Business organisations and procedures - Business and organis...

Learning Outcomes

This article explains the main business organisational structures in England and Wales and their practical legal implications, including:

• Distinguishing between sole traders, partnerships, LLPs, private companies and public companies, and comparing their key characteristics
• Understanding how separate legal personality and limited liability operate in practice, and how they affect contracts, asset ownership, litigation and risk allocation
• Identifying when business participants have unlimited, joint and several, or limited liability, and recognising circumstances in which personal exposure can arise despite limited liability (such as guarantees, wrongful or fraudulent conduct, and holding out)
• Outlining core formation and registration requirements for companies and LLPs, and the default rules governing partnerships where no written agreement exists
• Explaining the division of decision-making power between directors and shareholders, and the authority principles governing when partners, members and directors can bind the business to third-party contracts
• Applying these principles to typical SQE2-style client scenarios to advise on the most suitable business medium, taking into account liability appetite, management control, funding needs, and regulatory and administrative burdens

SQE2 Syllabus

For SQE2, you are required to understand the types of business medium and their characteristics from a practical legal standpoint, with a focus on the following syllabus points:

• The organisational features of sole traders, partnerships, limited liability partnerships, private companies limited by shares, and public companies
• The consequences of running a business as an unincorporated versus incorporated medium, including liability, management, and regulatory implications
• The concept of separate legal personality and the circumstances in which liability for business debts may be limited or unlimited
• Registration, disclosure, management, and formality requirements for each business medium
• The legal principles determining which structure will be most beneficial for clients based on their needs and risk profile

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which business mediums have to register with Companies House?
2. What is the key difference, in relation to liability for business debts, between a general partnership and a limited company?
3. True or false: In a private limited company, the directors and the shareholders must always be different people.
4. What is the legal significance of separate legal personality?
5. What formalities must be satisfied for a partnership to exist under English law?

Introduction

Deciding which type of business organisation to use is one of the most important choices for anyone setting up a new business. You must know how each business medium affects liability, management, regulation, and ownership. This is essential for structuring effective advice to clients and risk management in legal practice.

Business mediums in England and Wales fall into two main categories: unincorporated and incorporated. The key distinction is between businesses with no separate legal personality (such as sole traders and most partnerships) and those with a separate legal personality (companies and limited liability partnerships).

Key Term: unincorporated business
An unincorporated business does not have its own legal personality. The business and its owners are considered the same person in law.

Key Term: incorporated business
An incorporated business has a separate legal personality. The law treats it as distinct from its owners and managers.

Separate legal personality has practical consequences. An incorporated entity can own property, enter contracts and litigate in its own name; creditors usually have recourse only to the entity’s assets, not to owners personally. However, limited liability is not absolute: personal guarantees, wrongful or fraudulent trading, misfeasance, and certain statutory or common law exceptions can expose individuals. Understanding where the lines are drawn is important in practice.

Types of Business Organisations

Sole traders

A sole trader is a self-employed individual. The business is not a separate legal entity. The individual is entitled to all profits and bears all losses. There is no legal distinction between the business and its owner.

Key Term: sole trader
An individual who owns and runs a business themselves, with no distinction in law between the individual and the business.

Sole traders benefit from minimal regulatory formalities—no need to register at Companies House, but they must register for income tax with HMRC and file self-assessment returns. Many sole traders arrange appropriate insurance (e.g. public liability or professional indemnity where required). They may trade under their own name or a business name; if using a trading name, statutory trading disclosures apply.

The significant disadvantage is unlimited personal liability.

Key Term: unlimited liability
A person with unlimited liability is personally responsible for all debts and losses of the business, including with their private assets.

Access to finance can be constrained. Banks often require security over personal assets and cannot take a floating charge from a sole trader. Continuity can be an issue—the business ceases on death, although assets may be sold.

Worked Example 1.1

Amir starts a new plumbing business as a sole trader. The business incurs debts which exceed the value of its tools and van. The business cannot pay. Can creditors take Amir's house to satisfy debts?

Answer:
Yes. As a sole trader, Amir has unlimited liability. His personal assets, including his house, may be used to pay business debts.

Partnerships

A partnership is created whenever two or more people carry on business together with a view to profit. There is no need for written agreement or registration (although these may be advisable).

Key Term: partnership
An unincorporated business where two or more people 'carry on a business in common with a view of profit'. The partnership is not a separate legal person.

The Partnership Act 1890 (PA 1890) sets default rules unless varied by agreement. Without a written partnership agreement, key defaults include: equal sharing of income and capital profits, equal contribution to losses, each partner’s right to participate in management, decisions by majority for ordinary matters, unanimity for changes in the nature of the business, no entitlement to remuneration for acting in the partnership, and no power for a majority to expel a partner. A partnership at will may be terminated by any partner giving notice; death or bankruptcy of a partner usually dissolves the firm unless agreed otherwise.

Partners are agents of the firm. Liability to third parties turns on authority.

• Actual authority (express or implied) binds the firm.
• Apparent/ostensible authority may bind the firm if a partner appears to have authority and the third party acts in good faith.

