Business and Company Law INTRODUCTION In the United Kingdom any individual or group of individuals may engage in business

. To do this they must understand, control and manage the three principal business activities: Production  The provision of a product or service to satisfy the wants and needs of potential customers marketing  The management process that identifies and anticipates customer requirements. It includes the selling and distribution of products and services to satisfy these requirements Finance

The function which co-ordinates and controls the resources of the business to attain a predetermined level of profitability.

The forms of business organisation, which may be adopted, include sole trader, partnership and various types of company. Each of these types of organisation will afford certain advantages, but each will also have its own legal constraints and commercial drawbacks. These business organisation types are now examined in more detail. 2. SOLE TRADERS A sole trader is a person who enters business on his own account. He obtains the capital to start the business, he works in the business with or without the aid of employees and he receives, as his reward, the proceeds of the venture. There are a number of advantages of the sole trader type of business organisation.  No formal procedures are required to set up in business,  Independence means that with no one to consult, the sole trader can quickly put his plans into effect.  Personal supervision enables close working links with customers and employees  He is accountable only to himself and (apart from taxation authorities) he need not reveal the state of his business to anyone.  No formal procedures to sell or close down the business


PARTNERSHIPS Whenever two or more people join together in a venture with an object of gain. DEFINITION The basic law of partnership is contained in the Partnership Act of 1890. FORMING A PARTNERSHIP A partnership can be formed with no legal formalities. which subsists between persons carrying on a business in common with a view to profit". It is. showing:       The names of the partners and the name of the firm. The name under which the partnership business operates. merely by the agreement of the parties. 2 . few holidays  Sickness could lead to business difficulties  Unlimited liability -the sole trader is personally liable to the full extent of his private wealth for the debts of the business  Limited capital for expansion. a partnership exists whether this is realised or not. How accounts will be kept. The amount of money each partner contributes The ratio in which profits and losses are to be accepted. The principal ones are:  Long working hours. The duration of the partnership. and this defines partnership as "the relation. more usual to draw up a deed of partnership.Obviously there are disadvantages suffered by sole traders. however.

then the point of personal liability has more academic than practical interest nowadays.  He may sell the goods of the partnership and buy such goods as the partnership normally deals in.  A partner is allowed to borrow money. As deeds of partnership tend o vest quite broad degrees of authority in each partner. 3 . PARTNERS AS AGENTS Every partner is deemed to be an agent of his fellow-partners. No fundamental change in the business can be made without the consent of all the partners. and to pledge the firms property for this purpose.  He may receive payments owing to the firm and release debts. but if a partner acts outside of his authority. then the Partnership Act 1890 lays down certain rights and duties. then he will be personally liable for his acts unless the other partners accept what he has done. If there is no alternative agreement made. Normally a partner acting as an agent on behalf of the firm will have the following rights:  A contract made by a partner in connection with the partnership business will be binding on his fellow partners. They are not entitled to draw any salary for their work.  No person may be introduced as a partner without the consent of all existing partners  Any profits made outside the business by one partner are to be given to the firm unless a specific agreement to the contrary has been made  A partner may not transfer shares in the firm to any other person without the consent of all the partners. These are:  The firm will accept any liabilities incurred by a partner in pursuing the firm's business  All partners may assist in managing the business. but may make drawings in anticipation of expected profits  Any disputes and disagreements on the day-to-day running of the partnership business may be settled by a majority vote of the partners.RIGHTS AND DUTIES The rights and duties of the partners depend on the exact terms of the partnership agreement.

4 . the other partners accept any liability. but to ensure this cessation of liability. This is often achieved by inserting a notice in the ‘London Gazette’  If an infant is a partner. the remaining partners must take on that liability. DISSOLUTION OF A PARTNERSHIP A partnership may be dissolved by any of the following:  By expiry of time. or where the business of the partnership can only be carried on at loss.  For wrongs committed by the partnership.LIABILITY OF PARTNERS The major liabilities of partners are as follows:  Every partner of the firm is liable jointly with the other partners for all debts and obligations incurred by the firm while he is a partner.  By a court judgement – a court may dissolve a partnership on application by one of the partners on grounds such as one of the partners is of permanently unsound mind.  A partners liability ceases when he retires.  By mutual consent of all partners. but the remaining partners may immediately agree to enter a new partnership agreement)  When it is unlawful to continue.  If any partner is unable to pay their share of a partnership debt. the partner must advise all those people he has dealt with of his retirement.  By the death or bankruptcy of a partner (this automatically brings the partnership to an end. a person may bring an action in tort against the firm or an individual partner. This means that:  Partners have unlimited liability to the full extent of their personal wealth.

