Business Organisations

Sole trader

Jamie Anderson, a partner in the commercial department of a law firm, is commenting on the choices for different trading vehicles for business.

‘A client wanting to operate a business for profit might select from a number of different trading entities. Each has different legal characteristics and is subject to different rules and regulations. The simplest and commonest form of business structure is a sole trader. This generally suits a relatively small enterprise, such as an independent software developer, a hairdresser, or a small shop. It’s headed by a single individual and it differs from a company in that the ownership and management is usually vested in the same person, who is personally responsible for all the debts of the business, and may thus risk becoming bankrupt. Finances are confidential and formalities are few, aside from Value Added Tax, or VAT, regulations.’

Partnerships

‘A common form of structure for certain kinds of business, for example accountants, solicitors, and architects, is a partnership. This needs to have at least two members and normally a maximum of twenty. There is an exemption on size for some type of firm, such as solicitors and accountants. All the partners may be jointly and severally liable for all the debts of the business. The relationship between the partners is usually drafted in the Partnership Agreement. This can set out the duration of the partnership, its name and business, how profits, losses, and running costs are to be shared, how much capital each partner is to contribute, what rules will apply to the capital, what grounds will lead to a partner being expelled from the company, what restrictions are imposed on partners, and so on. It’s also possible to have a Limited Liability Partnership, or LLP, which has a legal identity separate from its members. In this sense it resembles a limited company. It’s possible for all the partners except one, known as the general partner, to be a limited partner. A sleeping partner may have a share in the business but doesn’t work in it. An individual is therefore able to invest capital in an LLP without risking any further liability. LLPs must be registered with the Registrar of Companies.’

Limited Companies

‘A Private Limited Companies (Ltd) is a separate legal entity which can sue, and be sued, in its own right. The Company is identified by its registered number, which will remain the same irrespective of any changes of name. A business can start life as a limited company and this may be particularly appropriate where high-risk projects are involved. In some instances, directors will be asked to guarantee the obligations of a company, for example by giving security over personal assets to guarantee company borrowing. This is particularly common in the case of new companies who are not able to demonstrate a history of profitable trading. A Public Limited Company, or PLC, is differentiated from a Private Limited Company in that the shares can be sold to the general public via the stock market to raise share capital. It’s mandatory for a PLC to have at least two shareholders, two directors, and a professionally qualified Company Secretary. The minimum authorized capital is £50,000 and 25% must be paid. Before the company can trade or borrow money, a Trading Certificate has to be obtained from the Registrar of Companies.

Reading 3: Company formation

Lawyers play important roles in the formation of a company, advising clients which entities are most suited to their needs and ensuring that the proper documents are duly filed.

You are going to read a conversation between an American lawyer, Ms Norris, and her client, Mr O'Hara. The lawyer describes how a specific type of corporation is formed in the state of Delaware.

5. Read the conversation and tick the documents required for formation that the lawyer mentions.

Ms Norris: So, based on all the background information you provided me with, my strongest recommendation is for you to incorporate for the reasons we discussed.

Mr O'Hara: All right. Of course, I trust your judgment. But I'm completely new to this. How does it work exactly? I mean, I assume that the paperwork has to be drafted by you and filed with the State ...

Ms Norris: Well, um, let me begin by telling you about how the process works in our state, in Delaware. You know, quite a few large corporations choose to incorporate here due to our highly developed corporate legal system.

Mr O'Hara: Right. So what do we have to do first?

Ms Norris: The first thing you have to do is select a name – but the incorporator has to check whether that name is available in the State.

Mr O'Hara: The incorporator?

Ms Norris: That’s the person who prepares, files and signs the articles of incorporation and everything necessary for incorporation. Of course, that’s something I could do for you.

Mr O'Hara: Got it. Go on.

Ms Norris: Well, I mentioned the articles of incorporation: that’s the first main document that needs to be filed. It includes information like the name of the corporation, the address of the corporation and of the corporation's registered office, and the name of the registered agent at that office - um, that’s the person to be served if the corporation is sued.

Mr O'Hara: OK, right. What else do the articles of incorporation include?

Ms Norris: They must state the purpose of the corporation and length of time that the corporation is to exist. The duration can be either perpetual or renewable. Another thing you’d have to provide is information about the capital structure: how much common stock, how much preferred stock, and what are the rights and responsibilities of each. This would be stated in the stock ledger. The stock ledger and the stock certificates are kept with the company records. Any questions?

Mr O'Hara: Could you explain what a stock ledger is?

Ms Norris: Sure, that's just a record of each shareholder's ownership in a corporation.

Mr O'Hara: I understand. So, is that all? Are there any other documents we have to file?

Ms Norris: Of course, the other document necessary for the company to function as a corporation is the bylaws...

Mr O'Hara: Those are the rules of the corporation?

Ms Norris: Exactly: the bylaws are the rules and regulations adopted by a corporation for its internal governance. There's one more thing: you’re also required to file the organisational board resolutions.

Mr O'Hara: What are those?

Ms Norris: Well, they're drawn up after the articles of incorporation have been filed and the bylaws created. That's the time when the first organisational meeting of your corporation will take place. At this meeting, the bylaws are then approved and adopted, officers are elected, and directors are appointed, among other things. All of these decisions are made during this meeting and then set down in the organisational board resolutions, and these resolutions are then filed. Then the incorporation process is complete.

