Ss lesson

1. Business Types

2. Learning Objectives
Business ownership
 Individuals
 Partnerships
 Companies (corporations)
Comparison of Ownership Types
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3. Introduction
There are three general ways of owning and
operating a business
 as an individual
 as a partnership
 as a limited company
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4. Individuals
The situation with an individual is fairly
straightforward as only one person is
involved
That person is the business
That person is often called a sole trader
S/he enters contracts in his/her own name in
order to do business
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5. Partnership
It defines a partnership as “the relation
which subsists between two or more
persons carrying on a business in common
with a view to profit”
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6. Definition of Partnership
There must be at least 2 people on a
partnership and not more than 20 (except in
law, medicine and accountancy)
A limited company cannot be a partnership,
although it can be one partner in a
partnership
The relationship between partners is based
on the contract
 ie the terms of their partnership agreement
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7. Definition of Partnership (cont.)
To qualify as a partnership, the people must
be carrying on a business
Business means any trade, profession or
occupation
However, simply sharing in the profits of a
business does not make you a partner in that
business
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8. Definition of Partnership (cont.)
The business must be carried out in
common
A partnership does not have a separate legal
personality from the people who run the
business
A partnership is simply a group of people
who carry on a business together
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9. Definition of Partnership (cont.)
Partnerships are not only for carrying on
business over a period of time, it is possible
to create a partnership for a single event or
business venture
The business must be run with the aim of
making a profit
However, simply sharing in the gross profits
of a business does not make you a partner
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10. Legal Status of a Partnership
The partnership does not have a separate
legal identity from the partners (ie the
owners)
As you will see, a limited company does
have a separate legal identity from its
owners
Because there is no separate legal identity,
partners care self-employed and not
employees 10

11. Formation of a Partnership
There are no special legal rules for forming
a partnership
It is an agreement between individuals
It may be made orally, in writing, or implied
from the behaviour of the individuals
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12. Formation of a Partnership (cont)
However, it is common to have a written
partnership agreement which sets out
 the name of the firm
 the nature of its business
 the method for sharing profits
 the amount of capital to be contributed by each
partner
 the reasons and method for ending the
partnership
This helps to avoid arguments later
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13. Liability of Partners
Each partner is liable for the full amount of
the firm’s debts and other liabilities
A third party can sue the firm or the
partners individually
Where the third party receives payment
from one partner, then the other partners
must contribute equally to the amount paid
by him (indemnify that partner)
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14. Liability of Partners (cont.)
In order for a firm to be liable in tort, the
wrongful act must have been done by a
partner in the course of the firm’s business
or with the approval of the other partners
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15. What is a Company?
A company is a body corporate or
corporation
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16. Separate Legal Personality
As companies are a kind of corporation,
they have their own separate identity
In law, they are regarded as a person
Although a company is not a natural person
(like you or me) the law treats it in the same
way in many areas
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17. Perpetual Succession
Changes in the membership of a company
have no effect on the continuation of that
company
Unlike a partnership, the death or
bankruptcy of a member does not end the
company
In public limited companies, members are
free to sell their shares on the stock
exchange
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18. Business Property
Business property is owned by the company
and not its shareholders
That means a creditor cannot take action
against company assets in respect of a debt
due by a member of that company
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19. Court Actions
A company can sue and be sued in its own
name
It can also enter contracts in its own name
The company’s liability for contractual
debts is unlimited
 It is only the members’ liability which is
limited
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20. Liability in Tort and Crime
Companies are vicariously liable for the torts of
their employees
Companies can be guilty of crimes which do not
require a mental element (eg intention or
recklessness)
However, it has been more difficult to prosecute
companies where the crime has such an element as
it has to be shown that one of the directors of the
company had the required mental element
This can be very difficult in a large company
where the directors are not involved in the day to
day operation of the business 20

21. Types of Company
Companies can be classified in several ways
Limited and Unlimited
Limited by Shares or by Guarantee
Public and Private
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22. Limited and Unlimited Companies
Companies are usually formed because of
the limited liability for their members
However, it is possible to create a company
without limited liability
Such companies do not have disclose their
accounts as limited companies do
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23. Limited by Shares or Guarantee
The most common kind of limited company
is one limited by shares
Once the shareholder has paid the full value
on his shares then he has no further liability
This is true even if the company does not
have enough money to pay its debts
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24. Limited by Shares or Guarantee
(cont)
A company limited by guarantee is usually
created for charitable, educational or
professional purposes
 ie it is not a trading company
The liability of members is to pay an agreed
amount if the company is wound up
Usually, the amounts are small, so the risk
is low
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25. Public and Private Companies
The main difference between public and
private companies is that the shares in a
public company may be bought and sold on
a stock exchange
Public companies must have at least two
directors, whereas a private company can
have one
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26. Public and Private Companies
(cont.)
Private companies may purchase their own
shares out of capital, whereas public
companies cannot
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27. Comparison of Ownership
It is useful to compare the advantages and
disadvantages of the three forms of business
 Sole trader
 Partnership
 Company
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28. Sole Trader - Advantages
No legal filing requirements or fees and no
professional advice is needed to set it up.
You just literally go into business on your
own.
Simplicity – one person does not need a
complex organisational structure.
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29. Sole Trader - Disadvantages
The disadvantages are that it is not a particularly
useful business form for raising capital (money).
For most sole traders the capital will be provided
by personal savings or a bank loan.
Unlimited liability – the most important point to
note in terms of comparing this form to the
company in that there is no difference between the
sole trading business and the sole trader himself.
The profits of the business belong to the sole
trader but so do the losses.
As a result he has personal liability for all the
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debts of the business.

30. Partnership - Advantages
No formal legal filing requirement involved
in becoming a partnership beyond the
minimum requirement that there be two
members of the partnership.
Easier to obtain capital as there can be up to
20 members of the partnership, all of whom
could pool their investment within the
partnership.
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31. Partnership – Advantages (cont.)
If you are aware of the problems the Partnership
Act can cause (see disadvantages) then you can
draft a partnership agreement to vary these terms
of the Act
The partnership agreement can therefore be used
to provide a very flexible organisational structure
although this usually involves having to pay for
legal advice.
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32. Partnership - Disadvantages
A partnership will end on the death of a
partner.
The partners are jointly and severally liable
for the debts of the partnership.
This means that each partner can be sued
for the total debts of the partnership
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33. Company - Advantages
Companies are designed as to make it easy to raise
capital.
Companies have the ability to subdivide their
capital into small amounts, allowing them to draw
in huge numbers of investors who also benefit
from the sub-division by being able to sell on
small parts of their investment.
Limited liability also minimises the risk for
investors and is said to encourage investment.
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34. Company – Advantages (cont.)
It is also said to allow managers to take
greater risk in the knowledge that the
shareholders will not lose everything.
The constitution of the company provides a
clear organisational structure which is
essential in a business venture where you
have large numbers of participants.
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35. Company - Disadvantages
Forming a company and complying with
company law is expensive and time
consuming.
It also appears to be an very complex
organisational form for small
businesses, where the Board of
Directors and the shareholders are
often the same people
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36. Summary (cont.)
Most companies nowadays are formed under the
Companies Act 1985
The law regards a company as a legal person
It has a separate identity from its owners (ie its
shareholders)
A company is liable for its own debts
Its shareholders are not liable for its debts. They
are only liable to pay for their shares
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