Law of Business Organisations Lecture Notes PDF

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Lecture OneIntroductionTypes of Business OrganisationDifferent types of organisation have different advantages and disadvantages. These must be considered when owners decide on which form their organisation should take. There are different types of organisation categorised by different types of owne...

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Lecture One Introduction Types of Business Organisation Different types of organisation have different advantages and disadvantages. These must be considered when owners decide on which form their organisation should take. There are different types of organisation categorised by different types of ownership. The most common private sector ones are: ● Sole Trader ● Private Limited Company (Ltd) ● Partnership ● Public Limited Company (plc) ● Limited Liability Partnership (LLP)

Sole Trader - A business owned by one person. ● Advantages: Sole traders keep all the profit they make for themselves. They also get to run the business as they see fit, making all the key decisions by themselves. ● Starting up as a sole trader is legally the easiest of all types of ownership. It has less rules and regulations than other types of organisations. ● Disadvantages: Sole traders take on all the risks of starting their own business and have the disadvantage of unlimited liability. ● A sole trader is liable for the organisation’s debt. This means that personal assets such as a car or house are at risk of being sold to pay off business debts. Partnerships - Can have a minimum of 2 and a maximum of 20 partners. Lawyers, estate agents, doctors and dental practices often operate as partnerships. A partnership is a business set up by the deed of partnership document. ● The deed of partnership document sets out the terms of the partnership. ● For example it states how much money each partner invested in the partnership and what role each partner will have in the partnership.

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A partner who invests but is not involved in the day-to-day running of a partnership is called a sleeping partner. Like sole traders, partnerships usually have unlimited liability. All partners have the worry of being liable for any partnership business debts.

A key factor on choosing a business structure is legal liability: ● Sole trader: One person - unincorporated business. ● Ordinary (general) partnership: the partners all have unlimited legal liability for debts. Partners share losses and profits. ● Limited Liability Partnership (LLP): has a separate legal personality and legal liability of partners is limited. ● A Limited Company: has a separate legal personality and legal liability of shareholders is limited to paid up value of their shares. Why is agency important? In the business world, the law of agency is important because there are many situations where one party (known as the principal) authorises another party (known as the agent) to act on their behalf). Businesses would be able to operate effectively unless transactions were carried out by agents. Generally where a contract has been made by an agent and a third party, the agent has no personal rights or liabilities under the resulting contract. The key aspects of agency: ● Where one party - the principal authorises another person - the agent to act on their behalf. ● Relationships governed by the law of agency. ● Contract made by the agent is between the principal and the third party. ● The parties may be natural or legal. How does this work? ● The agent negotiates on behalf of the principal but the contract is between the principal and third party.

How is

agency created? The agent must have legal authority to act on behalf of the principal in order for a contract with a third party to be binding by or against the principal.

Lecture Two Why is agency important? In the business world, the law of agency is important because there are many situations where one party (known as the principal) authorises another party (known as the agent) to act on their behalf. Businesses would not be able to operate effectively unless transactions were carried out by agents. Generally, where a contract has been made between an agent and a third party, the agent has no personal rights or liabilities under the resulting contract. Examples of Agency ● Estate Agents ○ Regulated by the Estate Agents Act 1979. ● You are an estate agent if: ○ You deal with people who want to buy or sell property, throughout the UK (includes commercial and agricultural property). ○ You do this as part of a business. ○ You act on instructions from a client. ● Auctioneers ○ Section 57 Sale of Goods Act 1979. ○ Barry v Davies [2000] 1 WLR 1962 (Lucy Jones Textbook, 2019, 88). ○ Auctions (Bidding Agreements) Acts 1927 and 1969. Examples of agency in the context of business organisations: Partnership - Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way of business of the kind carried on by the firm of which he is an member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner. Section 5 - Partnership Act 1890. ● Company Directors - Section 40 Companies Act 2006: Power of directors to bind the company. The Key Aspects of Agency ● One party - the principal - authorises another person - the agent - to act on their behalf. ● The relationship is governed by the law of agency. ● Contract made by the agent is between the principal and the third party. ● The parties may be natural or legal. ● Gratuitous agency agreement - legally binding.

