An Overview of Business Media – BLP Part 1

Business Law and Practice is, not surprisingly, concerned with the legalities of business. BLP requires an understanding of the legislation regulating business models and an ability to apply this understanding in a commercial way. The legislation (especially the Companies Act 2006) can be quite detailed – if you have been lugging around your statute book, you will appreciate this! I do not intend to look at the legislative provisions in detail but will hopefully provide some hints and tips to help you with the commercial aspects of the course.

Although, I originally intended to provide an overview of partnerships in this post, I decided it would be useful to have an overview of the different business media so that you could grasp what the benefits and pitfalls are of each in practice. Many LPC students will not have any exposure to the running of a business, so it is easy to get lost in the weeds of the legislation and miss the basics in the exam. Appreciating the purpose of the different business models in the back of your mind will help! The main business media are as follows:

•  Sole Trader
•  Partnership
•  Company
•  Limited Liability Partnership (LLP)

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Of the four, the first two are traditional models, with few start-up formalities and little regulation. The sole trader and partners of a partnership take full liability for the business and are able to run it without outside regulation. Sole traders are usually one-man-band type businesses of a relatively small size, mainly due to the unlimited liability of the proprietor. No sensible businessman wants to take all the responsibility for a business if he doesn’t have immediate control over what goes on. There are also some types of business where the sole trader model is required – a solicitors’ or accountants’ firm run by one qualified practitioner, for example.

Partnerships are governed by the provisions of the Partnerships Act 1890 but, as you will see, this is not particularly detailed and has been further clarified by case law. Partners can also agree to be governed by a partnership agreement, which will elaborate on the matters such as retirement and ownership of assets that the Partnerships Act is quiet on or that they wish to depart from the case law model. In reality, partnership agreements are nearly always advisable, if only to document the actual arrangement between the partners. It may all seem rosy now, but it won’t necessarily be later down the line (especially in this commercial climate).

It is worth remembering that partnerships can be formed without the intent (or even realisation) of the partners if the definition in the Partnerships Act is satisfied. If you are faced with a venture with more than one proprietor or key man involved, always check if it is a partnership, as this may influence your advice.

The third and fourth business models (companies and LLPs) are governed by the Companies Act 2006. There are start-up formalities and continuing reporting obligations, which also will have a cost to the start of the business. The liability of the owners (shareholders or members) is limited – in companies to the amount of share capital; in LLPs to an unknown amount (one key risk in LLPs!) – although it is thought to be lower than in a traditional partnership. It is worth noting that although the liability of the shareholders is limited, the directors have fiduciary duties to the company and can face criminal liability if they contravene the Companies Act 2006. If you are advising a start-up sole trader who will be both a director and shareholder, this should be flagged up; yes, you won’t lose your home if you go bust but you might end up in prison (perhaps an exaggeration but it has happened!).

The start-up documentation (memorandum and articles) governs the business and restricts the powers of the directors or members. These documents will also dictate the running of the company or LLP, right down to how meetings will be conducted. If the provisions of the constitutional documents are not followed properly then decisions may not be valid and it is very important that any meeting requirements, even the correct service of notices, are complied with to the letter. I have seen company debentures potentially invalidated because the meeting authorising the loan was not held in accordance with the articles. Needless to say, the bank was not pleased.

BLP will cover specific start-up formalities for the business models but there are some common issues that again are often easily overlooked in the exam. Don’t forget the following:

• Licences – some businesses such as pharmacies, pubs, hotels, childcare, etc. require licences to operate and businesses may commit an offence if they do not have one before trading
• Tax and national insurance – if there are any employees, PAYE registration, for sole traders and partners, registration as self-employed
• VAT registration – again, necessary for businesses over the threshold before trading. Consider voluntary registration if it would benefit the business
• Insurance – product liability, professional indemnity, employers’ liability and Intellectual property – protection for potential copyrighted items, obtaining patent protection before trading
• Online – website registration, domain name protection.

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Even though there are a few overlaps, BLP is easily split between the different media; the law of partnerships does not apply to companies and vice versa. It might be useful to colour code your notes accordingly

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