such as breaches of contract. Once a company is created it is then said to have its own legal “personality” which is separate from that of the individuals – the members – who bought it into existence. they have never proved popular and today very few exist. for any business debts even though he takes no active part in running of the business. a general partnership may have one or more limited partners who contribute capital and share in profits. with a view to setting up halfway house between ordinary partnerships and limited companies. Their liability is limited and they take no part in the conduct and running of the business. a company has the power to employ people. COMPANIES – BASIC TYPES OF LIMITED COMPANY A Company is termed a limited liability company if the capital to start a business is provided by shareholders (usually called “members”) whose liability for the debts of the business is limited to the amounts paid (and/ or payable) on their shares. In the event.LIMITED PARTNERSHIPS Limited partnerships were created by the Limited Partnerships Act 1907. but cannot normally be held liable for criminal acts. In operation. to own property and to enter into contracts. Such a partner is liable. A Company as a legal entity can also be sued for breaches of civil law. 5 . Once created. Such partnerships should be by partnership deed. with the other partners. SLEEPING PARTNERS A dormant or sleeping partner contributes towards the capital of the business and receives a share of the profits.

details of the business are available to anyone who wishes to view them – customers. This means that. unlike partnerships and sole traders. Shareholders can only put at risk the amounts paid for the shares. for example. Has a registered name ending with Public Limited Company (PLC). limited by shares or guarantee) which: Have at least two members.  Includes an issued share capital of at least the authorised minimum (i. principally:  The main advantage is that of limited liability.000.The formation of a company has certain advantages to its creators. PUBLIC LIMITED COMPANY A public limited company is limited liability company (i. These are dealt with more fully in the following paragraphs. Have at least two directors.e.e. and suppliers and customers may view a company as a business with an enhanced credibility. The main disadvantage is that a company’s accounts must be submitted to the Register of Companies each year. with partnerships and sole traders.  A company can also present a more substantial identity to the outside world. Have a company secretary. There are also certain drawbacks with creating a company.  Declares itself by its memorandum to be a Public Limited Company.  It allows the business to expand by securing money from outside sources in exchange for shares. £50. competitors etc.000).  Has authorised share capital of at least £50.  The current tax regimes can make it beneficial to pay corporation tax on company profits rather than personal taxation on the earnings as a sole trader or partner. Personal property is not at risk as it is.     6 .

which is not a public limited company. Wales or Scotland. As the company may not exceed the powers outlined in the objects clause. it is usual to draft the clause as widely as possible.  Not invite the public to buy its shares or debentures and is required to certify that it has not issued any such invitation when making the Annual Return to the Registrar of Companies.  Have a registered name ending with ‘Limited’.  The amount of authorised share capital. raise money by selling shares to friends. It must:  Have at least one director and a company secretary who must be separate people.  The objects of the company.PRIVATE LIMITED COMPANY A private limited company is a limited company. It can. or Edinburgh for Scotland. family members etc. however.  The limitation of the member’s liability. The only limit to the number of members of a private company is provided by the amount of authorised share capital.  Whether the registered office is situated in England. 7 . with the word ‘limited added. although the secretary may be a director. COMPANIES – FORMATIOM AND REGISTRATION MEMORANDUM OF ASSOCIATION The first members of a limited company will draw up a memorandum of association indicating the following:  The name of the company. The promoters of the company must sign the memorandum and send it to the Registrar of Companies in Cardiff for England and Wales.

the company will be officially registered.ARTICLES OF ASSOCIATION These are contained in a document showing the appointment. A statutory declaration that the relevant requirements of the Companies Act have been met.      Once the Certificate of Incorporation has been issued a private limited company may commence business.  The necessary fee.000. which confirms that the issued share capital is not less than the authorised minimum of £50. Once the Registrar has received all of the necessary documents and the fee. private or public. Details of the company’s registered office. COMPANIES – COMMENCEMENT IN BUSINESS CERTIFICATE OF INCORPORATION Before any company. the Trading Certificate. powers and remuneration of the directors. It will also show the rights of various classes of shareholders and rules governing meetings. the following documents must be lodged with the Registrar of Companies: The memorandum of association. Particulars of the director (s) and secretary. The articles of association. must wait until the Registrar issues a further document. Public limited companies. The Articles of Association for the procedural ‘rule book’ of the company. The Registrar does this by issuing a Certificate of Incorporation and by giving the company a registration number. can be officially registered. however. 8 .

