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of mons。 Other than very large businesses； it is not usual to have either
a qualified lawyer or a legal department in businesses in the UK。 Such
services are usually bought in on either a contractual or ad hoc basis。 Law
is an imprecise field。 As Henry L Mencken； the American journalist and
critic； so succinctly expressed it： ‘a judge is a law student who marks his
own examination papers’。
The plexity of mercial life means that； sooner or later； you will
find yourself taking； or defending yourself against； legal action。 It may be a
contract dispute with a customer or supplier； or perhaps the lease on your
premises turns out to give you far fewer rights than you hoped。 A former
employee might claim you fired them without reason。 Or the Health
and Safety Inspector will call and find some aspect of your machinery or
working practices less than satisfactory。
6
176 The Thirty…Day MBA
Ignorance does not form the basis of a satisfactory defence； so every MBA
needs to know enough law to know when they might need legal advice；
however high their standard of ethics and social responsibility may be。
CORPORATE STRUCTURES
As an MBA it’s highly likely that you will be working for a conventional
pany； private or public （see Chapter 2 for more on public panies）。
There are； however； a number of distinct forms that a business can take； the
choice of which depends on a number of factors： mercial needs； financial
risk and the need for outside capital。
Each of these forms is explained briefly below； together with the procedure
to follow on se。。ing them up。 You can change your ownership status
later as your circumstances change； so while this is an important decision it
is not a final one。
Sole trader
Over 80 per cent of businesses start up as sole traders and indeed around
55 per cent of all businesses employing fewer than 50 people still use this
legal structure。 It has the merit of being relatively formality free and； unless
you intend to register for VAT； there are few rules about the records you
have to keep。 There is no requirement for your accounts to be audited； or
for financial information on your business to be filed at panies House。
As a sole trader there is no legal distinction between you and your business
– your business is one of your assets； just as your house or car is。 It
follows from this that if your business should fail； your creditors have a
right not only to the assets of the business； but also to your personal assets；
subject only to the provisions of the Bankruptcy Acts。 The capital to get the
business going must e from you – or from loans。 There is no access to
equity capital。
Partnerships
Partnerships are effectively collections of sole traders and； as such； share
the legal problems a。。ached to personal liability。 There are very few restrictions
to se。。ing up in business with another person （or persons） in partnership；
and several definite advantages。 By pooling resources you may have
more capital； you will be bringing； hopefully； several sets of skills to the
business； and if you are ill the business can still carry on。
There are two serious drawbacks that you should certainly consider。
First； if your partner makes a business mistake； perhaps by signing a disastrous
contract； without your knowledge or consent； every member of the
Business Law 177
partnership must shoulder the consequences。 Under these circumstances
your personal assets could be taken to pay the creditors even though the
mistake was no fault of your own。
Second； if your partner goes bankrupt in his or her personal capacity；
for whatever reason； his or her share of the partnership can be seized by
creditors。 As a private individual you are not liable for your partner’s private
debts； but having to buy him or her out of the partnership at short notice
could put you and the business in financial jeopardy。 Even death may not
release you from partnership obligations and in some circumstances your
estate can remain liable。 Unless you take ‘public’ leave of your partnership
by notifying your business contacts and legally bringing your partnership
to an end； you could remain liable。
The legal regulations governing this field are set out in the Partnership
Act 1890； which in essence assumes that petent businesspeople should
know what they are doing。 The Act merely provides a framework of agreement
that applies ‘in the absence of agreement to the contrary’。 It follows
from this that many partnerships are entered into without legal formalities
– and sometimes without the parties themselves being aware that they have
entered a partnership！
The main provisions of the Partnership Act state：
。 All partners contribute capital equally。
。 All partners share profits and losses equally。
。 No partner shall have interest paid on his capital。
。 No partner shall be paid a salary。
。 All partners have an equal say in the management of the business。
。 Unless you are a member of certain professions （eg law； accountancy；
etc） you are restricted to a maximum of 20 partners in any partnership。
It is unlikely that all these provisions will suit you； so you would be well
advised to get a ‘partnership agreement’ drawn up in writing by a solicitor
at the outset of your venture。
Limited partnerships
One possibility that can reduce the more painful consequences of entering
a partnership is to form a limited partnership bining the best a。。ributes
of a partnership and a pany。
A limited partnership works like this。 There must be one or more general
partners with the same basic rights and responsibilities （including unlimited
liability） as in any general partnership； and one or more limited partners
who are usually passive investors。 The big difference between a general
partner and a limited partner is that the limited partner isn’t personally
178 The Thirty…Day MBA
liable for debts of the partnership。 The most a limited partner can lose is the
amount that he or she： paid or agreed to pay into the partnership as a capital
