LPC NOTES
[COMPANY LAW]
(2019-2020)
, CONTENTS
1 CHAPTER 1. FORMS OF BUSINESS ORGANISATION..................................3
1.1 Sole traders.......................................................................................................3
1.2 Partnerships.......................................................................................................4
1.3 Company.........................................................................................................12
1.4 Other forms of business organisation.............................................................18
2 CHAPTER 2. INCORPORATION......................................................................21
2.1 The meaning of incorporation........................................................................21
2.2 The effect of incorporation.............................................................................22
3 CHAPTER 3. FORMATION OF COMPANY....................................................31
3.1 Promoters........................................................................................................31
3.2 Formation of company....................................................................................36
3.3 Constitution of company................................................................................37
3.4 Distribution of profit.......................................................................................54
4 CHAPTER 4. FINANCING THE COMPANY...................................................55
4.1 The legal concept of capital and the financing of companies.........................55
4.2 Share capital....................................................................................................55
4.3 Debt security...................................................................................................66
4.4 Maintenance of capital....................................................................................74
5 CHAPTER 5. MANAGEMENT OF THE COMPANY......................................84
5.1 Directors.........................................................................................................84
5.2 Company meetings.......................................................................................103
5.3 Protection of minority shareholders..............................................................109
6 CHAPTER 6. FUNDAMENTAL CHANGES...................................................113
6.1 Charter amendments.....................................................................................113
6.2 Mergers and acquisitions..............................................................................113
6.3 Liquidation....................................................................................................116
,1 CHAPTER 1. FORMS OF BUSINESS
ORGANISATION
When one person or a group of individuals decide to start a business the first decision that should be
made is what kind of business organisation will be employed. There are advantages and
disadvantages to being a company, on the one hand, and a partnership or a sole trader on the other.
Sole traders or partnerships are unincorporated businesses 1, while limited companies of different
types are incorporated businesses.
The different types of business organisations have been developed to suit the needs of different
types of businesses. Most businesses fall into one of the following three categories:
a sole trader;
a partnership;
a company.
1.1 Sole traders
The simplest economic and legal unit is the sole trader, that is an individual carrying on business
either alone or employing others. Sole traders may employ others in their business but they do not
share the profits of the business with them. Sole traders buy all the equipment and resources they
need for their businesses with their own money or with money others lend to them. They must
repay such loans and meet all other liabilities they incur in the business from their own money,
whether or not the business succeeds. Although sole traders must pay taxes they are not
accountable to anyone else and may stop and start different businesses as they choose. They also
keep all profits of the business and, so long as they meet its liabilities, can spend those profits as
soon as they are received.
Thus, as an economic unit, a sole trader is very vulnerable since he or she can be made personally
bankrupt for his or her business debts. In that sense this is probably the most risky type of business
enterprise.
What are the obvious disadvantages in trading as a sole trader? You might have thought of the
following points:
If the business fails, the sole trader still has to pay its debts and may be ruined.
As a result the sole trader is unlikely to take risks which could be profitable.
The finance which the sole trader can raise is limited to personal assets and the amounts others will
lend and this may be insufficient for the needs of the business.
Although the sole trader can employ people he or she cannot give them a share in the business
which may demotivate them.
1
An “unincorporated” business is any business which has not adopted formal corporate status, i.e. as either a
limited company or a limited liability partnership.
, 1.2 Partnerships
Partnerships2 were developed to overcome the last of these problems. It is the main non-corporate
vehicle by which individuals conduct business on a joint basis. A partnership is a relationship of two
or more persons (Some jurisdictions limit the maximum number of members, especially in a general
partnership. For example, in the UK there may be no more than twenty owners - members, unless it
is a limited partnership.) carrying on as co-owners a business with a view to make a profit. This is the
essential difference between a partnership and a sole trader: two or more persons sharing a
business. Like sole traders partners use their own money to fund the business and must meet all the
liabilities of the business from their own money. A partnership is a very private and flexible way of
carrying on business. The partners are free to agree between themselves how to organise their
internal governance, management, the shares they will each receive of the profits of the business
and the work each partner will do in the business.
