Company Formation CLASSIFICATION OF LEGAL ENTITIES When creating a company, you are essentially setting up an entirely new legal ‘person’ which can sue, be sued, enter in to contracts etc. This is the basic principle. Companies can Be divided in to two Basic groups – directors and shareholders. However, often one person can Be Both a shareholder and a director. This is, of course, an oversimplification, But is the Basic principle. Corporate Governance – A ‘soft law’ approach to preventing issues Before they occur, setting up structures and processes to stop major frauds and scandals happening Before they do. Corporate Failure – How companies get in to trouBle and the mechanisms that are in place to take effect after a company has run in to trouBle. Mechanisms can Be aimed to ‘rescue’ companies rather than to write them off. This can help protect those that work for the company or have interest in the company. There are different types of legal entities as follows: 1) Sole Proprietor 2) Partnership 3) European Economic Interest Group 4) Unincorporated Associations 5) Trusts 6) Corporations, which can be incorporated as: i) A Limited LiaBility Partnerships ii) A Societas Europeae (SE) iii) A Company iv) A Community Interest Company v) Other, including without statute Company Formation SOLE PROPRIETORS (SPs) One person going into business on his own account – the simplest form of Business structure. This is simply an individual carrying out on some form of Business activity on his own account i.e. being self-employed. Whilst sole proprietorships will be operated for that individual’s interests, they can also take on employees although the vast majority do not do so. The key element is that a sole proprietorship is not incorporated, not do they carry out partnerships with anyone else. Unlike incorporated structures, there is no separation between the SP and his business, and SPs do not have corporate personality. Accordingly, SPs own all of the assets of their business and is entitled to all the profits that the business generates but is also liable in full for any debts the business incurs. Formation of SPs Commencing Business as a SP is very straightforward and involves little formality. Prospective SPs must register themselves with HMRC as self-employed. SPs are generally not suBject to the CA 2006, so do not need to file accounts at Companies House and are suBject to much less regulation than companies. However, Being self- employed means SPs must complete their own tax returns, so clear and accurate records should be kept of transactions entered into. Finance of SPs In terms of finance, SPs are at a disadvantage when compared to other Business structures. Partnerships can raise finances By admitting new partners. Companies, especially puBlic companies, can raise finance by selling shares. Neither of these options are available to SPs. A SP will either need to invest his own money (and risk losing it if the Business fails) or oBtain a loan. Banks are, however, generally cautious as SPs are often small affairs. Liability of SPs Unlimited and personal liability – you are accountable for all debts of the business as there is little to no difference Between the company and you i.e. your personal assets and your business assets are in danger. If a SPs personal asset cannot cover the debt owed, he will likely be declared bankrupt. Company Formation PARTNERSHIPS – Partnerships Act 1890 Partnerships can Be large and are not necessarily just two people But there must Be at least two. Where there are lots of partners, the Business will often Be forced in to Becoming a formal company. The only historical exception to this is professions such as lawyers and accountants were larger firms are allowed to operate under partnerships. Section 1(1) Partnership Act 1890 - Definition of “Partnership” "The relation which suBsists Between persons carrying on a Business in common with a view to profit." Types of Partnership 1) The ordinary partnership Usually referred to as simply ‘partnership’. 2) Limited partnership Formed under the Partnership Act 1907 – although are extremely rare. 3) Limited liaBility partnership An incorporated Business structure with limited liaBility. Discussed later. The Relationship between Partners and other Partners The PA 1890 estaBlished detailed rules regarding the relationship Between partners. Many partnerships will have in place a written partnership agreement that sets out the rights and obligation of the partners. Where a partnership agreement does not exist, s24 -25 PA 1980 set out a number of default terms that will apply. These terms also apply if a written partnership agreement does exist, unless the implied terms under these sections are inconsistent with or excluded By the written agreement. Company