contribution； received from the partnership a。。er it became insolvent。
To keep this limited liability； a limited partner may not participate in the
management of the business； with very few exceptions。 A limited partner
who does get actively involved in the management of the business risks
losing immunity from personal liability and having the same legal exposure
as a general partner。
The advantage of a limited partnership as a business structure is that
it provides a way for business owners to raise money （from the limited
partners） without either having to take in new partners who will be active
in the business or having to form a limited pany。 A general partnership
that’s been operating for years can also create a limited partnership to
finance expansion。
Limited pany
Of the 4。5 million businesses trading in the UK； over 1。4 million are limited
panies。 As the name suggests； in this form of business your liability is
limited to the amount you state that you will contribute by way of share
capital； though you may not actually have to put that money in。
A limited pany has a legal identity of its own； separate from the
people who own or run it。 This means that； in the event of failure； creditors’
claims are restricted to the assets of the pany。 The shareholders of the
business are not liable as individuals for the business debts beyond the
paid…up value of their shares。 This applies even if the shareholders are working
directors； unless of course the pany has been trading fraudulently。
Other advantages include the freedom to raise capital by selling shares。
Disadvantages include the cost involved in se。。ing up the pany and
the legal requirement in some cases for the pany’s accounts to be audited
by a chartered or certified accountant。 Usually it is only businesses
with assets approaching ￡3m that have to be audited but if； for example；
you have shareholders who own more than 10 per cent of your firm they
can ask for the accounts to be audited。 The behaviour of panies and
their directors is governed by panies Acts that have e into effect
since 1844； the latest of which came into effect in November 2006。
Public limited pany （PLC）
PLCs are panies that can sell shares to the public at large； either through
a recognized stock market or by advertising in the press or through intermediaries。
They need to fulfil some minimum； not too onerous conditions：
Business Law 179
。 It must state that it is a PLC in its articles of association。
。 It must have an authorized share capital of at least ￡50；000。
。 Before it can trade； ￡50；000 of share capital must be taken up and a
quarter of that must be actually paid up。
。 Each allo。。ed share must be paid up to at least a quarter of its nominal
value。
。 There must be at least two shareholders； two directors and a pany
secretary who meets certain standards in terms of qualifications or
experience。
See also Chapter 2 for more on public capital。
City code on takeovers and mergers
Buying up a PLC is a more plicated process than taking over a private
pany or business。 In the first instance； shareholders in the business
being acquired have to be offered the same deal。 Family； directors and
those with major blocks of shares can’t be offered preferential treatment。
The buying pany must be able to fulfil the cash consideration involved
before making any announcement。 There are conditions under which a
potential bidder must either make a formal offer or walk away from the
target for at least six months。 Once 90 per cent of a target pany’s shares
have been acquired； the remaining shareholders have to accept the deal。
The Take Over Panel （thetakeoverpanel。uk） rules on taking
over another pany quoted on a stock market run to 266 pages！
pany limited by guarantee
This type of incorporation is used for non…profit organizations that require
corporate status as a means of protecting participants。 There are no shareholders
but its members give an undertaking to contribute a nominal
amount towards the winding up of the pany in the event of a shortfall
when it closes down。 It cannot distribute its profits to its members； and is
therefore eligible to apply for charitable status if necessary。 You may find
this type of pany being used by a business as a means of isolating part
of its activities； such as clubs or sports associations that are not part of its
profit…generating business。
Co…operative
A co…operative is an enterprise owned and controlled by the people working
in it。 Once in danger of being extinct； the workers’ co…operative is
enjoying something of a eback； and there are over 4；370 operating in
the UK； employing 195；000 people。 They are growing at the rate of 20 per
cent per annum。
180 The Thirty…Day MBA
Help and advice on business corporate
structure
A Guidance Note entitled ‘Business Ownership’ is available from panies
House （wwwpanieshouse。gov。uk 》 Guidance Booklets）。
Business Link （businesslink。gov。uk 》 Taxes； returns and payroll 》
Choosing and se。。ing up a legal structure 》 Legal structure： the basics） has
a guide to pu。。ing your business on a proper legal footing； explaining the
tax and other implications of different ownership structures。
Cooperatives UK （cooperatives…ukop 》 Services 》 Co…operative
Development） is the central membership organization for co…operative
enterprises throughout the UK。 This link is to the regional network。
Desktop Lawyer （desktoplawyer。uk 》 BUSINESS 》 BUSINESS
START…UP 》 Choosing a business structure 》 The Partnership） has a
summary of the pros and cons of partnerships as well as inexpensive partnership
deeds。
EMPLOYMENT LAW
Trading regulations
Organizations are heavily regulated in almost every sphere of their trading
operations。 Some types of business require a permit before they can even
start trading and all businesses have to ply with certain standards when
it es to advertising； holding information or offering credit。 These are the
regulations that govern the trading activities of most business ventures。
Getting a licence or permit
Some bus