Limited
Liability Company
Individuals who own shares in limited
liability companies are referred to as
members, not partners or
shareholders.
The day-to-day management of a
limited liability company is handled by
"managers.

Corporations
An organization that is formed under
state corporate law exists, for legal
purposes, as a separate being or an
"artificial person." The stockholders
have no liability for corporate debts
beyond the value of their stock.

Creating a Corporation
A corporation is considered be an
artificial person
Once created, a corporation continues
to exist separate and distinct from the
people that compose it.

Types of Corporations
There is a wide range of corporation
types, ranging from small, privately held
corporations to huge, multinational
corporations with offices scattered
across the globe.

Corporate Shareholders
The persons who own the corporation
are called shareholders.
Shareholders are also entitled to an
annual payment, referred to as a
dividend, based on corporate profits.

Corporate Officers and

Directors
Corporations have officers who manage
corporate affairs. These officers are
responsible for negotiating with
vendors, hiring and firing employees
and all of the other tasks that we would
associate with any business manager.

Corporate Directors
Directors decide on long-term goals and
strategies for the corporation which they
then put into effect through the
corporate officers.

Disadvantages of
Corporations
Shareholders do not enjoy the "pass
through" provisions for income tax
purposes that are seen in sole
proprietorships, general partnerships,
and other business structures that we
discussed in this chapter.
A corporation pays its own income
taxes.

Advantages of Corporations
As an artificial person, a corporation
may own property, negotiate contracts,
and, in many ways, enjoy a degree of
flexibility that resembles that seen in
sole proprietorships or partnerships.

Corporate Existence
Corporations do not die.
Although a corporation may cease to
exist because of bankruptcy or by
merger with another corporation, it does
not cease to exist when individual
shareholders, directors or officers die.

Transfer of Ownership
Shares in corporations are bought and
sold by millions every day on the
various stock exchanges around the
world.
Share ownership, in the form of stock
certificates, is a source of wealth for
millions of people.

Steps in Forming a
Corporation
All states have rules about how a
corporation is formed.
In most situations, parties form a
corporation by filing Articles of
Incorporation with the state.

Articles of Incorporation
The articles of incorporation set out the
basic details of the corporate entity.

Articles of Incorporation
The name of the corporation
The number of shares the corporation is
authorized to issue
The classes of stock issued
The name and address of the Registered
Agent
The names and addresses of the principal
incorporators

Corporate Organizational
Meeting
This meeting, held among the people
who create the corporation, has several
purposes.
The parties elect officers for the
corporation and then enact by-laws for
the day-to-day management of the
corporation.

Piercing the Corporate Veil

This doctrine holds that when a person
uses corporate property
interchangeably with his private
property, the court may disregard the
existence of the corporation and seize
the persons personal assets.

The Role of the Legal Team in

Creating a Business
Business people often seek out legal
advice in both creating and running
their businesses.

 Legal professionals are often involved

in every step of business activities and
assist with the drafting and filing of
Articles of Incorporation to bankruptcy
actions if the business is not able to
stay afloat.

Licenses and Permits

Local ordinances may require business
licenses or other permits to run specific
types of businesses.
If the business will be run out of the
clients home, there is also the issue of
zoning permits.

company

Traditional
partnership

Sole-proprietorship

1. Structure
A company is a person
separate from its
members.
Saloman v saloman

Two or more persons

carrying out a business
with a view of making a
profit

Individual in a business
of his own

2. Transferability
Shares in a company
are generally
transferable although
the right of transfer may
be restricted.

Generally, a partner
cannot transfer his
status as a partner to
someone else without
the consent of all the
other partners.

A sole proprietorship
may transfer his
business to someone
else

3. Management
Members of a company
as such are neither its
directors nor its agents

Partners are agents of

the firms for carrying on
its business and are
entitled to manage the
firm

A sole-proprietorship
may transfer his
business to someone
else

company

partnership

Sole-proprietorship

4. Constitution
A company must be
constituted in writing
i.e. memorandum of
association and
Articles of association.

Partnership may be
formed orally or in
writing

No agreement is
necessary since sole
proprietorship is only
one person in the
business

5. Capital
Strict rules concerning
repayment of
subscribed capital

More straight for a

partner to withdraw
capital

Sole proprietorship may

withdraw his capital

6. Liability
Members liability is
limited to the assets of
the company.

Partners liability is
unlimited.

Sole proprietorship
liability is unlimited

company

partnership

Sole proprietorship

7. Security
Companies can use
current assets as
security by creating
floating charge

A partnership may not

Sole proprietorship
create a floating charge cannot create a floating
on assets
charge

8. Succession
Change in the
ownership does not
affect existence

Partnership is dissolved Business dies when

when any of the
sole proprietorship dies
partners leave

9. Dissolution
A company is dissolved
by winding up and
liquidation which is a
formal procedure

Partnership may be
dissolved informally
e.g. by agreement of
the partners

Sole proprietorship mat

be dissolved informally.

Difference between traditional

partnership and LLP
TP

LLP

formation

Can be formed by two

or more person
agreeing to carry on
business in a
partnership

Formally incorporated
by registering certain
document with the
register of company
2006

Has corporate
personality

no

yes

Regulated by?

Regulated by the
partnership act 1980

Regulated by company
act unless stated
otherwise by LLP 2000

Difference between traditional

partnership and LLP
TP

LLP

Liability of partners

The partners are jointly

liable for the debts of
the partnership and its
liabilities

Members are not liable

for its debts and
liabilities

Disqualification

Partners cannot be
disqualified from acting
as a partner

The members can be

disqualified for acting
as a member