United Kingdom Law/Company

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Company law is the branch of UK law that focusses on businesses known as limited companies, although there are other forms of business. It is usually taught as an optional subject at the second or third year level of law degrees, and is often seen as a vital part of the pathway towards becoming a commercial lawyer. This course is designed to provide a general overview of company law and is organised into "bite-size" units to make it easier to learn.

UK company law is based almost entirely on statutes, of which the most important is the Companies Act 2006,[1] one of the longest and most comprehensive Acts of the UK Parliament, with more than 1300 sections and 16 Schedules. Notably, unlike much of the rest of UK law which applies only to part of the country, this Act applies to the whole of the United Kingdom. The sources of the Act include European Union law and common law decisions, which have been fully incorporated into the Act. However, for the purposes of this course, reference will be made to relevant cases to illustrate ideas.

Types of business[edit]

English company law recognises five main types of business structure, each with specific requirements regarding regulation, ownership and liability. Additionally there are a number of factors in common, in that they require money (or capital), an evaluation of business risks, and (for most of them) some way of resolving disagreements. The five types are:

  • Sole trader
  • Partnership
  • Private limited company (Ltd)
  • Public limited company (Plc)[2]
  • Limited liability partnership (LLP)

Sole trader[edit]

A 19th-century sole trader.

A sole trader is quite simply a single person operating a business on their own, although they may employ other people. The sole trader sets up the business using their own funds or a loan from a bank. Consequently this is type of business has the simplest structure because a single person doesn't require a complex system of organisation. There are a number of benefits and disadvantages to this type of business.

A major advantage of sole trading is that the person has full control and does not have to account for their business decisions, because the risks are entirely personal, rather than other people's money being involved. The person has legal ownership of the whole business and can buy or sell them without having to consult anyone else, because there is no separation between personal and business assets.

Another major advantage is that sole traders are only subject to minimal regulations, and do not have to submit annual accounts because they are not required to register with Companies House. The only exceptions are when certain taxes have to be paid by the sole trader including income tax.

The most important disadvantage is that a sole trader has unlimited liability for debts, so there isn't a clear line separating business and personal property. If the business has debts that are due to be paid, these are directly linked to the person, meaning that creditors can demand the repayment of the debts from the trader rather than just the business itself.

Partnership[edit]

Two business partners.

One step up from sole trading is the creation of partnerships, which occur when two or more people set up a business together, usually based on a simple agreement between the partners. Sometimes this happens because the success of a sole trader has attracted other people who wish to invest the business. It is noteworthy that there have to be at least two partners but there can be as many as are willing to enter the partnership. The major piece of legislation governing partnerships is the Partnership Act 1890. The basic definition given in that Act is that:[3]

Partnership is the relation that subsists between persons carrying on a business in common with a view of profit.

It should be clear that this is a very simple definition which could be interpreted in a number of ways. This becomes apparent when we consider the choice of formats that the partnership agreement can take. The prospective partnership can be created by:

  • a simple verbal agreement; or
  • a formal written agreement outlining the terms and conditions (similar to a contract); or
  • the conduct of the partners.[4]

An important element of partnership is the sharing of accountability, meaning that each partner is accountable to and for the other partner(s) and consequently all of the partners must bear responsibility for all decisions taken by one or more partners. Thus, each partner is liable for debts incurred by the partnership, even if they didn't personally make the decisions that led to the debt being accumulated.

Incorporated[edit]

Limited liability partnership (LLP)[edit]

Private[edit]

Public[edit]

Notes[edit]

  1. "Companies Act 2006". The National Archives. 
  2. This includes "listed companies", which offer shares on a stock market.
  3. Section 1(1) Partnership Act 1890.
  4. Partnerships can be deemed to exist simply by people behaving as if they were partners. An example of this is the case of Khan v Miah [2000] 1 W.L.R. 2123 in which Khan had withdrawn from a restaurant venture with Miah before it began operating but the House of Lords decided that the partnership had begun when "they performed part of the joint enterprise in which they had agreed to engage."