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Legal Structures


The different forms - non-incorporated and incorporated business organisations - determine legal responsibilities and regulation and associated law. They also influence the legal forms and characterise the scope of ownership, management responsibility and control - power and authority i.e. the governance of business and managerial behaviour and practice (as well as along with a lot of other things). They have major implications for society, democracy, owners, managers, employees, customers and stakeholders.

Non-incorporated Forms of Business

Non-incorporated forms of business ownership and organisation include; sole proprietorship and partnerships each of which in their nature have benefits and disadvantages.

Sole Proprietor

Often but not always, this is a single person in business on their own, running a small operation. Sole proprietors are self-employed yet can employ many staff. They may be:

·        trades-people; carpenters, builders, stall holders, management consultants etc

·        independent retailers; Pizza restaurants, butchers, computer shops etc

·        craft or cottage workshops; picture frame makers, engine re-conditioning businesses etc

A sole proprietor is the business . They trade under their own name or under a trade name that describes the business or attracts customers. But their own name must appear on letterheads and in the shop or office if they have a trade name that is not their own.

The "Business" is not a legal entity as such.

To set up a sole proprietorship all that is needed is the capital and the "entrepreneurial spirit, courage and energy" to start transacting business with customers.

There is no legal requirement to keep audited accounts books but the proprietor must still pay income tax on profits received from the business and account for VAT if registered. Records are thus needed to communicate taxable earnings to the Inland Revenue and inputs/outputs to the Customs and Excise.

Advantages and Disadvantages

·        Inexpensive and quick to set up. No legal procedures. Begin trading immediately.

·        Profits and earnings go to the autonomous, independent proprietor who can decide and act quickly. Annual accounts do not have to be submitted to Companies House so saving on bookkeeping/auditing charges i.e. he/she need not publicly disclose the business’s financial affairs except to the tax people.

·        There is a problem of "one-man/woman band". All tasks such as selling, accounting, tax records etc are frequently undertaken by the proprietor. If he/she is weak in any area of knowledge, expertise and acumen - the business will suffer. He/she may be a good painter and decorator but is poor at administering paperwork or marketing goods and services well.

·        a sole proprietor ‘s work is usually intensive. When he/she is not working, no money comes in. Holidays and time-off are difficult and economies of scale e.g. in buying, are often elusive. Unit costs are often higher e.g. purchase price per ream of photocopying paper, quantity of packaging materials etc.

·        The sole trader is personally liable for the debts of the business. If their business fails their personal belongings can be sold to meet the debts of the business. The proprietor enjoys the profits but accepts personal responsibility for losses for which they have unlimited liability. He/she is the business and not an employee of it. If a customer sues for damages arising from work done, then this must be settled from the proprietor’s own personal resources. The risk of losing a home and personal wealth/savings is clear albeit that insurance polices can be taken out against certain losses.

·        losses in the first few years of business can be offset against income from the three years before the business was begun (tax refund).

·        the sole proprietor has no access to equity capital (from selling shares in the business).

Sole proprietorship is a successful, and popular form of business. Probably about 1 million such businesses exist and new sole proprietorships are created (and die) every day..


a ..... "relationship which subsists between persons carrying on a business with a view to profit"

Partnership Act 1890

There have been several interpretations of partnerships. A partnership is not incorporated and has unlimited liability, but can be legally acknowledged organisation where two or more and often not more than fifteen join together to carry out a business. The partners' names must be on all business stationery and displayed on the premises.

Partnerships are common amongst professionals such as accountants, solicitors/barristers. Trades-person partnerships (e.g. Mary and Jim’s Shirt Ironing Service) are also evident.

Professional partnerships give clients some assurance in that, say, their solicitor is one of a partnership who share accountability. Losses must be borne by all partners, even if caused by one only.

Partnerships enable:

·        More than one person invests in the business and there is still no need to submit accounts. Yet partners divide profits between themselves

·        Partnerships bring together skills and abilities (specialisation) to benefit the business. The burden of work can be shared and so relieving pressure.