Formation Examples of implied terms include: • All partners are entitled to share equally in profits of the firm and must contriBute equally to firm losses • Every partner must take part in firm management • No new partners can Be admitted without consent of present partners • The agreement Between partners can only Be altered By express agreement of all partners • The majority of partners cannot expel a partner unless as express power to do so have been agreed upon by all of the partners The Relationship between Partners and Third Parties Sections 5-18 PA 1890 regulate the relationship between the partners and third parties. This includes the extent to which the partners can contractually Bind the firm and the other partners to a third party, and the extent to which the firm and other partners can Be liaBle for the acts and omissions of a single partner that causes a third party to sustain loss. Agency Regarding a partner’s aBility to Bind his partnership and co-partners to a third party, the key provision is Section 5 PA 1890. Section 5 Partnership Act 1890 Provides that teach partner is an agent of the firm and of his co-partners. Accordingly, providing a partner acts within his authority to act, he is able to contractually Bind his firm and his co-partners to a third party. In certain cases, a partner may even Be aBle to contractually Bind his firm to a third party where he exceeds his authority, or where he has no authority. As each partner has the power to contractually bind his co-partners, it follows that every partner is jointly liaBle for the deBts and oBligations of the firm incurred whilst he is a partner. Liability LiaBility in an ordinary partnership is unlimited and personal. Furthermore, a partner may Be held liaBle in tort or found criminally guilty for the acts of other partners. Under Section 10 PA 1890, each partner is vicariously liaBle for the wrongful acts or omissions of another Company Formation partner, providing that the partner was acting within his authority, or that the act or omission was done whilst in the ordinary course of the firm’s Business. EUROPEAN ECONOMIC INTEREST GROUPING (EEIG) Arises as a part of our membership to the European Union. Designed to enable existing Business undertakings in different countries to form Body to provide common services ancillary to members’ primary activities. • European Commission, Directorate-General Justice and Consumers “Notice to Stakeholders Withdrawal of the United Kingdom and EU Rules on Company Law” (Brussels, 21.11.17) • European Economic Interest Grouping Regulation 2137/ 85 [1985] O.J. L199/ 1 A. Nature Article 3(1) European Economic Interest Grouping Regulation 1985 Article 3(2) European Economic Interest Grouping Regulation 1985 Article 23 European Economic Interest Grouping Regulation 1985 Article 24 European Economic Interest Grouping Regulation 1985 B. Formation Article 1(1) European Economic Interest Grouping Regulation 1985 Article 3(2) European Economic Interest Grouping Regulation 1985 Article 3(3) European Economic Interest Grouping Regulation 1985 Article 4 European Economic Interest Grouping Regulation 1985 Article 5 European Economic Interest Grouping Regulation 1985 Article 6 European Economic Interest Grouping Regulation 1985 Advantages Encourages collaboration between existing organizations. Essentially a legal structure to enable businesses across Europe to collaborate with each other. Enables business in different countries to form a Body to provide common services ancillary to members’ activities. Disadvantages There are restrictions on how these operate. The purpose is to facilitate and develop members’ activities – it does not look to make profit for itself and only looks to serve its members. It cannot manage the members. It cannot hold shares in its members. Cannot employ more than 500 people. Main restrictions: Members of an EIG are jointly and severally liaBle for the deBts (just like with partnerships). Company Formation THE UNINCORPORATED ASSOCIATION Often referred to as ‘cluBs. These differ from partnerships – partnerships exist to make profit (as per its definition), ‘cluBs’ do NOT intend to make profit and, therefore, are not partnerships. Conservative and Unionist Central Office v. Burnell [1982] 1 WLR 522 at 525 per Lawton LJ (CA): "Two or more persons Bound together for one or more common purposes, By mutual undertakings, each having mutual duties and oBligations, in an organisation which has rules which identify in whom control of it and its funds rests and upon what terms and which can Be joined or left at will." TRUSTS A way of carrying out an economic activity. In a Business context, this is usually aBout holding property for the Benefit of someone else. This is NOT trading with a common