Companies must also keep  Register of directors. every company must keep a register showing certain information concerning all directors and members. address and occupation. Register of mortgages and charges. Before the Stock Exchange will permit a listing they will require the company to provide detailed information. To enable the shares of a public limited company to be traded the plc will usually apply for a “listing” on the London Stock Exchange. REGISTERS Under the Companies Act. Before a private limited company can become a public limited company it must pass a resolution to alter its memorandum and articles of association and apply to the Registrar of Companies to re-register.  Minute book. This information includes:      Date on which each person became a shareholder.LISTED COMPANIES Almost all companies begin life as private limited companies. Shareholder’s name. Number and identification of shares held. They will convert to public limited companies usually only when expansion requires more capital than the private owners can provide. 9 . which will then be published as the “listing particulars”.  Books of account. Although it is now possible to make offers of unlisted securities on the Alternative Investments Market. Details of transfers of shares.

if the name of any director is printed on the stationery.  The registration number of the company. The law is anxious that companies make public the fact that they are in fact limited companies and enjoy the benefits of limited liability. usually at head office. Separate legislation also requires that VAT records are maintained for a minimum of 6 years. for the following minimum periods:  Private limited companies – 3 years. 10 . then the law requires the names of all the directors be included.  The address of the registered office. It is not a legal requirement to show the names of directors on company headed stationery. In addition. the Companies Act requires companies to maintain copies of their accounting records. However.  Public limited companies – 6 years.ACCOUNTS It is a requirement for limited companies to file copies of their accounts each year with Companies House. The Companies Act requires companies to show the following information on all their business letters:  The place of registration of the company i. whether it is registered in England and Wales or Scotland.e. OTHER PROVISIONS Limited liability gives companies great protection.

If the company chooses to issue shares there are two basic types of share it can issue:  Preference Shares Preference shares give the holder the right to a preferred “fixed” dividend. such as obtaining loans from banks or other institutions. There are obviously other ways of raising capital. The alternative sources of capital are examined more fully in ‘Financial Management Techniques’. However. Preference shares represent a relatively safe investment. issuing debentures or retaining profits to plough back into the business. preference shares are still shares and not loans. and the shareholder will buy the shares in anticipation of the company making profits and sharing those profits with the shareholder in the form of dividends. 11 . A share is exactly what its name implies. Even preference shareholders will not receive their dividend if the company makes no profit at all. Normally holders of preference shares do not have any voting rights. Preference shareholders are still paid dividends and not interest. it represents a tiny piece of the company. The Articles of Association of the company will specify the various rights of the preference shareholders.COMPANIES – SHAREHOLDERS AND DIRECTORS Share capital The issuing of shares is one way of raising money (capital) for a business. “Preferred” means that the holders of preference shares must be paid their dividends before any remaining profits are distributed between the ordinary shareholders. “Fixed” means that the rate of dividend is fixed in advance and is not directly dependant upon the company’s level of profit.

They are paid interest not dividends. using information obtained in confidence. addresses and nationalities of directors. Once this amount has been reached then it is possible to increase the share capital further.e. DIRECTORS A director can be directly appointed by the founders of the Memorandum or named in the Articles. to the buyer / seller’s advantage. Generally. or voted into office at a general shareholders meeting. all companies are forbidden to make loans to directors. 12 . Ordinary shares carry voting rights. Debenture holders are therefore not shareholders. It is important to note that debentures are not part of a company’s share capital. but the presence of the voting rights mans that disgruntled ordinary shareholders can always vote to remove directors who have failed to produce acceptable profits for the company. whether by a director or any other person. They represent a riskier investment than preference shares. They are in fact. Directors are answerable to the shareholders for the conduct and efficiency of the company. buying or selling the company’s shares on the market. Ordinary shareholders will not receive any dividend until preference shareholders have been paid. They are also required to have regard to the interests of the company’s employees. is a criminal offence. In both private and public companies the Memorandum of Association will specify a maximum amount of money that the company is authorised to raise by issuing shares. Ordinary Shares Ordinary shares are often known as the equity share capital of a company. The company must keep an updated register containing the names. but this will require the passing of a resolution to that effect by the existing shareholders. part of the company’s loan capital. Insider dealing i.