1	DBA filing	□
2	articles of incorporation	□
3	stock ledger	□
4	general partnership agreement	□
5	stock certificates	□
6	IRS & State S Corporation election	□
7	bylaws	□
8	organisational board resolutions	□

:

5. Company types (USA) Look at the following table, which provides information on the documents, required to form and operate the different company types in the United States. Based on what you read in Exercise 4, which type of business association was the lawyer discussing with her client?

US entities	Documents required for formation and operation
sole proprietorship	DBA filing
general partnership	General Partnership Agreement local filings if partnership holds real estate
limited partnership	Limited Partnership Certificate. Limited Partnership Agreement
C corporation	Articles of Incorporation. Bylaws. Organisational Board Resolutions, Stock Certificates, Stock Ledger
S corporation	Articles of Incorporation. Bylaws, Organisational Board Resolutions, Stock Certificates, Stock Ledger, IRS & State S corporation election

6. Company types (UK) The table on page 20-21 contains information about five types of common UK business associations, covering the aspects of liability of owners, capital contributions and management. (In many jurisdictions in the world, there are entities which share some or all of these characteristics.) Look at the table and decide which entity (a-e) is being described in each row (1-5).

a private limited company (Ltd)

b general partnership

c public limited company (PLC)

d limited partnership

e sole proprietorship

Entity	Liability of owners	Capital contribution	Management
1)...................	Unlimited personal liability for the obligations of the business	Capital needed is contributed by sole proprietor.	Business is managed by the sole proprietor.
2)....................	Generally no personal liability of the members for obligations of the business	No minimum share capital requirement. However, capital can be raised through the issuance of shares to members or through a guarantee.	Company is managed through its managing director or the board of directors acting as a whole.
3)....................	No personal liability; liability is generally limited to shareholder contributions (i.e. consideration for shares).	The minimum share capital of £50,000 is raised through issuance of shares to the public and/or existing members.	Company is managed by the board of directors; shareholders have no power to participate in management.
4)....................	Unlimited personal liability of the general partners for the obligations of the business	Partners contribute money or services to the partnership; they share profits and losses.	The partners have equal management rights, unless they agree otherwise.
5)...................	Unlimited personal liability of the general partners for the obligations of the business; limited partners generally have no personal liability.	General and limited partners contribute money or services to the limited partnership; they share profits and losses.	The general partner manages the business, subject to any limitations of the Limited Partnership Agreement.

Reading 4: Memorandum of association

An important document in company formation is the memorandum of association (UK) or articles/certificate of incorporation (USA). This document sets forth the objects of the company and its capital structure; as such, it represents a legally binding declaration of intent to which the members of the company must adhere.

7. Below is an extract from the articles of incorporation of a US company. Read through the text quickly and tick the issues it addresses.

1. appointing members of the board of directors 

2. changing corporation bylaws 

3. procedures for holding a vote of the shareholders 

4. stipulations for keeping corporation records 

The power to alter, amend or repeal the bylaws or to adopt new bylaws shall be vested in the Board of Directors; provided, however, that any bylaw or amendment thereto as adopted by the Board of Directors may be altered, amended or repealed by a vote of the shareholders entitled to vote for the election of directors, or a new bylaw in lieu thereof may be adopted by 5 vote of such shareholders. No bylaw which has been altered, amended or adopted by such a vote of the shareholders may be altered, amended or repealed by vote of the directors until two years shall have expired since such action by vote of such shareholders. [...]

The Corporation shall keep as permanent records minutes of all meetings of its shareholders and directors, a record of all action taken by the shareholders or the directors without a meeting, and a record of all actions taken by a committee of the directors in place of the Board of Directors on behalf of the Corporation. The Corporation shall also maintain appropriate accounting records. The Corporation, or its agent, shall maintain a record of its shareholders in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order, by class of shares, showing the number and class of shares held by each.

8. Read the text again and decide whether these statements are true or false.

1. The board of directors only has the power to change the bylaws if the shareholders in turn have the power to amend any changes made by the board of directors.

2. The board of directors is proscribed at all times from changing any bylaw which has been altered by a vote of the shareholders.

3. Records must only be kept of decisions reached by shareholders and directors in the course of a meeting.

4. Records of the shareholders must list the number of shares they own.

9. For each of these words or phrases, find the italicised word(s) in the text that most closely matches its meaning.

1 passed 3 instead 5 cancelled 7 given to

2 who have the right to 4 on condition 6 revised

Language use: Shall and may

10. Read through the text on page 21 again, noting how shall and may are used. 1. Which of these words most closely matches the meaning of shall in each case? a) will b) must 2. What do you notice about the use of shall in line 6? 3. Which of these words most closely matches the meaning of may in the text? a) can b) could In legal documents, the verb shall is used to indicate obligation, to express a promise or to make a declaration to which the parties involved are legally bound. This use differs from that in everyday speech, where it is most often used to make offers (Shall I open the window?) or to refer to the future (/ shall miss you), although this latter use is less frequent in modern English. In legal texts, shall usually expresses the meaning of ‘must’ (obligation): Every notice of the meeting of the shareholders shall state the place, date and hour. or 'will' (in the sense of a promise): The board of directors shall have the power to enact bylaws. Shall can also be used in legal texts to refer to a future action or state: ... until two years shall have expired since such action by vote of such shareholders. In everyday speech, this future meaning is commonly expressed using only the present perfect (... until two years have expired ...). Another verb commonly found in legal documents is may, which generally expresses permission, in the sense of ‘can’ (this use is less common in everyday English): ... any bylaw or amendment thereto as adopted by the Board of Directors may be altered, amended or repealed by a vote of the shareholders. In everyday English, may is sometimes used as a substitute for might, indicating probability (He may want to see the document).