The default position is that all partners share profits and losses equally, can participate in management, and have unlimited, joint and several liability for debts.

Key Term: joint and several liability
Each partner can be made to pay the whole of a partnership debt, not just their share.

Partnerships are not required to register at Companies House. However, business name rules under the Companies Act 2006 apply where the name is not simply a list of partners’ names; certain sensitive words require prior approval and trading disclosures are mandatory.

Outgoing and incoming partners need careful handling:

• Former partners remain liable for debts incurred while they were partners unless released by creditors (e.g. novation or deed of release).
• For future debts, serve actual notice on long-standing counterparties and publish appropriate notice; avoid holding out (e.g. remove names from stationery and websites).
• New partners do not automatically assume liability for pre-existing debts unless agreed.

Worked Example 1.2

Katie leaves a design partnership. A year later the firm orders supplies on credit from a supplier it has used for years. Katie’s name still appears on old stationery. The supplier sues Katie for the new invoice. Is she liable?

Answer:
Potentially yes, unless Katie served actual notice on the supplier that she had left and ensured she was not held out as a partner. Liability for future debts can arise through holding out. Removing old stationery and serving notice under the PA 1890 are key steps.

Limited liability partnerships (LLPs)

A limited liability partnership is a hybrid structure combining features of a company and partnership. It must be registered at Companies House and is a separate legal person.

Key Term: limited liability partnership (LLP)
A business medium established under the Limited Liability Partnerships Act 2000, combining limited liability for all members with partnership governance.

LLPs are incorporated under the Limited Liability Partnerships Act 2000 and have separate legal personality. Members’ liability is generally limited to their agreed contributions, but liability can arise through wrongful or fraudulent trading or misfeasance (company and insolvency law provisions apply). LLPs must have at least two members on incorporation; if an LLP continues with only one member for over six months, that member may become jointly and severally liable with the LLP for debts incurred during that period. Designated members have specific filing and administrative responsibilities (e.g. accounts, confirmation statements, notifying changes in membership). LLPs may keep a register of people with significant control (PSC) and can grant fixed and floating charges over their assets.

LLPs have ongoing disclosure and formality requirements, but the liability of members is usually limited to capital contributed—unless wrongful or fraudulent conduct occurs.

Worked Example 1.3

Zoe and Nina want to open a design consultancy but are concerned about personal liability for large contracts. What business structure provides them with limited liability but allows them to share profits and management?

Answer:
A limited liability partnership (LLP) would give Zoe and Nina limited liability and partnership-style management and profit sharing, unlike a traditional partnership.

Companies

Companies are the most formal business medium. On registration at Companies House, a company becomes a separate legal person. The most common company types are private companies limited by shares and public limited companies (plcs).

Key Term: company
A business organisation formed by registration at Companies House. The company is a separate legal person with limited liability for its members.

Key Term: separate legal personality
A company acts as a legal entity that can hold property, contract, and sue or be sued in its own name.

Registration requires submission of an application (form IN01), a memorandum of association, articles of association, and payment of fees. The application includes director details, registered office, a statement of capital and initial shareholdings, and PSC information. Most companies adopt the prescribed Model Articles unless bespoke articles are prepared.

Key Term: IN01
The Companies House application to register a company, containing core incorporation information (name, office, directors, capital).

Key Term: memorandum of association
A short document signed by subscribers stating they wish to form a company and agree to become members (and, for companies with share capital, to take at least one share each).

Key Term: articles of association
The company’s internal rulebook governing director powers, decision-making and shareholder rights.

Key Term: model articles
Standardised articles available for different company types, often adopted by private companies limited by shares.

Key Term: people with significant control (PSC)
Individuals who own or control significant interests in a company or LLP; details must be maintained and filed.

Separate personality and limited liability were firmly recognised in Salomon v Salomon & Co Ltd: members are not generally liable for the company’s debts; the company owns its assets and owes its obligations. Other cases illustrate practical consequences: in Lee v Lee’s Air Farming a controlling shareholder could still be an employee; in Macaura v Northern Assurance shares confer no proprietary interest in company assets.

Authority and third party protection matter in practice:

• Directors’ actual authority derives from the articles or board decisions.
• Apparent authority can bind the company (e.g. holding out).
• Statutory protection for third parties dealing in good faith means internal limitations cannot generally be used to avoid obligations.

Key Term: board meetings (BMs)
Meetings of directors where board resolutions are passed to manage the company’s business.

Key Term: general meetings (GMs)
Meetings of members where ordinary or special resolutions are passed on matters reserved to shareholders.

Key Term: indoor management rule
A third party dealing in good faith may assume the company’s internal procedures have been complied with, without investigating internal approvals.

Private companies limited by shares

A private limited company is the most commonly used company. Profits belong to the company. Company debts are paid only from company assets (except in very limited circumstances).

Key Term: limited liability
Liability for company debts is limited to the amount unpaid on shares for members (shareholders). Personal assets are protected.

Private companies may have one director (who must be a natural person); shareholders can also be directors. They cannot offer shares to the public.