more commonly. lead to the director being required to make substantial contributions from his personal wealth to cover losses incurred. shareholders.  Maintaining the company registers. if this situation has been brought about by the director breaching one of the specified duties. For public limited companies the Company Secretary must meet certain criteria. The company secretary will either be a director in his / her own right or will have been appointed by the directors. outside their authority or in breach of the duty of loyalty and good faith. chartered secretary. which is negligent. Directors will be liable for any act. having a professional qualification such as an accountant. the official Receiver. 13 .Directors owe to their companies a duty of care and skill in undertaking their activities. The company secretary’s duties include:  Ensuring that the company meets all of the requirements of the Companies Act and other legislation. and also a duty of loyalty and good faith. either having prior experience as a secretary or. Under the Insolvency Acts it is possible for directors to be sued by creditors. particularly the register of shareholders. in fact anyone suffering a loss. solicitor or barrister. Such action for wrongful trading can. if successful.  Organising company meetings. COMPANY SECRETARY The company secretary has a key role in the administration of any private or public limited company.

He will fill in the requisite form showing his own and the proxy’s name and address and the particulars of the meeting. COMPANIES – WINDING UP A company can be dissolved and removed from the register of companies. voluntary winding up and compulsory winding up. He must also sign the form and have his signature witnessed. They must present a balance sheet and a profit and loss account t its shareholders. These will explain the previous year’s trading and expectations for the following year. the directors can file a statutory declaration with the Registrar of Companies stating that the company is able to pay all of its debts. where a private company has only one director. However.AUDITORS Auditors are usually appointed at the general meeting of the company. VOLUNTARY WINDING UP Member’s voluntary winding up Shareholders can at any time agree to wind up the company. Dissolution of a company is more frequently referred to as winding up or liquidation. If the company is solvent. 14 . Once this is accepted then the shareholders can appoint their liquidator who will arrange the winding up. PROXIES If the Articles of Association allow. they must first pass a resolution to this effect. There are basically two major forms of winding up. a shareholder may pass his voting rights to someone acting on his behalf. Shareholders will also be given the directors and the auditor’s reports. then only one director’s signature is required in addition to the company secretary. Two directors and the company secretary must sign these.

 The company is unable to pay its debts. are able to appoint a liquidator to control the winding up. The creditors. This is by far the most common reason for compulsory winding up. A trading certificate is normally issued to plcs after the Certificate of Incorporation and it is the document that permits trading to begin. the directors of the company will give the creditors a full statement of the company’s financial position. This will take place when the company cannot meet all of its debts in full and is unable to make the necessary statutory declaration of solvency. the power to make orders for the compulsory winding up of companies. The winding up process will commence and a bankruptcy order will be issued if the company fails.  The number of shareholders falls below two.Creditors Voluntary Winding Up. principally the High Court. For compulsory winding up the process is controlled by the court which will appoint a liquidator (usually the Official Receiver) to dispose of the company assets and pay what is available to the creditors. Situations which would allow a compulsory order to be made include circumstances where:  The company does not commence in business within a year from its incorporation. A meeting of the creditors will be called by the company and. The Registrar may withhold the certificate if he has been unable to obtain certain details relating to its finances. not the shareholders. COMPULSORY WINDING UP The Insolvency Act give the courts.  For public limited companies the Registrar of Companies withholds a trading certificate. 15 . or it suspends its business for a year or more. at the meeting. within 3 weeks. to pay a creditor who has delivered a statutory demand for payment to the company’s office.

For a compulsory winding up. Priority for payment is in the following order:  The liquidator’s fees and expenses. preference shareholders will receive their payments before any ordinary shareholders. including any PAYE owed. The Articles of Association will specify the priorities within the total group of shareholders but. For voluntary liquidations the court has no involvement. when the liquidator has realised and distributed the assets he can apply to the court for an order to dissolve the company and to release him from his duties. mainly the sums owed to the trade creditors. The Insolvency Act 1986 sets out the powers and duties of the liquidator.  Unsecured debts. His chief duties will include selling or realising the property and other assets of the company.LIQIIDATOR’S DUTIES. The liquidator must follow a strict order of priorities when distributing the money raised by the disposal of the assets.  Preferential debts. paying debts (including his own costs) and distributing any balance to shareholders. 16 . plus any other expenses associated with the winding up. as a general rule.  Shareholders. VAT and the wages of the employees.