Business Structures: Incorporation and Liability

Posted on Feb 23, 2025 in Law & Jurisprudence

Incorporation

Incorporation is the legal process of forming a business entity recognized in law.

Unincorporated Businesses

These are not separate legal entities. In law, there is no difference between the owner(s) and the business, meaning that any legal action is effectively taken against the owner(s).

Incorporated Businesses

The owner and the business are separate legal entities. In law, there is a difference between the owner(s) and the business, meaning that legal action can be taken against the business.

Liability

Liability means being legally responsible for any debts or financial commitments of a business.

• Limited Liability: The owners can only lose the money they have invested in the business. Their risk is minimized as none of their personal possessions can be lost.
• Unlimited Liability: The owner is responsible for all the debts. These debts must be paid even if the business doesn’t have the money, so they may have to sell their own assets to raise the funds.

Sole Traders

Definition:

• A sole trader is the most common form of business organization. It is a business owned and operated by just one person.
• It is unincorporated – legally, the owner *is* the business.
• It has unlimited liability.
• The owner is the sole proprietor.
• There are few legal requirements to set it up. The only common legal regulations that must be followed are: [Insert relevant regulations here].

Partnerships

Concept:

• A form of business in which two or more people agree to jointly own a business.
• It is a group or association of at least two people who agree to own and run a business together.
• The partners contribute to the capital of the business, usually have a say in the running of the business, and share any profits made.
• Partnerships can be set up very easily.

Partnership Agreement

• A written and legal agreement between business partners. It is not essential for partners to have such an agreement, but it is always recommended.
• Without this document, partners may disagree on who put the most capital into the business or who is entitled to more of the profits.
• An agreed legal document that outlines the rules by which a partnership will be run.
• It outlines:
  • Who the partners are
  • How much each partner has invested
  • How major decisions will be made
  • How profit should be shared
  • The process when a partner leaves or joins

Private Limited Companies

A private limited company is owned by shareholders. It is a separate legal unit from its owners, meaning it is an incorporated business.

Public Limited Companies

• More suitable for very large businesses.
• Public limited companies are not in the public sector of industry. They are not owned by the government but by private individuals, and as a result, they are in the private sector.
• In the UK, they are denoted by “plc”.

Annual General Meeting

An Annual General Meeting (AGM) is a legal requirement for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.