·        Liability losses are shared between partners, reducing personal bankruptcy risks.

Disadvantages include:

·        Unlimited liability (more complex than for a sole proprietor).

·        Set up costs. Legal agreements are needed to e.g. constrain partner(s) who may want to take flight if the business is in difficulty. Profit distribution between partners must be defined.

·        The sole proprietor is no longer independent. Decisions require consultation between partners if the partnership is to work effectively. One partner cannot act unilaterally e.g. over investments, holidays, contracts to accept etc. Decision-making processes can be slowed with the potential for argument.

·        Partners, as for sole proprietors, are the business (not employees). If one dies or cannot continue with the business, then the partnership is dissolved (partnership agreements need to provide for this) and then reformed.

Partners are liable for income tax but there is no requirement to keep audited accounts (potentially less administration) and no need to disclose publicly the business’s turnover and financial performance except to the tax people.

Partnerships can grow into big U.K-wide and international organisations as have some of the accounting firms (partnerships). They may have many employees.


Cooperatives and Not-for-Profit Organisations


Co-operatives, central and local government departments and agencies and charities, churches, social care establishments, schools, clubs. Even for some of these the profit motive - or surplus of income over expenses is a significant organisational objective.















Incorporated Business Organisations

You should able to explain limited liability, its importance and how it works, how ownership (shareholders) occurs and the obligations of limited liability; how such companies are managed and organised functionally. You should also appreciate the nature and structure of a holding company and how holding companies make money.


Incorporated Forms of Business

In the 19th century legislation was introduced enabling businesses to be recognised as legal entities - legal personalities. Large amounts of capital was needed for emergent industries such as engineering and chemicals and the personal wealth of investors who did not want to be active in managing the business was at risk with unlimited liability. So a need for new forms of business other than sole proprietors and partnerships was evident.

Those who work in companies are employees and continuity of succession is available in more flexible ways than provided by sole proprietors and partnerships. If an employee leaves a business’s employment, the company as a legal entity can re-appoint and go on without having to dissolve as a result.

Setting up the Company

Section 1 of the Companies Act 1985 allows two or more people to form an incorporated company for any lawful purpose. The business has a legal identify separate from the shareholders and between shareholders.

The company's accounts must be audited annually by a chartered or certified accountant and records of the company must be filed at Companies House (Cardiff).

You can start the company with only two shareholders, one a director and the other the company secretary who keeps the records required by law. Directors salaries are taxed under PAYE as employees.

You can either

·        buy a ready made company from a company registration agent (say £250). If you do not like the name offered - this can be changed for approx. £50.

·        or set up a tailor-made company with the help of a solicitor/adviser (costs more, takes longer)

NB: companies pay corporation tax on profits. It has a registered name which is legally protected and the company has a regulated structure.


Benefits/constraints are;

·        investors offer capital to the company becoming one of the owners. Ownership is shared with other investors. The amount owned is in units of "a share".

·        in exchange for injection of shareholder capital, the company agrees to distribute a portion of the profits between shareholders. How much this is (the dividend) is decided by company management. Dividend payments (and growth in the value of shares) represent shareholders’ return on investment. These can be compared to other investments such as government bonds or interest from bank accounts.

·        Shareholders liability is limited to amount they have invested (the value of their shares and no more). If company fails, business assets e.g. land, equipment, stocks, bad debts etc are liquidated and losses are paid. Creditors can only claim back as much money as the business owns (personal possessions cannot be claimed).  This is known a limited liability.

·        employees contract to do work for a reward package. They may suffer job loss, but employees cannot be pursued for company debts.

·        in reality liability may not be limited. If a company is new, small or has problems, financial institutions (the bank) may be unwilling to lend money without personal guarantees.

