SOLE TRADER, PARTNERSHIP AND COMPANY

Sole traders run their business alone, making all the decisions and taking all the risks by themselves.
Somewhat like the amoeba in the world of business organization.

Advantages of being a sole trader include not having to deal with time-consuming legal paperwork or
fees, and not needing professional guidance to get started, further decreasing costs of setting it up. Also,
the simplicity of being a sole trader means that you do not need complex organizational structures, for
example, an independent freelance graphic designer can manage their projects, clients, and finances all
by themselves without the need for multiple layers of management or bureaucracy. Overall, it offers the
freedom and ease of starting and running a business without the hassle of legal formalities or
complicated structures. It is a straightforward approach that suits many small-scale entrepreneurs.

However, being a sole trader has its drawbacks. It is not the best choice if you need a lot of money to
start or grow your business. Most sole traders rely on their personal savings or loans from banks to fund
their ventures. Secondly, there is unlimited liability, which means they will be personally responsible for
everything related to the business. Unlike a company, where the business is a separate legal entity, as a
sole trader, the individual and their business are essentially one and the same. Thus, if the business runs
into debt or goes bankrupt, creditors can come after their personal assets like their car or house to cover
what is owed to them. Thus there is a lot more at stake, and it is riskier if things do not go well.

Partnerships offer great flexibility in terms of legal structure, often being quite straightforward.
According to Section 1 of the Partnership Act 1890, a partnership is defined as the arrangement
between individuals who work together in a business to make a profit. This is quite broad, allowing
partnerships to be formed through various means; it could be agreed upon verbally, implied through
actions, or established through a formal written agreement. Moreover, the partners directly own the
firm's assets, which contrasts sharply with a company, where shareholders do not own the company's
assets outright. Also, unless explicitly stated otherwise, a partnership is subject to the regulations
outlined in the Partnership Act 1890.

Advantages of partnerships include the simplicity of formation, as there is no need for extensive legal
paperwork beyond having at least two partners, which makes it accessible for small businesses and
entrepreneurs. Moreover, partnerships enable individuals to combine their resources, making it easier
to invest in and grow the business. Since 2002, there has been no limit on the maximum number of
partners, allowing for greater flexibility in scaling up. Also, partnerships can customizable terms through
a Partnership Agreement, offering a flexible organizational structure tailored to their specific needs,
which can deviate from the default regulations outlined in the Partnership Act 1890.

However, the broad definition of partnership outlined in the Partnership Act 1890 can catch individuals
off guard. For instance, if three individuals start a business together without formally establishing a
company or partnership, they could still be considered partners under the law. Secondly, partnerships
automatically dissolve upon the death of a partner, which may not align with the partners' original
intentions if they were unaware of this aspect when forming the partnership. This can impose
unexpected limitations. Also, partners share joint and several liability for debts of the partnership, which
implies that each partner can be individually sued for the entire debt owed by the partnership,
regardless of their individual contribution or involvement in incurring the debt.
If Partnerships v Sole tradership:

When considering whether to operate as a partnership or a sole tradership, it is crucial to weigh the
impact of various company law provisions on the attractiveness of each option for smaller businesses.
Partnerships often involve multiple owners who share decision-making responsibilities, leading to more
formalized decision-making processes compared to the independent decision-making of sole
traderships. While both structures require financial record-keeping, partnerships may face more
complex accounting requirements due to their multiple owners. Moreover, partnerships must adhere to
company law provisions regarding directors and their duties, which can affect partnership dynamics and
governance. While sole traderships do not have directors. Partnerships may appoint designated partners
to handle administrative tasks, reflecting a more structured approach to management. Additionally,
while partnerships operate under partnership agreements outlining roles, responsibilities, and profit-
sharing arrangements, sole traderships offer simpler structures with the owner retaining full control.
Although neither partnerships nor sole traderships have shareholders, considerations such as raising
capital and company constitutions differ between the two structures.

