Business Law

Common questions about Business Law.

Questions:

> What are the different types of entity for running/setting up a business?

There a many ways in which a business can be set-up or run, for example:

SOLE TRADER

A sole trader is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. All profits and all losses accrue to the owner (subject to taxation specific to the business). All assets of the business are owned by the proprietor and all debts of the business are the individuals. This means that the owner has no lesser liability than if they were acting as individual instead of a business.

PARTNERSHIP

A Partnership relationship subsists between two or more persons carrying on business in common with a view to profit. Partnerships are governed in the UK by the Partnership Act 1890. A partnership is not a separate legal entity. Partners generally have unlimited liability.

A partnership under the Partnership Act 1890 differs from a limited liability partnership established under the Limited Liability Partnerships Act 2000.

PRIVATE LIMITED COMPANY (often known as a "Limited Company")

A Private Limited Company is a company that is owned by shareholders, and run by directors.

A Private Limited Company can be limited by shares (members' liability is limited to the amount unpaid on shares they hold) or limited by guarantee (members' liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up).

It is not a public company so it is not allowed to offer its shares to the general public.

LIMITED LIABILITY PARTNERSHIP (LLP)

Introduced in April 2001 by the Limited Liability Partnerships Act 2000, an LLP is a hybrid form of business entity: it is neither a partnership nor a company. Like a company, an LLP is a corporate body and therefore a separate legal entity and an LLP member's liability is limited.

However, like a partnership the relationship between the LLP members is governed by private agreement. An LLP does not have shareholders or director and is taxed like a partnership.

PUBLIC LIMITED COMPANY (PLC)

A company with a separate legal existence from its shareholders who enjoy limited liability. A public limited company's shares are listed and can be bought and sold on the stock market by members of the public. A PLC must have an allotted share capital with a nominal value of at least £50,000.

For further information on setting up a business, speak to our Business Law Team.

 

> I am setting up a company as a joint venture with other shareholders. What considerations should be made when deciding whether we need a shareholders agreement to govern our relationship as shareholders in the company?

We would normally recommend that you look at creating a shareholders agreement BEFORE setting up a company with other parties, in order to protect each other and set out the "ground rules" before going into business together.

The attached fact sheet is useful and sets out various concepts that you may wish to include in your shareholders agreement

For more information about joint ventures or shareholders agreements speak to our Business Law Team.

> Why should I have terms and conditions for my business?

Many reasons can apply, dependent on the type of business that you carry out and the risks involved. As general commentary:


1. Certainty and avoiding arguments at a later date.

One of the main reasons for commercial disputes is a failure to ensure that one party is agreeing to the other party providing the goods or services. Terms and Conditions allow you to ensure that a party cannot get out of its obligations as they have agreed to you providing the goods and services for a fee or price and on specific written terms.

2. Support the quality of services/goods and create the right impression

Your Terms ought to compliment the Goods or Services that you provide. If you provide a shoddy service or your products are defective or damaged then do not hide behind your terms. They should be used to "back up" the quality of your products and the level of service that you provide.

3. Set out the principles of contract law.

English law requires four elements for the formation of a contract, these are:

(a)        offer;
(b)        a corresponding acceptance;
(c)        consideration; and
(d)        an intention to create legal relations.

Consider to whom you wishes to make an offer and ensure that only these people are allowed to accept them.

A contract is only created when an offer is accepted (if the other elements of consideration and intent to create legal relations are present). An offer can be accepted by a communication to the offeror or by conduct.

Your terms and conditions can set out the mechanism for an offer to be accepted.

4. Cancellation and Late Payment

In some circumstances, you may enter into a contract that is for a fixed length of time. Consider whether you may need to "get out" of this contract early, for instance if the other party is late in making payments to you, or materially breaches the other terms contained within the agreement.

Consider whether you want to charge interest on any late payments if the end user does not pay within the specified time.

5. Restrict your Liability

In certain circumstances, you can use terms and conditions to restrict your liability to the end user if something goes wrong. There are strict rules at law, that state the extent that liability can be limited, and that such clauses should be brought to the attention of the end user when entering into the contract.

You cannot limit liability for fraud, death or personal injury.


6. Protect your confidential information and intellectual property

In some circumstances, when carrying out business, access may be granted to your confidential information or "trade secrets", consider whether this information needs to be protected by your terms and conditions.

7. Jurisdiction

Do you carry out business overseas? Is the end user based overseas? Disputes could arise as to which country the agreement was actually made, and as to which country's law actually applies.

It is important to set out the governing law that relates to your contract and the country in which any dispute shall be brought. This avoids argument at a later date.

For more information on commercial contracts and terms and conditions contact our Business Law Team.

> What does being a director of a limited company involve?

Being a director of a company is a huge responsibility.