Ownership of companies

When a non-incorporated business develops into a limited company the entrepreneurs who injected capital to fund the business and can retain control (via a majority shareholding). Shares can be transferred when others pay the "owners" for a number of shares at a given value. Thus the original owners can raise money for the company or to liquidate some of the funds they injected into the company. The shares reflect the value of the firm which may be greater than the actual sums thus invested.

A company’s value

Harry the Horse’s chain of betting shops is valued at, say £1 million. This value is divided up into shares typically £1 or 25p. So at 25p, 4 million shares are created and taken up by private investors. With a handful of shares (large or small hand), the shareholder part owns the business and can vote on policies at annual general meetings. Voting rights are pro-rata to size of share-holding, therefore large shareholdings offer more voting power.

Shares of some limited companies may be held by one person and have a total nominal share value of a few hundred pounds only. Share values of £ billions are common to large public limited companies and shares are held by tens of thousands (but maybe the majority by a few, large, other companies - the institutional investors).

Distribution of share ownership

The distribution of share ownership influences how the business is controlled. If a shareholder has enough shares (51%), then he/she effectively controls the company. He/she can veto the motions of other shareholders at AGMs and so determine company policies and management.

There is more than one type of company

Private company (ltd)

·        limited by shares the company’s capital is limited to the amount of share capital its members have agreed to pay

·        shares are not available to the general public, but are held usually by those involved in the business or by family and friends

Public limited company (Plc)

·        must have a share capital of at least £50,000 (authorised minimum) at the time of incorporation

·        Shares can be bought by the general public via a flotation and then via a share exchange (e.g., stock exchange)

Legal Conditions

All companies, both ltd and plc are bound by legal conditions. Failure to comply puts the company in breach of the law. All companies must submit the following all of which can be inspected by the public:


Memorandum of association

·        This is filed at Companies House when the company is founded. It gives

·        the company name and purposes, the address of the company’s office

·        a declaration of association (members intention to form a company and take shares in it)

·        a statement that the members are claiming limited liability at law, the value of the share capital

·        how the shares are distributed

·        type each member holds (e.g. voting/non-voting rights).

Articles of association

These are bye-laws regulating internal arrangements and rules of the company:

·        identity of shareholders

·        regulations for issue and transfer of shares

·        rules for shareholder meetings

·        appointed directors, their powers and responsibilities

·        the company secretary

·        the auditors of the company’s annual accounts.


An annual general meeting (AGM) must be held each year and not more than 15 months after the holding of the preceding one.

Every year the company must report the following to the Registrar of Companies.

details of its office, share capital, members and their shareholding, security, directors and total debts secured by a charge on assets.

In addition to the accounts the company must keep

·        a minute book

·        a register of directors and company secretaries

·        a book of share certificates

·        a register of debenture holders

Annual audited accounts

The company must have a proper set of books and records. The following must be submitted to Companies House

1.      the profit and loss statement

2.      the balance sheet

3.      a directors report

(1) and (2) must be audited by an accredited accounting organisation. At Companies House the statements are open to public inspection. Certain exemptions from audit are possible.



Company Directors

Anyone can become a director provided they are not an undischarged bankrupt and have not been disqualified by a court from holding a directorship. A company when incorporated must have at least one director and a company secretary. The same person cannot be the sole director and company secretary.

Directors are typically chosen by shareholders at the AGM and are responsible to them for the operation control and maintenance of the business: company assets and resources. They must, to the best of their ability, provide the shareholders with a suitable return on investment.

The articles of association set out the scope and duties of directors. Typically medium to large companies have a group e.g. four to eight, each Director having an area of functional responsibility for operations. One is typically appointed as the Managing Director or Chief Executive who oversees and co-ordinates all operations. The Chairman chairs Board meetings and ensures that full reporting to shareholders is undertaken.

Directors are company agents and can make contracts on the company’s behalf.  Legal responsibilities include:

·        submitting annual accounts that satisfy accounting standards on time

·        approving changes in company assets and company investments

·        approving shareholder dividends

·        legal compliance in every regard


Directors may be:

Executive directors who work full time for the company have functional management responsibility for an area of the company’s operations e.g. Managing Director, Marketing, Operations, Finance, Human Resources.