Initiatives like the Modern Company Law Review emphasize a "think small first" approach, recognizing
the unique needs of smaller enterprises and advocating for regulatory frameworks tailored to their
circumstances. Additionally, judicial developments, such as the application of section 994 of the
Companies Act 2006 to "quasi partnerships" and the rules on informal, unanimous agreements by
shareholders, highlight efforts to accommodate the distinct challenges faced by smaller businesses
within company law. These developments provide context for evaluating the attractiveness of each
business form, as they reflect a growing awareness of the need to address the specific needs and
realities of smaller enterprises. Therefore, when weighing the advantages and disadvantages of
partnerships versus sole traderships, it's essential to consider how these broader initiatives and judicial
developments may impact the suitability of each option for smaller businesses.

While limited liability can be compromised by personal guarantees in smaller companies, incorporating
as a company offers distinct benefits. These include perpetual succession, autonomy from owners,
enhanced status, and the ability to create floating charges for reduced borrowing costs. Overall, despite
potential limitations, the advantages of company incorporation often outweigh these challenges, making
it a preferred choice for businesses aiming for long-term growth and stability.

When assessing if private limited companies face excessive regulation, it's crucial to consider the wide
array of regulations they must adhere to, covering areas like corporate governance, taxation,
employment, and sector-specific requirements. These regulations aim to protect stakeholders' interests,
ensure fair competition, and promote public welfare. While regulations serve important purposes,
there's ongoing debate about whether they impose undue burdens, particularly on smaller businesses.
Striking a balance between regulatory objectives and business needs is essential for fostering a
conducive business environment. Periodic review and refinement of regulations are necessary to ensure
they remain effective and supportive of business growth while safeguarding public interests.

Advantages of a Company include the ability to attract a large number of investors, especially because
of the option to issue shares. This access to capital markets provides opportunities for growth and
expansion that may not be available to other business structures. Companies offer limited liability
protection to their shareholders, meaning their personal assets are generally protected from business
debts, this also makes it easier to entice an individual to become a shareholder in a company. Moreover,
the Constitution of a company provides a clear framework for its organizational structure, outlining
roles, responsibilities, and decision-making processes. Also, unlike sole traders or partnerships, which
may dissolve upon the death or departure of an owner or partner, a company has perpetual existence
(Re Noel Tedman Holdings Pty Ltd). This continuity ensures stability and allows for long-term planning
and investment.

Also, operating as a registered company can enhance the credibility and prestige of a business.
Customers, suppliers, and partners may perceive companies as more stable, trustworthy, and
professional entities compared to unincorporated businesses. Once registered, the company's name is
also protected from being used by other businesses in the same jurisdiction, reducing the risk of brand
confusion or infringement. Furthermore, some government contracts and tenders may need businesses
to be registered as companies to be eligible for consideration, and securing government contracts and
access to public procurement opportunities brings opportunities to expand businesses. Companies may
also find it easier to expand internationally and establish a presence in foreign markets due to the
recognition and acceptance of the corporate structure globally, which facilitates cross-border
transactions, partnerships, and investment opportunities.

However, forming a company entails compliance with company law, which can be costly and time-
consuming. This includes legal and administrative requirements for registration, ongoing reporting, and
adherence to various regulations. The process of “incorporation” of a company involves its formation,
governed by sections 7 to 15 of the CA 2006. Individuals establishing the company must provide
Registrar of Companies with key documents; the company's Constitution including its Articles of
Association and any objects clause, a Memorandum of Association indicating the intent to form a
company, an application containing details such as company's name, share capital, registered office
address, liability status, statement of the directors' names and addresses, and a declaration of
compliance with the CA 2006.

Although UK law was making efforts in simplifying the process of registering companies, in 2023, UK
introduced the Economic Crime and Corporate Transparency Act 2023, which goes against the idea of
making it simpler. This law was passed to address concerns about UK companies being used for
fraudulent and illegal activities. It includes various measures to prevent such misuse and promote more
transparency regarding company ownership and control. These measures have made some changes to
the company registration process, such as requiring identity checks for those forming companies and
making it necessary for new company applications to declare that their purpose is lawful.

Furthermore, a company's organizational structure, particularly for small businesses, can become
complex when the board of directors and shareholders are the same individuals. This overlap can lead to
potential conflicts of interest and challenges in decision-making.

While companies benefit from limited liability, they are also subject to corporate tax on their profits.
This can result in double taxation if profits are distributed to shareholders as dividends, as they are
taxed again at the individual level. Managing tax liabilities and optimizing tax efficiency requires careful
planning and compliance with tax laws. Public limited companies especially, are subject to heightened
scrutiny and accountability from the regulators and the public. This includes disclosure requirements,
shareholder activism, hiring non-executive directors, and potential litigation risks. Maintaining
transparency, corporate governance standards, and reputational integrity are essential but can also be
demanding and resource-intensive.