How does this work? ● The agency negotiates on behalf of the principal but the contract is between the principal and the third party.

How is agency created? ● The agent must have legal authority to act on behalf of the principal in order for a contract with a third party to be binding by or against the principal.

Agency by Necessity ● Agent must be in control of the principal's property. ● Must be impossible for the agent to get the principal's instructions. ● Genuine emergency. ● Agent must act in good faith in the interests of the principal. ● Example: Great Northern Railway v Swaffield (1874) LR 9 Ex 123. ○ Horse arrived at the railway station and the staff looked after it until the owner came to pick it up. Staff then charged the man for the cost of looking after the horse because without the staff looking after the horse it would’ve died. Agency by Estoppel

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The concept of agency by estoppel arises where one person (P) acts in such a way that the other (T) believes that a third person (A) is authorised to act on his (P’s) behalf and enters into a transaction with the third person. Example: Freeman and Lockyer v Buckhurst Park Properties Ltd [1964] 2 QB 480 (CA) ○ Buckhurst Park Properties Ltd allowed one of its directiors to act if he was the Managing Director and to give instructions to Freeman & Lockyer to do work for the company. ○ The company was bound by the contract entered on its behalf because they knew the director was telling third parties that he was the managing director and they didn’t stop him doing this. ○ “Apparent” or “ostensible” authority - Diplock LJ. ○ Ostensible authority or apparent authority: is the power of an agent to legally bind its principal with a third party, and. arises from conduct of a principal, by permitting the agent to make contracts of a particular kind on its behalf.

Conditions for Ratification ● Ratification must be within a reasonable time. ● Principal must adopt the whole contract. ● Principal must have been in existence at the time of contract and be named or identified as the principal. ○ Pre-incorporation contract - see section 51 Companies Act. ● Principal must have legal capacity. ● Agent must expressly or impliedly indicate he is acting as an agent. ● Ratification must be communicated to the third party (communication may be oral written or by conduct). Types of Authority A contract made by an agent is only binding on the principal if the agent has authority. There are three possible types of authority: 1. Express Actual Authority. 2. Implied Actual Authority. 3. Apparent Authority. If no authority, the principal only bound if ratification.

Rights of an Agent and Duties of an Agent

Relations between an agent and third party: ● Once an agent has created a contract between third party and principal the general rule is: ○ The agent has no further responsibility. ○ Only the third party and the principal can sue and be sued for breach of contract (even if the agent was responsible for the breach). ● There are some exceptions to the general rule.

Lecture Three Partnerships and the Formation of Companies (CH15) Types of Business Organisations Different types of organisation have different advantages and disadvantages. These must be considered owners decide on which form their organisation should take. There are different types of organisation categorised by different types of ownership. The most common private sector ones are: ● Sole trader. ● Partnership. ● Limited Liability Partnership (LLP). ● Private Limited Company (Ltd) ● Public Limited Company (plc).

Incorporated vs Unincorporated Companies ● Legally: An organisation is either incorporated or unincorporated. ● Deciding whether to be an unincorporated or incorporated legal structure is one of the first choices to make: choice of creating a legal personality for an organisation. Legal Personality ● Under English Law every natural person has a legal personality from birth until death. ● Individuals have complex rights and duties under the legal system determined by their actions and their current status in life. ● Some artificial persons can also have a legal personality. A key factor on choosing a business structure is legal liability: ● Sole trader: one person unincorporated business. ● Ordinary (general) partnership: the partners have unlimited liability legal liability for debts. Partners share losses and profits. ● Limited Liability Partnership (LLP): has a separate legal personalisty and legal liability of partners is limited. ● A limited company: has a separate legal personality and legal liability of shareholders is

