CONTENTS
1 CHAPTER 1. FORMS OF BUSINESS ORGANISATION.................................1
1.1 Sole traders......................................................................................................1
1.2 Partnerships......................................................................................................2
1.3 Company........................................................................................................10
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............................................................................23
3 CHAPTER 3. FORMATION OF COMPANY...................................................32
3.1 Promoters.......................................................................................................32
3.2 Formation of company...................................................................................37
3.3 Constitution of company...............................................................................38
3.4 Distribution of profit......................................................................................58
4 CHAPTER 4. FINANCING THE COMPANY..................................................59
4.1 The legal concept of capital and the financing of companies........................59
4.2 Share capital...................................................................................................59
4.3 Debt security..................................................................................................71
4.4 Maintenance of capital...................................................................................81
5 CHAPTER 5. MANAGEMENT OF THE COMPANY.....................................92
5.1 Directors........................................................................................................92
5.2 Company meetings......................................................................................114
5.3 Protection of minority shareholders.............................................................122
6 CHAPTER 6. FUNDAMENTAL CHANGES..................................................126
6.1 Charter amendments....................................................................................126
6.2 Mergers and acquisitions.............................................................................126
6.3 Liquidation...................................................................................................129
,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 businesses1, 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
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.
Page 1 of 140
,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.
1.2 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
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.
Page 2 of 140
, 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.
----------------------------------------------------------------------------------------------------
Partnership Agreement
This Partnership Agreement is made on May 15, 2010 between Mr. John Smith and
Mr. Robert Wilson.
Name and Business
The parties hereby form a partnership under the name of [Insert Business Name] to
produce [Insert Business Product/Service]. The principal office of the business shall be
[Insert Address].
Term
The partnership shall begin on [Insert Date], and shall continue until terminated.
Capital
The capital of the partnership shall be contributed in cash by the partners as follows:
A separate capital account shall be maintained for each partner.
Neither partner shall withdraw any part of their capital account.
Upon the demand of either partner, the capital accounts of the partners shall be
maintained at all times in the proportions in which the partners share in the profits and
losses of the partnership.
Profit and Loss
The net profits of the partnership shall be divided equally between the partners and the
net losses shall be borne equally by them. A separate income account shall be
maintained for each partner. Partnership profits and losses shall be charged or credited
to the separate income account of each partner. If a partner has no credit balance in
their income account, losses shall be charged to their capital account.
Page 3 of 140
1 CHAPTER 1. FORMS OF BUSINESS ORGANISATION.................................1
1.1 Sole traders......................................................................................................1
1.2 Partnerships......................................................................................................2
1.3 Company........................................................................................................10
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............................................................................23
3 CHAPTER 3. FORMATION OF COMPANY...................................................32
3.1 Promoters.......................................................................................................32
3.2 Formation of company...................................................................................37
3.3 Constitution of company...............................................................................38
3.4 Distribution of profit......................................................................................58
4 CHAPTER 4. FINANCING THE COMPANY..................................................59
4.1 The legal concept of capital and the financing of companies........................59
4.2 Share capital...................................................................................................59
4.3 Debt security..................................................................................................71
4.4 Maintenance of capital...................................................................................81
5 CHAPTER 5. MANAGEMENT OF THE COMPANY.....................................92
5.1 Directors........................................................................................................92
5.2 Company meetings......................................................................................114
5.3 Protection of minority shareholders.............................................................122
6 CHAPTER 6. FUNDAMENTAL CHANGES..................................................126
6.1 Charter amendments....................................................................................126
6.2 Mergers and acquisitions.............................................................................126
6.3 Liquidation...................................................................................................129
,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 businesses1, 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
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.
Page 1 of 140
,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.
1.2 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
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.
Page 2 of 140
, 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.
----------------------------------------------------------------------------------------------------
Partnership Agreement
This Partnership Agreement is made on May 15, 2010 between Mr. John Smith and
Mr. Robert Wilson.
Name and Business
The parties hereby form a partnership under the name of [Insert Business Name] to
produce [Insert Business Product/Service]. The principal office of the business shall be
[Insert Address].
Term
The partnership shall begin on [Insert Date], and shall continue until terminated.
Capital
The capital of the partnership shall be contributed in cash by the partners as follows:
A separate capital account shall be maintained for each partner.
Neither partner shall withdraw any part of their capital account.
Upon the demand of either partner, the capital accounts of the partners shall be
maintained at all times in the proportions in which the partners share in the profits and
losses of the partnership.
Profit and Loss
The net profits of the partnership shall be divided equally between the partners and the
net losses shall be borne equally by them. A separate income account shall be
maintained for each partner. Partnership profits and losses shall be charged or credited
to the separate income account of each partner. If a partner has no credit balance in
their income account, losses shall be charged to their capital account.
Page 3 of 140