SHELF COMPANIES

An option is to purchase a "ready-made" company, which is already incorporated and available for
immediate use. Registration agents typically set these companies up and can be acquired quickly and
affordably. When purchasing a ready-made company, the shares are transferred to the nominees of the
buyer. The original directors and administrators resign, and the buyer appoints new ones according to
their preferences. This option provides a convenient way to establish a company without going through
the entire incorporation process. However, there are drawbacks to acquiring a ready-made company as
there is the task of changing the company's directors and shareholders. The existing ones will need to
retire and transfer their shares, which can involve paperwork and legal formalities. Additionally, certain
aspects of the company, such as its name or constitution, may not align with the buyer's preferences
and may require modifications.

Moreover, there is a risk in taking over an existing company rather than forming a new one. The
acquired company may have already accrued liabilities before the acquisition. While the buyer will not
be personally liable for these debts due to the company's limited liability, they would not want their
major investments to be used to settle pre-existing debts. Starting a new company from scratch ensures
that the company is free of any previous liabilities. Nonetheless, if the buyer trusts the seller and
believes the company to be reputable, they may be confident that it has not incurred any significant
debts before acquisition. In such cases, acquiring a ready-made company can still be a viable option,
especially if it offers advantages such as convenience and expedience.

PRE INCORPORATION PQ

In August 2020, scientists working for Cells plc developed a new type of battery. In September 2020
Cells incorporated a subsidiary, Subvolta Ltd to make the battery. A week before Subvolta was
incorporated, Roberta, a director of Cells signed a lease for a factory that Subvolta was to occupy,
adding the words ‘signed for Subvolta Ltd without personal liability” above her signature. Will she be
personally liable?

Ordinarily, when an individual acts as an agent for a company and enters into a contract on its behalf,
they are generally not personally liable for the obligations of that contract, instead, it is the company
that assumes legal responsibility for fulfilling the contract terms. This reflects the doctrine of separate
legal personality, which treats the company as a distinct legal entity.

However, this particular lease contract is made pre-incorporation. As per Re Northumberland Avenue
Hotel Co (1886), contract made on behalf of a company before its incorporation is not binding on the
company. Thus, the company cannot enforce or ratify such a contract after its incorporation.

Early cases made distinctions between contracts made 'for and on behalf of' the company (Kelner v
Baxter (1866), where the agent could be personally liable if the company did not exist at the time, and
those where the promoter signed their own name to authenticate the company's name (Newborn v
Sensolid (1954), resulting in no contract if the company did not exist. These, though intricate, depended
on the intention of the parties involved. However, statutory provisions have replaced these common law
principles. Article 7 of the First Company Law Directive states that individuals acting on behalf of a
company before its formation are personally liable for any resulting obligations, unless agreed
otherwise. This directive was implemented into UK law through the European Communities Act 1972
and is now reflected in section 51(1) of the Companies Act 2006, as also seen in in Phonogram v Lane
(1982). Braymist Ltd v Wise Finance Ltd (2001) further clarified that when section 51(1) applies, a valid
contract is considered to exist between the agent and the contracting party. This means the agent has
both liability for the contract and the right to take legal action to enforce it.

However, this default rule can be excluded by an “agreement to the contrary”. Lord Denning interpreted
the phrase 'subject to any agreement to the contrary' in Phonogram Ltd to mean that in order for a
promoter to avoid personal liability, the contract must clearly state that the promoter will not be held
liable. Thus, provided that the court accepts that the words preceding Roberta’s signature amount to an
‘express agreement to the contrary’, then she will not be liable.

(The provisions do not apply when a company has been purchased as a ready-made entity (off the shelf)
and is in the process of changing its name. This is because the company already exists, contrary to the
requirement in the section that it 'has not been formed' (Oshkosh v Dan Marbel Ltd). Additionally, the
agent must intend to make the contract on behalf of a new company for the section to apply. Therefore,
the section does not apply when the parties are unaware that the company has been dissolved (Cotronic
Ltd v Dezonie).