limited to paid up value of their shares. Unincorporated Business Organisations An unincorporated group is legally understood as a collection of individuals. ● Has no legal identity outside of the people who are on its management committee. ● As a result, the members of an unincorporated group are personally liable for the group’s actions. ● Unincorporated groups cannot enter into contracts in their own right. ● A member must enter the contract in their own name. An unincorporated structure is most appropriate for individuals/groups which: ● Have low incomes. For example: sole traders. ● Do not intend to employ staff or acquire property such as sole traders. Partnerships ● Unincorporated businesses. ● No separate legal personality. ● No delegated management. ● Mutual agency. ● Partnerships can have a minimum of 2 and formerly a maximum of 20 partners. ○ Lawyers, estate agents, doctor/dental practices often operate as partnerships. ● A partnership is a business set up by the deed of partnership. Sets out the terms of the partnership. ○ Example: how much money each partner invested in the partnership. ○ Example: what role each partner will have in the partnership. ● A partner who invests but is not involved in the day-to-day running of a partnership is called a sleeping partner. ○ Like sole traders, partnerships usually have unlimited liability. ○ All partners have to worry of being liable for any partnership business debts.

Duties of partners to each other - imposed law: ● Partners owe each other a duty to act honestly for the benefit of the partnership. ● They are agents of the firm and other partners. ● They are bound by obligations agreed in partnership agreement. ● They are also bound by specific duties set out in Partnership Act 1890.

S24 Partnership Act 1890 ● If partners do not agree the terms of the partnership the default articles of partnership set out in s24 PA 1890 will apply: ○ For example: if partners do not state they wish to share the profits in a specific way, profits will be shared equally. ○ Note similar regulations apply to LLPs under LLP Regulations. Partners and Third Parties ● Authority to bind the firm. ● Liability for contracts: Partners are jointly and severally liable for the firms’ contracts. ● Liability for torts: Partners are jointly and severally liable in torts or other wrongful for acts committed by a partner in the ordinary course of business or done with the actual authority of the co-partners. The Liability of a Partnership

Three Types of Partnership 1. ● ● ● ●

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The Conventional Partnership Defined by the 1890 Partnership Act. Many of its key features are similar to those for a sole trader. Partners responsible for their own and each other’s debts. Partners are taxed on all the profits, although their share of the profits will vary by agreement. ○ There are some significant differences: If the partnership makes a loss, partners may be restricted by the amount of capital they

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have contributed to the partnership when claiming relief to offset losses against other income. Those partners who are not fuly participating in the business may face further restrictions. Individual partners may rent property to partnership to use in its business, and charge it rent.

2. The Limited Partnership ● Limited Partnerships were governed by the 1907 Limited Partnership Act. ● Key features: ○ At least one partner must have unlimited liability. There are referred to as a ‘general partner.’ ○ Limited partners’ liability is capped. In the event of business failure they will only lose the capital contribution that they may have made to join the partnership (unless fraud). ○ The common set-up is that the limited partner will provide the initial funding. It is not permitted to participate in management or bind the partnership. A limited partnership’s entitlement to losses is restricted pro-rata to its capital contribution. 3. ● ● ●

The Limited Liability Partnership (LLP) A cross between a conventional partnership and a company. Governed by 2000 Limited Liability Partnership Act and 2006 Companies Act. Key Features: ○ An LLP is a separate legal entity to its members (the partners). ○ LLPs have designated partners who are the equivalent to company officers. ○ LLP accounts are filed with Companies House. ○ Partners have limited liability unless: the LLP becomes insolvent and the partners knowingly allowed this to happen - may be required to repay their profits of 2 previous years and a partner is found to be at fault at a time when acting under own personal capacity. ○ An LLP is taxed transparently, as if it were a conventional partnership. ○ Losses are restricted in proportion to each partner’s capital contribution. ○ LLPs are subject to substantial tax anti-avoidance legislation.

Limited or unlimited partnership? ● The LLP is the favourite type of partnership for most individuals. It affords the partners the protection of limited liability. ● Limited Partnership is useful: ○ For estate planning: LLP has to file its accounts with Companies House but a limited partnership does not. ○ Favourite vehicle for private equity and investment funds. ○ Flexibility to allow for various partnership interests. Usefuls when one partner wishes to have limited liability to take a back seat in the partnership. ● Flexible trading vehicles: consider a conventional unlimited partnership of an LLP.

