F4​​-​​The​​Formation​​

and​​
Constitution​​
of
Business​​Organisations
Corporations​​
and​​
Legal​​
Personality

SOLE​​
TRADER:

A ​sole trader describes any business that is owned and controlled by one person. Although, they may employ
workers. Sole traders don’t have a separate legal existence from their owner. As a result, the owners are
personally​​liable​​for​​
the​​firm’s​​debts,​​which​​
is​​called​​unlimited​​liability​.

The​​advantages​​​of​​a​​
sole​​trader​​are:

1) Easy​​to​​set​​up;
2) Small​​amount​​of​​
capital​​
needs​​to​​
be​​invested;
3) Low​​wage​​bill;
4) Easier​​to​​keep​​overall​​control.

The​​disadvantages​​​of​​a​​
sole​​
trader​​
are:

1) No​​one​​to​​share​​the​​responsibility;
2) Long​​hours;
3) Limited​​personal​​
capital;
4) Risk​​of​​unlimited​​
liability.

TYPES​​
OF​​
COMPANIES:

There​​are​​various​​types​​of​​companies​​
which​​
can​​be​​registered​​in​​terms​​of​​different​​liabilities:

1) Formed​​without​​
liability​​
(unlimited​​
companies):
- Such​​companies​​receive​​
all​​the​​benefits​​which​​flow​​from​​incorporation​​except​​limited​​liability;
- The shareholders remain liable to the full extent of their personal wealth for any unpaid debt of the
company;
- Any​​subsequent​​
debt​​
is​​owed​​to​​the​​
company​​and​​not​​directly​​to​​the​​creditors;
- These​​companies​​do​​not​​
have​​to​​
submit​​
their​​accounts​​and​​make​​them​​available​​for​​public​​inspection.
2) Limited​​by​​Guarantee​​(charities​​and​​
education​​bodies):
- It​​limits​​the​​member's’​​
liability​​to​​an​​agreed​​amount;
- The​​sum​​guaranteed​​
is​​usually​​
a​​
nominal​​sum,​​so​​no​​real​​risk​​is​​involved;
3) Limited​​by​​Shares​​(charities​​and​​education​​bodies):
- The​​effect​​is​​to​​
limit​​the​​
liability​​
to​​the​​
amount​​remaining​​unpaid​​on​​shares​​held;
- If the shareholder has paid the full nominal value of shares then that is the end of responsibility with regard
to​​company​​debts;
- If the company goes into liquidation, the shareholders can’t be required to contribute to its assets in order to
pay​​out​​the​​debts;
- Can​​be​​either​​Public​​
Limited​​
Companies​​
(PLC)​​or​​Private​​Limited​​Companies​​(Ltd.).

LIMITED​​
LIABILITY:

Limited liability is a type of liability that does not exceed the amount invested in a limited partnership or limited
liability​​company.​​It​​is​​
one​​of​​
the​​
biggest​​advantages​​of​​investing​​in​​publicly​​listed​​companies.

Shareholders can participate wholly in a growth of the company while liability is restricted to amount invested. In
a​​limited​​partnership​​the​​
limited​​
partners​​have​​limited​​liability,​​while​​the​​general​​partner​​has​​unlimited​​liability.

The​​limited​​liability​​feature​​
protects​​
the​​investors​​or​​partners​​personal​​assets​​while​​allowing​​them​​to​​invest.

LEGAL​​
PERSONALITY:

The principle of separate legal personality states that a corporation has separate legal personality, rights and
obligations​​totally​​distinct​​from​​
those​​
of​​its​​shareholders.

- Upon incorporation a company becomes a new and independent legal entity and it is completely separate
from​​the​​subscribers​​
who​​formed​​it​​and​​
manage​​it;
- A​​company​​can​​
sue​​
in​​
it’s​​own​​
name​​
and​​
may​​be​​sued;
- A​​company​​can​​
own​​
property​​and​​
assets.

On the one side the rights of members were limited, and on the other side a creditor’s practical ability to seek
redress was also limited. In order to balance this, the courts can pierce the ​veil of incorporation under certain
circumstances:

1) Agency;
2) Fraud;
3) Group​​enterprises;
4) Trusts;
5) Enemy;
6) Tax;
7) Companies​​Act.