Non-executive directors are usually engaged in a part-time or advisory capacity. Often specialists, they may be former executive directors or well regarded people who bring expertise or external influence to the company/Board e.g. Nigel Lawson (a national bank).

Company Secretary. Companies must have at least one Director and a company secretary (usually appointed by the Board) who may or may not be a Director. The company secretary usually reports to the MD. This is a professional role as the responsibilities involve important administrative functions often of a legal nature. The company secretary is responsible for submitting the audited accounts to the Registrar of Companies and has the legal authority as a company agent to make contracts on the company’s behalf.

Management and Employees. Executive directors take responsibility for the running of designated functional areas of a company. In sizeable companies, the process of delegation enables directors to appoint others. Delegation means devolving responsibilities to subordinates. Sub-ordinate staff are accountable for carrying out delegated roles and duties but the primary responsibility rests with the Directors. The formal processes of job appointments and definition enable the Directors to authorise staff reporting to them to take action on their behalf.


Holding companies

Ownership of 51% of shares gives majority voting rights at an AGM and on the payment of dividends the largest share of profits. 51% gives as much control as a 100% holding.

Individuals or other organisations (e.g. pension funds, insurance companies, banks) can own shares. Unit and Investment Trust companies for example exist by owning shares of other companies.

Some companies (holding companies) may seek to own sufficient shares (51%) to control other companies. Holding companies themselves do not make goods or provide services, the companies they own with 51% will do this. The owned companies may be:

·        Subsidiary companies
The holding company owns more than 50% thus giving control.

·        Associated companies
The parent company owns 20-50%. This is a large shareholding should provide considerable influence (but not control) over the associated company. How much influence will depend on ownership of the other shares. Owning 49% and wanting control when a rival company has a 51% stake may be a less than appropriate strategy. Related companies as similar to Associated companies. They typically own fewer than 20% of shares in another company. This holding may be held because good dividends may be expected or the two companies are co-operating with each other in some area of business. Small shareholdings may be held by banks or Unit or Investment Trust companies as ingredients in their portfolio of ownership.


PLCs are often holding companies. The parent or holding company’s profits arise from the profits from other companies it owns (its corporate portfolio). Parent companies may have a corporate head office and will employ corporate executives/managers, accountants, legal staff,and other administrators. Unilever, British Petroleum Plc, United Biscuits, Kingfisher are all holding companies which control many other companies whose products and services are household names (Persil, Selfridges, , Tetley Tea)

Holding companies make profits and returns for their shareholders by buying, running and selling other companies. They do this via:

·        the profits of companies they own

·        acquiring other companies and selling at a profit; Such acquisition may include buying another holding company, splitting up the held companies and selling some or all of these to redeem all or part of the initial purchase cost. Some of the acquisitions may be retained in the holding company's (purchasers) portfolio.

Benefits of a Holding company

·        the parent has a portfolio of market interests. A company that operates in only one market, such as hotels is subject to the economic and competitive health of that industry. A holding company spreads risk and has more opportunities. With a down-turn one of its market sectors, it can switch its interests and concentrate more on other sectors or divesting and entering other markets.

·        Each subsidiary is separate a legal entity, they are not all absorbed in one company and any given subsidiary can be readily sold off (portfolio divestment). A holding company is a convenient structure for this.

·        the rules of majority shareholding mean that a holding company controls by owning only 51% of shares in a subsidiary. This is a cheaper option than buying the company outright.

·        it is difficult to control very large organisations. In a holding company, the Directors of member companies, can be given degrees of autonomy to manage their companies effectively. A holding company aids the devolving of responsibility, authority and action.

·        with subsidiary companies maintained as distinct entities in holding companies further businesses can be acquired by merger or take-over and added to the group portfolio.





