Forms of business | Lanbuk on the Law of Companies

In simple terms

A business can be run by one person alone, by partners, or through a company. The choice affects who owns the assets, who pays the debts and how the business can raise money.

The sole trader

A sole trader runs the business alone. There are no formalities beyond any licences the trade needs. He keeps all the profit and takes all the decisions. But the business is not separate from him. Its debts are his debts, and his private property can be taken to pay them. When he dies, the business as such ends.

The partnership

A partnership is the relationship between people carrying on a business in common with a view to profit. It can be made by agreement or even by conduct. Each partner is usually an agent of the firm and of the other partners, and each is liable for all the firm's debts without limit. An ordinary partnership is not a legal person separate from the partners.

The limit of twenty: section 16 of the Act says that no company, association or partnership of more than 20 persons may be formed to carry on business for profit unless it is incorporated under the Act or formed under another enactment. Partnerships of legal practitioners and of accountants, and registered co-operative societies, are exempt. So an ordinary trading partnership may have at most 20 partners.

The company

A registered company is a legal person. It owns its own property, it is liable for its own debts, and in a limited company the members are not liable beyond their shares. It has perpetual succession. In return it must follow the formalities of the Act: registration, a registered office, returns, accounts, meetings and filings with the Commission.

Comparing them

Liability: unlimited for a sole trader and for partners; limited for members of a limited company.

Formalities: few for a sole trader or partnership; many for a company.

Continuity: a sole trade ends with the trader, and a partnership is easily dissolved; a company continues.

Finance: a company can issue shares and and give floating charges; the others borrow on personal credit or fixed security.

Management: a sole trader manages alone, partners usually manage together, and in a company management is given to directors who need not be members.

Words and Latin in this note

Debenture: A document that creates or acknowledges a debt owed by a company, often secured by a charge. A debenture holder is a creditor, not a member. Open the note.

Memory map

Forms of business

The partnership

The limit of twenty

Comparing them

Liability
Formalities
Continuity
Finance

Key points

A sole trader and the business are one person,…
Partners are agents of each other and are each…
Section 16 bars a trading partnership of more…
A company is a separate legal person, with…

Cases

Salomon v A Salomon and Co Ltd

Key terms

Debenture

Take-home points

A sole trader and the business are one person, so the trader is liable for all business debts.
Partners are agents of each other and are each liable without limit for the firm's debts.
Section 16 bars a trading partnership of more than 20 persons unless it is incorporated, with exceptions for lawyers, accountants and co-operatives.
A company is a separate legal person, with limited liability for members of a limited company and perpetual succession.
The price of incorporation is formality and public disclosure.