Public limited companies (plcs)

A public company can raise money from the public by issuing shares. It is subject to more onerous reporting and disclosure requirements, must have at least two directors and a qualified company secretary, and must meet the statutory minimum share capital requirement. Public companies can list shares on a stock market if regulatory requirements are met.

Company decision‑making and director authority

The board manages day-to-day affairs (typically under Model Article 3). Certain transactions must be authorised by the members—by ordinary or special resolution—before the directors implement them (for example, adoption/amendment of articles, removal of directors, allotment authority where required, substantial property transactions, loans to directors, long-term service contracts, buybacks). Private companies can use written resolutions; special notice is needed to remove a director at a meeting.

Authority to bind the company may be:

• Actual (express or implied through role or course of dealing).
• Apparent/ostensible (representation of authority reasonably relied upon).
• Statutory protection applies to good faith third parties: limitations in the constitution do not affect their rights; ultra vires challenges by counterparties are restricted.

Capital, allotments and pre‑emption rights

Key Term: share capital
The aggregate nominal value of all issued shares in a company; shares are personal property and each has a fixed nominal value.

Directors must have authority to allot shares. In a private company with only one class of shares, the directors may allot without member authority unless restricted by the articles; where there are multiple classes or in public companies, member authorisation is needed. Statutory pre-emption rights protect existing ordinary shareholders against dilution unless properly disapplied; filings include SH01 (return of allotment), and share certificates must be issued within prescribed timeframes.

Key Term: pre‑emption rights
Rights requiring new equity to be offered first to existing shareholders pro rata to their holdings, unless disapplied in accordance with the Companies Act and the articles.

Maintenance of capital principles restrict share buybacks and redemptions to prescribed procedures and sources; companies cannot acquire their own shares outside the statutory regime, and capital reductions require compliance with statutory safeguards.

Debt vs equity finance and security

Companies and LLPs can raise debt and equity finance. Equity issues alter ownership and control; pre-emption and approvals ensure fairness. Debt creates repayment obligations and can be secured. Incorporated bodies can grant floating charges over circulating assets (sole traders and general partnerships cannot). Charges should be registered at Companies House within the applicable timeframes for priority and transparency; failure risks invalidity against a liquidator or administrator. In insolvency, floating charges granted shortly before the onset of insolvency may be vulnerable if not supported by new value; preferences and transactions at an undervalue can be unwound.

Key features of incorporated businesses

• Registration at Companies House: required for LLPs and all companies
• Separate legal personality: the business exists independently from its members
• Limited liability: most owners’ liability for debts is capped
• Ongoing reporting, record keeping, and disclosure obligations

Comparison: unincorporated and incorporated businesses

Worked Example 1.4

Eric and Farah want to start a local shop. They have little money to invest and want as little paperwork as possible. Which business medium is most suitable, and why?

Answer:
As they are risk-tolerant and prioritise simplicity, operating as a partnership or sole trader best suits their needs. Both avoid company formality and are not required to register at Companies House.

Worked Example 1.5

A private company with one class of ordinary shares wants to issue new shares to an investor. Existing shareholders object to dilution. What steps must the board consider before proceeding?

Answer:
Confirm the directors have authority to allot under s.550 (or seek an ordinary resolution under s.551). Consider statutory pre-emption rights: offer the new shares pro rata to existing ordinary shareholders on terms at least as favourable or validly disapply pre-emption rights by appropriate resolutions and article provisions. File SH01 after allotment, update the register of members and issue share certificates within time.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The distinction between unincorporated (sole trader, partnership) and incorporated (LLP, company) business mediums in England and Wales
• The meaning and significance of separate legal personality, including practical consequences for contracts, asset ownership and litigation
• Unlimited liability for unincorporated medium owners and joint and several liability for partnership debts; authority rules for binding the firm; and the effects of holding out and notice on outgoing partners
• The main characteristic of limited liability for incorporated entities and the basics of company and LLP registration, PSC disclosure, and designated members’ responsibilities
• Company decision-making: the division between director powers and matters reserved to shareholders; when member approval is required
• Formation mechanics for companies: IN01, memorandum, articles, model articles, and post‑incorporation steps
• Share capital terminology and procedures: directors’ allotment authority, pre‑emption rights, filings and maintenance of capital constraints
• Financing differences: equity vs debt, ability to offer floating charges, and registration/priority of security; headline risks in insolvency (preferences, transactions at an undervalue, and vulnerable floating charges)
• Public versus private company features, including minimum officers and restrictions on offering shares to the public
• Practical structure selection factors: control, liability appetite, funding needs, privacy/publicity, complexity and cost

Key Terms and Concepts

• unincorporated business
• incorporated business
• sole trader
• unlimited liability
• partnership
• joint and several liability
• limited liability partnership (LLP)
• company
• separate legal personality
• limited liability
• IN01
• memorandum of association
• articles of association
• model articles
• people with significant control (PSC)
• board meetings (BMs)
• general meetings (GMs)
• indoor management rule
• share capital
• pre‑emption rights