Forms of Business

Sole proprietorship
Partnership
Company
 Sole proprietorship
• One man business
• No formalities
• No difference between the business and
ownership/ autonomy
• Owners liability unlimited
• Raising capital impossible
 Corporations
• Corporations are creations of statute
• Are legal persons
• Corporation’s authority to act and liability for
its actions are separate and apart from its
owners, who are called shareholders
• Limited liability of shareholders
 Corporate personality
• With incorporations company become a legal
person distinct from its shareholders;
• Cases:
• Salomon v. Salomon & Co Ltd
• Lee and Lees Air Farming Co
• Macaura v. Northern Assurance Company
Corporate Personality, ethics & Lifting
the veil of incorporations
• Lipman v. Jones (sale of land case)
• Gilford Motor Company Ltd v Horne (solicitor
case)
• Holding and subsidiary company
Adams v Cape Industries Plc
 Lifting the veil of incorporation
• Holding and subsidiary company
- Where the company is a mere façade
- Where the subsidiary is an agent of the
company
Statutory Provisions
- Reduction in number of members
- fraudulently inducing persons to invest money
- Non publication/ unauthorized use of name
 Lifting the veil
• Shareholder’s limited liability means that
shareholders are liable up to their investment
• In certain situations the corporate veil of
limited liability can be lifted, holding the
shareholders personally liable
Formation of company, promoters and
ethical issues
• Memorandum and articles of association
• Memorandum contains object clause of the
company. Any act done outside the scope of
the memorandum is considered ultra vires of
the company
• The object clause can be changed with
consent of the shareholders at a general
meeting
• Memorandum is a constructive notice to the
public of the business of the company based
on which public subscribe shares of the
company
• Therefore it is very important that
memorandum remains as it is
 Articles and ethics
• Articles of association contains internal
management rules of the company within which
company runs its business
• Articles of association provides the general guide
line of business management but how far those
rules have been complied with or not is a
question of fact and part of indoor management
of which creditors are not aware
• Therefore, indoor management rule protect the
third parties dealing with the company from
defective dealing by the board of directors.
 Promoters, pre – incorporation
contracts and ethics
• Promoters: persons who takes necessary steps to
form a company
• The subscriber to the Memorandum of the
company
• They are the first shareholders and directors of
the company
• Any unfair dealing of the promoters with the
company before incorporation make them liable
even after their retirement from the company
 Pre incorporation contracts
• Contracts entered into by the promoters
before incorporation of the company during
the formation period
• Presumption is that the company will ratify all
these pre incorporations contract on its
incorporation
• If no new contract concluded, the promoters
remain liable to the other parties
 Pre incorporation contract and
personal benefit of the promoters
• Kelner v Baxter
The promoters of a hotel company entered into a
contract on its behalf for the purchase of wine.
When the company came into existence it
ratified the contract. The wine was consumed but
before payment was made the company went
into liquidation. The promoters, as agents, were
sued on the contract. They contented that
liability has passed to the company on
ratification. Court held ratification not enough.
New contract is necessary.
 Directors
• Every corporation is governed by a board of
directors (elected by the shareholders)
• Directors can be shareholders
• Number of directors is set forth in the
companies act and company’s bylaws
 Duties of Directors
• Directors are fiduciaries of the corporation.
They owe ethical and legal duties to the
corporation
• Directors are expected to act in good faith,
using prudent business judgment, and in the
best interest of the corporation
• Failure to exercise due care may subject
individual directors to personal liability for
negligence
 Majority rule and fraud on minority

• As a general rule, courts would not normally

interfere in the internal management of a
company when the decision has been taken
by a majority decision. In any case, the
majority of the members may even alter the
articles of association.
 Foss v Hasbottle
• Two members of a company brought a suit on
behalf of themselves and all other members
except those who were defendants and directors
of the company for compelling them to
compensate for the losses suffered by the
company for the directors purchasing their own
land for company’s use at a price greater than its
normal market value. The court declined to allow
the plaintiff’s suit as it found nothing that
prevented such an action to be brought by the
company itself.
 Statutory Protection of the Minority:

• the rule of majority is not absolute. The examples

where an individual member may successfully sue in
her/his own name would include the followings:
• For preventing a company from acting illegally or
inconsistent with its memorandum of association;
• For preventing actions that demands special majority
when such majority approval has not been obtained;
• For preventing a company to act inconsistently with its
articles of association;
• For vindicating a statutory right such as the right to
seek any rectification in the share register under
Section 43 of the Companies Act, 1994.