The partners will, of course, need to make contracts with third parties for carrying on the firm's
business, for example to purchase equipment. As a matter of law, if any one partner makes such a
contract on behalf of the business all of the other partners are 'bound' by the contract; i.e. they
must perform it themselves. Given the partners are personally liable for their firm’s debts; there are
no public disclosure requirements. Individual partners are taxed on their personal income from the
partnership as if they were self-employed.
Behind sole traders, a partnership is the second most popular type of business and is more
commonly associated with professional services such as accountants, solicitors and doctors. It is also
common in partnerships for each partner to specialise in a specific area of the business. For
example, in an accountancy service, one partner may specialise in book keeping, another partner
may specialise in financial advice, and so on.
Although partnerships can be informal, it is advisable to have a partnership agreement. The aim of
such agreement is to provide a written structure of a business with respect to each partner’s
responsibility, rights, profit\liability sharing, and also the terms on which the partnership can be
terminated.
The following is an example of such partnership agreement. Of course, depending on the will of the
parties and their peculiar needs it may be much longer, as long as 15-20 pages. Important: This is an
example based on a general partnership.
----------------------------------------------------------------------------------------------------
2
This is the earliest form of business organisation. In the Middle Ages the principle trades were regulated by the
guilds of merchants which roughly resembled modern trade protection associations. The guilds regulated a
broad branch of trade or conferred on their members a monopoly of dealing in a particular kind of commodity.
Their regulations also covered apprenticeships, the employment of qualified employees, even business ethics.
The medieval guild was part of the structure of municipal organisation in major European countries. It
represented a closed economic group of sole traders characterised by corporate monopoly and privilege. The
two business organisations which bear some resemblance to the modern partnership are the Commenda and the
Societas. The Commenda, which was found in Babylonian and Arabic as well as Western law, was a cross
between a modern partnership and a loan and involved one person advancing money to a trader on terms that he
should have a return which varied with the profits. Originally this was a temporary association for a particular
transaction. The Commenda has largely disappeared from the English scene but still exists in other Continental
European countries, for example, in France. The modern version of this form appears in the new Russian Civil
Code as well, in the form of the Partnership in Commanda. The Societas was a more permanent association
which was the forerunner of the modern partnership. As such it developed as a form of commercial agency
which gradually transformed into modern forms and types of partnership organisations.
[COMPANY LAW]
(2019-2020)
, CONTENTS
1 CHAPTER 1. FORMS OF BUSINESS ORGANISATION..................................3
1.1 Sole traders.......................................................................................................3
1.2 Partnerships.......................................................................................................4
1.3 Company.........................................................................................................12
1.4 Other forms of business organisation.............................................................18
2 CHAPTER 2. INCORPORATION......................................................................21
2.1 The meaning of incorporation........................................................................21
2.2 The effect of incorporation.............................................................................22
3 CHAPTER 3. FORMATION OF COMPANY....................................................31
3.1 Promoters........................................................................................................31
3.2 Formation of company....................................................................................36
3.3 Constitution of company................................................................................37
3.4 Distribution of profit.......................................................................................54
4 CHAPTER 4. FINANCING THE COMPANY...................................................55
4.1 The legal concept of capital and the financing of companies.........................55
4.2 Share capital....................................................................................................55
4.3 Debt security...................................................................................................66
4.4 Maintenance of capital....................................................................................74
5 CHAPTER 5. MANAGEMENT OF THE COMPANY......................................84
5.1 Directors.........................................................................................................84
5.2 Company meetings.......................................................................................103
5.3 Protection of minority shareholders..............................................................109
6 CHAPTER 6. FUNDAMENTAL CHANGES...................................................113
6.1 Charter amendments.....................................................................................113
6.2 Mergers and acquisitions..............................................................................113
6.3 Liquidation....................................................................................................116
,1 CHAPTER 1. FORMS OF BUSINESS
ORGANISATION
When one person or a group of individuals decide to start a business the first decision that should be
made is what kind of business organisation will be employed. There are advantages and
disadvantages to being a company, on the one hand, and a partnership or a sole trader on the other.
Sole traders or partnerships are unincorporated businesses 1, while limited companies of different
types are incorporated businesses.
The different types of business organisations have been developed to suit the needs of different
types of businesses. Most businesses fall into one of the following three categories:
a sole trader;
a partnership;
a company.