Private- and Public-sector Firm

The Private Sector

The economy can be divided into the private and public sectors. The private sector is made up of members of the general public and firms owned by the general public. These firms include sole traders, partnerships, limited companies (owned by private shareholders) and Public Limited Companies (Plcs) (also owned by private shareholders).

The Public Sector

The Public Sector is made up of the central government in London, various local councils, and firms owned by the government (nationalised industries) such as the Post Office.

Private-sector Firms

Types of Private-sector Firm

Table 5.1 summarises the main types of firm owned by members of the general public.

Table 5.1 Private-sector firms







Sole trader

Corner shop


With sole trader

Requires little capital. Incentive to work hard. Regular customers known. Owner Can make quick business decisions.

Unlimited liability. Difficult to find capital. Long hours worked. Holidays or illness cause problems.


Firm of doctors

2 to 20

Shared equally between partners

Each partner contributes capital. Each partner specialises. Regular customers known.

Unlimited liability. One partner's mistake affects all partners. Partners may disagree.

Private limited company (Ltd)

Small family business

1 or more

Directors elected by shareholders

Limited liability. Shareholders contribute capital. Protected from takeovers.

Still limited capital for expansion. Limited economies of scale.

Public limited company (plc)


2 or more

Directors elected by shareholders

Limited liability. Large amount of capital can be raised. Economies of scale.

Unwanted takeover possible. Can be remote from customers. Potential diseconomies of scale.


Oxford and Swindon

2 or more


Profits returned to customers. Democratic.

Committee may lack business experience.


The owners are liable or responsible for the debts of a company.

·        Unlimited liability means the owner may have to sell some or all of his personal possessions to help pay off the company's debts.

·        Limited liability means that the owner loses only the money he has put into the company and no more. He does not have to sell personal belongings.

Establishing a Limited Company

Limited companies have their own legal identity. They can sue people and other companies and be sued themselves. Anyone wanting to establish a limited company must issue:

·        A memorandum of association stating the name, aims and address of the company and the amount of capital to be raised.

·        Articles of association stating the internal organisation of the company.

The Registrar of Companies then issues a certificate of incorporation which permits the company to trade.

The limited company then prepares a prospectus describing the history and prospects of the firm and inviting individuals to buy their shares. Only a public limited company can advertise its prospectus.

Each share allows one vote and pays one dividend (profit payment). Each year the shareholders elect a chairman and a board of directors who control the everyday running of the firm.

Public-sector Firms

Types of Public-sector Firm

Each nationalised industry (or public corporation) has its own Act of Parliament and its own government minister. Firms owned by the government aim to operate in the public interest and do not necessarily try to make maximum profits.

Public Limited Companies and Public Corporations

These are compared in Table 5.2

Table 5.2 Differences between public limited companies and public corporations


Public limited company

Public corporation


General Public



Chairman elected by shareholders

Chairman selected by the government



Very large


Raised by issuing shares

Raised by issuing stocks


Go to the shareholders

Go to the government


Make a large profit

Serve the public interest


The Thatcher administration followed a course of selling state-owned firms such as British Telecom back to the private sector. This is called privatisation.

Arguments for Privatisation

·        Firms operate more efficiently in the private sector because they are trying to maximise profits.

·        Money can be raised to increase government services or to pay for tax cuts.

·        Ordinary people become shareholders and take a greater interest in economic matters ('peoples's capitalism').

Arguments Against Privatisation

·        Public monopolies simply become private monopolies.

·        Socially necessary but unprofitable services may not now be provided.

·        Nationalised industries are already owned indirectly by the general public.


A multinational corporation is a very large firm with a head office in one country and several branches operating overseas.

Advantages of Multinationals

·        Investment by multinationals creates jobs for the host country.

·        The multinational will introduce new production techniques and managerial skills.

·        New or better goods may now become available in the host country.

Disadvantages of Multinationals

·        Profits are returned to the overseas head office.

·        The multinational may operate against the interest of the host country.

·        The multinational may force its overseas branches to buy supplies from the head office.




E-mail Steve Margetts