Not only does being a director grant a person the right to be involved in the day to day running of the business, but it also confers many responsibilities and duties, not only to the shareholders of the company, but also its' creditors, which if breached can potentially (in some circumstances) incur personal liability on the directors.

Company directors are appointed by and are answerable to the shareholders (owners) of the company.  However, as a result of the Companies Act 2006, company directors responsibilities are now specified in law (these new statutory duties of company directors are set out in Part 10 of the Companies Act 2006).

As well as these legal responsibilities, being a company director brings with it several other important directors responsibilities, such as the day to day running of the business, duties to employees (including health and safety), making purchases and entering into credit arrangements on behalf of the company, and ensuring certain documents are submitted on time to the Registrar at Companies House.

The Companies Act states that the role of directors is to act in a way which they consider most likely to promote the success of the company for the benefit of its shareholders as a whole and that, in doing so, they will need to have regard where appropriate to long term factors, the interests of other stakeholders and the community, and the company's reputation. There is particular focus on the area of conflicts of interest.

There are now several general duties specified at law as forming part of a company director's role.  Company directors must:

1. Act within their powers and in accordance with the company's constitution

2. Promote the success of the company for the benefit of shareholders, paying due regard to:
a. the likely consequence of any decision in the long term
b. the interests of the company's employees
c. the need to foster the company's business relationships with suppliers, customers and others
d. the impact of the company's operations on the community and the environment
e. the desirability of the company maintaining a reputation for high standards of business conduct

3. Exercise independent judgment


4. Exercise the reasonable care, skill and diligence that would be expected by a person in that position in a company of that size (eg an experienced non-executive director would have higher standards expected of them than a more inexperienced executive, but there is a minimum expectation of any director).

5. Avoid conflicts of interest, including conflicting multiple directorships

6. Not accept benefits from third parties.  Note that this does not necessarily include a director receiving a benefit from a person or company which provides services to the company. A more difficult area is the giving or receipt of corporate hospitality so it's often advisable to put a policy in place regarding the limits on what can be received.

7. Declare interests in proposed transactions or arrangements.  Note that a director may not necessarily be party to the transaction or arrangement to be 'interested' in it.

Furthermore, in certain instances a director may be guilty of an offence known as "wrongful trading", which could potentially incur personal liabilities on a director.

Wrongful trading occurs when the directors of a company have continued to trade a company past the point when they:

(a) "knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation"; and
(b) they did not take "every step with a view to minimising the potential loss to the company's creditors".

If you are a Director, or have been asked to become a Director, please do not hesitate to call our Business Law Team for further advice.

> Company sales and purchases: Shares or Goodwill & Assets?

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The attached fact sheet sets out some of the initial considerations to be made when buying or selling a company.

If you are thinking of buying or selling a company, please contact our Business Law Team for further guidance.

> What are the main changes for a company arising from the Companies Act 2006?

Some of the key effects resulting from the Companies Act 2006 include:

All companies:

• A clear statement of directors' general duties clarifies the existing case law based rules
• Companies are able to make greater use of electronic communications for communications with shareholders.
• Directors automatically have the option of filing a service address on the public record (rather than their private home address).
• Directors must be at least 16 years old, and all companies must have one natural person as a director - i.e. they cannot have all corporate directors.
• There are improved rules for company names.
• Companies are no longer required to specify their objects on incorporation.
• There is no need to have a company memorandum - the articles form the basis of the company's constitution.

Private companies:

• There are now separate and simpler model Articles of Association for private companies.
• As part of the "think small first" agenda, there is a separate, comprehensive "code" of accounting and reporting requirements for small companies.
• Private companies are not required to have a company secretary.
• Private companies do not need to hold an annual general meeting unless they positively opt to do so.
• It is easier for companies to take decisions by written resolutions.
• There are simpler rules on share capital, removing provisions that are largely irrelevant to the vast majority of private companies and their creditors.

Key benefits for Shareholders:

There are greater rights for nominee shareholders. These will include the right to receive information electronically or in hard copy if they so wish.

There is more timely accountability to shareholders by requiring public companies to hold their AGM within 6 months of the financial year-end.

A good guide to the Companies House 2006 can be found on the Department for Business, Innovation and Skill website: http://berr.gov.uk/policies/business-law/company-and-partnership-law/company-law

For more information about the Companies Act 2006 and legal compliance please contact our Business Law Team for advice.

Contact us

O'Neill Patient Solicitors LLP
Chester House, 2 Chester Road, Hazel Grove,  Stockport, Cheshire, SK7 5NT

Telephone:

0161 694 3000 / 0161 483 8555

E-mail:

info@oneillpatient.co.uk

Fax:

0844 576 2140 (we do not accept service by fax or email)