Business organisations and procedures - Business and organis...

Learning Outcomes

On completing this article, you will be able to distinguish between the principal types of business organisations in England and Wales and explain how the choice affects liability, management, and regulatory obligations. You will also understand the practical significance of limited liability and key company formalities. Your knowledge will support accurate legal analysis and client advice on the most suitable business structure for typical SQE2 practice scenarios.

SQE2 Syllabus

For SQE2, you are required to understand the types of business medium and their characteristics from a practical legal standpoint. Pay particular attention, during your revision, to:

• The organisational features of sole traders, partnerships, limited liability partnerships, private companies limited by shares, and public companies
• The consequences of running a business as an unincorporated versus incorporated medium, including liability, management, and regulatory implications
• The concept of separate legal personality and the circumstances in which liability for business debts may be limited or unlimited
• Registration, disclosure, management, and formality requirements for each business medium
• The legal principles determining which structure will be most beneficial for clients based on their needs and risk profile

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which business mediums have to register with Companies House?
2. What is the key difference, in relation to liability for business debts, between a general partnership and a limited company?
3. True or false: In a private limited company, the directors and the shareholders must always be different people.
4. What is the legal significance of separate legal personality?
5. What formalities must be satisfied for a partnership to exist under English law?

Introduction

Deciding which type of business organisation to use is one of the most important choices for anyone setting up a new business. You must know how each business medium affects liability, management, regulation, and ownership. This is essential for structuring effective advice to clients and risk management in legal practice.

Business mediums in England and Wales fall into two main categories: unincorporated and incorporated. The key distinction is between businesses with no separate legal personality (such as sole traders and most partnerships) and those with a separate legal personality (companies and limited liability partnerships).

Key Term: unincorporated business
An unincorporated business does not have its own legal personality. The business and its owners are considered the same person in law.

Key Term: incorporated business
An incorporated business has a separate legal personality. The law treats it as distinct from its owners and managers.

Types of Business Organisations

Sole traders

A sole trader is a self-employed individual. The business is not a separate legal entity. The individual is entitled to all profits and bears all losses. There is no legal distinction between the business and its owner.

Key Term: sole trader
An individual who owns and runs a business themselves, with no distinction in law between the individual and the business.

Sole traders benefit from minimal regulatory formalities—no need to register at Companies House, but they must register for income tax with HMRC. However, the significant disadvantage is unlimited personal liability.

Key Term: unlimited liability
A person with unlimited liability is personally responsible for all debts and losses of the business, including with their private assets.

Worked Example 1.1

Amir starts a new plumbing business as a sole trader. The business incurs debts which exceed the value of its tools and van. The business cannot pay. Can creditors take Amir's house to satisfy debts?

Answer:
Yes. As a sole trader, Amir has unlimited liability. His personal assets, including his house, may be used to pay business debts.

Partnerships

A partnership is created whenever two or more people carry on business together with a view to profit. There is no need for written agreement or registration (although these may be advisable).

Key Term: partnership
An unincorporated business where two or more people 'carry on a business in common with a view of profit'. The partnership is not a separate legal person.

The default position is that all partners share profits and losses equally, can participate in management, and have unlimited, joint and several liability for debts.

Key Term: joint and several liability
Each partner can be made to pay the whole of a partnership debt, not just their share.

Partnerships are not required to register at Companies House. However, specific formalities may apply if the firm wishes to operate under a business name that is not simply a list of partners’ surnames.

Limited liability partnerships (LLPs)

A limited liability partnership is a hybrid structure combining features of a company and partnership. It must be registered at Companies House and is a separate legal person.

Key Term: limited liability partnership (LLP)
A business medium established under the Limited Liability Partnerships Act 2000, combining limited liability for all members with partnership governance.

LLPs have ongoing disclosure and formality requirements, but the liability of members is usually limited to capital contributed—unless wrongful or fraudulent conduct occurs.

Worked Example 1.2

Zoe and Nina want to open a design consultancy but are concerned about personal liability for large contracts. What business structure provides them with limited liability but allows them to share profits and management?

Answer:
A limited liability partnership (LLP) would give Zoe and Nina limited liability and partnership-style management and profit sharing, unlike a traditional partnership.

Companies

Companies are the most formal business medium. On registration at Companies House, a company becomes a separate legal person. The most common company types are private companies limited by shares and public limited companies (plcs).

Key Term: company
A business organisation formed by registration at Companies House. The company is a separate legal person with limited liability for its members.

Key Term: separate legal personality
A company acts as a legal entity that can hold property, contract, and sue or be sued in its own name.

Registration requires completion of prescribed forms, a memorandum of association, articles of association, and payment of fees. Most companies adopt the prescribed Model Articles unless bespoke articles are prepared.

Private companies limited by shares

A private limited company is the most commonly used company. Profits belong to the company. Company debts are paid only from company assets (except in very limited circumstances).

Key Term: limited liability
Liability for company debts is limited to the amount unpaid on shares for members (shareholders). Personal assets are protected.

Public limited companies (plcs)

A public company can raise money from the public by issuing shares. It is subject to more onerous reporting and disclosure requirements, and must have a minimum share capital of £50,000.

Key features of incorporated businesses

• Registration at Companies House: required for LLPs and all companies
• Separate legal personality: the business exists independently from its members
• Limited liability: most owners’ liability for debts is capped
• Ongoing reporting, record keeping, and disclosure obligations

Comparison: unincorporated and incorporated businesses

Worked Example 1.3

Eric and Farah want to start a local shop. They have little money to invest and want as little paperwork as possible. Which business medium is most suitable, and why?

Answer:
As they are risk-tolerant and prioritise simplicity, operating as a partnership or sole trader best suits their needs. Both avoid company formality and are not required to register at Companies House.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The distinction between unincorporated (sole trader, partnership) and incorporated (LLP, company) business mediums in England and Wales
• The meaning and significance of separate legal personality
• Unlimited liability for unincorporated medium owners and joint and several liability for partnership debts
• The main characteristic of limited liability for incorporated entities and the basics of company registration and formalities
• Key implications for registration, management, ongoing obligations, and liability in each business form

Key Terms and Concepts

• unincorporated business
• incorporated business
• sole trader
• unlimited liability
• partnership
• joint and several liability
• limited liability partnership (LLP)
• company
• separate legal personality
• limited liability