1.1 Sole traders
The simplest economic and legal unit is the sole trader, that is an individual carrying on business
either alone or employing others. Sole traders may employ others in their business but they do not
share the profits of the business with them. Sole traders buy all the equipment and resources they
need for their businesses with their own money or with money others lend to them. They must
repay such loans and meet all other liabilities they incur in the business from their own money,
whether or not the business succeeds. Although sole traders must pay taxes they are not
accountable to anyone else and may stop and start different businesses as they choose. They also
keep all profits of the business and, so long as they meet its liabilities, can spend those profits as
soon as they are received.
Thus, as an economic unit, a sole trader is very vulnerable since he or she can be made personally
bankrupt for his or her business debts. In that sense this is probably the most risky type of business
enterprise.
What are the obvious disadvantages in trading as a sole trader? You might have thought of the
following points:
If the business fails, the sole trader still has to pay its debts and may be ruined.
As a result the sole trader is unlikely to take risks which could be profitable.
The finance which the sole trader can raise is limited to personal assets and the amounts others will
lend and this may be insufficient for the needs of the business.
Although the sole trader can employ people he or she cannot give them a share in the business
which may demotivate them.
1
An “unincorporated” business is any business which has not adopted formal corporate status, i.e. as either a
limited company or a limited liability partnership.
, 1.2 Partnerships
Partnerships2 were developed to overcome the last of these problems. It is the main non-corporate
vehicle by which individuals conduct business on a joint basis. A partnership is a relationship of two
or more persons (Some jurisdictions limit the maximum number of members, especially in a general
partnership. For example, in the UK there may be no more than twenty owners - members, unless it
is a limited partnership.) carrying on as co-owners a business with a view to make a profit. This is the
essential difference between a partnership and a sole trader: two or more persons sharing a
business. Like sole traders partners use their own money to fund the business and must meet all the
liabilities of the business from their own money. A partnership is a very private and flexible way of
carrying on business. The partners are free to agree between themselves how to organise their
internal governance, management, the shares they will each receive of the profits of the business
and the work each partner will do in the business.
The partners will, of course, need to make contracts with third parties for carrying on the firm's
business, for example to purchase equipment. As a matter of law, if any one partner makes such a
contract on behalf of the business all of the other partners are 'bound' by the contract; i.e. they
must perform it themselves. Given the partners are personally liable for their firm’s debts; there are
no public disclosure requirements. Individual partners are taxed on their personal income from the
partnership as if they were self-employed.
Behind sole traders, a partnership is the second most popular type of business and is more
commonly associated with professional services such as accountants, solicitors and doctors. It is also
common in partnerships for each partner to specialise in a specific area of the business. For
example, in an accountancy service, one partner may specialise in book keeping, another partner
may specialise in financial advice, and so on.
Although partnerships can be informal, it is advisable to have a partnership agreement. The aim of
such agreement is to provide a written structure of a business with respect to each partner’s
responsibility, rights, profit\liability sharing, and also the terms on which the partnership can be
terminated.
The following is an example of such partnership agreement. Of course, depending on the will of the
parties and their peculiar needs it may be much longer, as long as 15-20 pages. Important: This is an
example based on a general partnership.
----------------------------------------------------------------------------------------------------
2
This is the earliest form of business organisation. In the Middle Ages the principle trades were regulated by the
guilds of merchants which roughly resembled modern trade protection associations. The guilds regulated a
broad branch of trade or conferred on their members a monopoly of dealing in a particular kind of commodity.
Their regulations also covered apprenticeships, the employment of qualified employees, even business ethics.
The medieval guild was part of the structure of municipal organisation in major European countries. It
represented a closed economic group of sole traders characterised by corporate monopoly and privilege. The
two business organisations which bear some resemblance to the modern partnership are the Commenda and the
Societas. The Commenda, which was found in Babylonian and Arabic as well as Western law, was a cross
between a modern partnership and a loan and involved one person advancing money to a trader on terms that he
should have a return which varied with the profits. Originally this was a temporary association for a particular
transaction. The Commenda has largely disappeared from the English scene but still exists in other Continental
European countries, for example, in France. The modern version of this form appears in the new Russian Civil
Code as well, in the form of the Partnership in Commanda. The Societas was a more permanent association
which was the forerunner of the modern partnership. As such it developed as a form of commercial agency
which gradually transformed into modern forms and types of partnership organisations.