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Fund or asset management: consider a limited partnership.

Partnership Agreements A partnership agreement can determine: ● Profit share. ● Capital contributions. ● How to deal with the arrival and departure of a partner. ● Succession. ● Death of a partner. ● Divorce of a partner. ● Partnership assets. Incorporated Companies Types of registered/incorporated companies:

Incorporated Companies: Possess Legal Personality Corporations are legal persons with their own rights and duties. Different from the rights and duties of their owners and managers and employees. Company liable for contracts and torts. Company characterised as a ‘nexus of contracts’: common counterparty in contracts with suppliers, consumers. ● Permitting the firm to serve as a single contracting party that is distinct from the various individuals who own or manage the firm enhances the ability of these individuals to engage together in joint projects. ● Salomon v Salomon & Co (1897).

Separate Legal Personality Different from partnerships - which do not have legal personality. When you sue a partnership you are suing the partners of the partnership. In Salomon v Salomon: ● Salomon - leather merchant incorporated his business. ○ Became major shareholder of the company as well as a secured creditor of the company. ○ If the company failed he would get paid before other creditors (those who were unsecured). ● A year after the company was created it failed and was liquidated. ● Salomon was a secured creditor. ○ The proceeds from liquidation were sufficient to pay him. ○ But not to the unsecured creditors. ● Those unsecured creditors brought a lawsuit against Salomon. ○ Arguing that Salomon and his company were the same person. ○ Therefore Salomon is personally liable for the debts of the company. ● The House of Lords argued that the company was different from Salomon. ○ It had a separate legal personality. Role of a law in shaping a companies legal personality: 1. Rules of Entity Shielding ● Corporation has its own assets different from the assets of its owners. ● The assets of the corporation are not available for attachment or liquidation by creditors of owners of the corporation. ● Shareholders cannot withdraw their participation and force liquidation of firm. ● Unlike in partnerships in which a partner may leave and force the termination of the partnership. 2. Rules on Authority and Delegated Management ● Determine who has the authority within the firm to buy, sell assets of the firm and to bond the firm through contracts. ● In business corporations such authority is delegated in a board of directors. 3. Rules on Legal Standing ● Rules determining whether, how and who can sue a corporation. ● When and how the corporation can sue other parties. ● Example: in relation to contracts entered by the corporation. Economic rationale of these rules shared across legal systems: ● Allow firms to serve effectively as contracting parties distinct from the persons who own and manage the firm. ● All the contracts are with the firm, not with individuals within the firm. ● Create common rules on which contracting parties rely without the need to enter into several contracts. Origins of corporate personhood in the US

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The 14th Amendment adopted 1868, gave the federal government ultimate power over the states in respect to the rights of newly freed slaves. Sought to overturn state-level legislation that was being created to limit the liberties of freedmen after the Civil War. 14th Amendment: nor shall any state deprive any person of life, liberty or property without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws. Santa Clara County v. Southern Pacific R. Co., 118 U.S. 394 (1886) Supreme Court: corporations are persons subject to 14th amendment protections

Lecture Four

Separate Corporate Personality ‘Person’ and a ‘Legal Person’ ● Layman’s View: A person is an individual being. ● A person in law has a much wider meaning. ○ It could mean an individual (a natural person). ○ Or a group of individual (natural persons). ○ Or a thing which the law ascribes legal rights and duties (artificial legal person). ○ S16 CA 2006. S16 & Separate Personality ● Effect of Incorporation (s16) ○ ‘Body corporate’. ○ ‘All functions of an incorporated company. ○ Implications in practice: Salomon v Salomon Co Ltd (1897) S16 of Companies Act 2006

Salomon v Salomon (1897): The Problem ● A Salomon&Co borrowed money from Mr Broderip and others. ● W...