ls

Settin€ up a business

Lawyersoften haveto use these terms when talking about

businesslaw. Howmanyof them are you familiar wlth?
Canyou explain any of them?

r soletraderr
articlesof association
equity/ company capital. tangibleassets.
registerof companies . unlimited
liability

Forfurtherhelp,lookat the termsin the text below.

t Deborah Eyans, for the firm's

a solicitorin the lawflrm GarfleldBrown,is writinga brochure
clientsaboutthe differentbuslnessstructuresin the UnitedKingdom.Fill the gapswith the
wordssuppliedbelow.

INFORMATION
FORINVESTORS
AND ENTREPRENEURS
FROMABROAD
in theUnitedKingdom
Legalstructures i

:. :::l :.:1,: :.. .

'

agreement. caSt.:t',.debtsr onyourown . owners.

.,'.pr9fitsr publicly. separate. shareholding
personaflyliable

Workingfor yourself

lf youworkfor yoursellyou areself-employed andaredescribed as a sotetrader.Youdo not

haveto registeryourbusiness in orderto setit up: yousimpty starttradingandmanage the
business '. However,onceyourbusiness makesa certainamountof
moneyevery year,
you mustregisterwiththe tax authority.As a sotetrader,thereis no limitto the
amountof capitalyoucantakeout of the business, buton theotherhand,youhaveunlimited
for
tiability your
6 | UNIT1 Settingup a business

Partnerships

Therearetwo maintypesof partnership in the U.K.Theotdestis thegeneral partnership.

This
business vehicledoesnot havea separatelegalidentityfromthe peoplewho formit. This
meansthatthe partners are I withoutlimitfor thedebtsof thefirm.
A writtenpartnership a is recommended but is notrequired
by taw.
A generaI partnership cankeepits partnership agreement andits financial informationprivate.
Partners do not haveto provide a minimum amountof equityby lawbuttheyusuallyagreeto
paycapitalintothefirmwhentheyjointhe partnership. Thesecondtypeof partnership in the
partnership
U.K.is the timitedliabitity (LLP). Untikea general partnership,the partnersare
calledmembers. Thevarestillthe I of the business,buttheirliabitity
for
the debtsof the firmis timited.However,
everyLLPmustpublishregularfinancialinformation
aboutitself.

Limitedcompanies

Thesebusiness structures mustbe registered on the Register

of Companies andhavea
b legalidentity.
Thismeansthe members areonlytiabteto payfortheir
z in thecompany. lt is the company thatis liabteto its creditors.
Whena
company is formed,its ownerswillnormally putcapitaIintoit. However, thiscompany capital
doesnot haveto consistentirelvof 8- tangibleassetse.g.machinery
canalsobe contributed. Limitedcompanies mustalsohavea writtenagreement - calledthe
articlesof association. Thetwo maintypesof limitedcompanyarethe privatecompany(which
hasLimitedor Ltd in its name)andthe publiccompany, or plc.
A plc is often- but not always- a companywhosesharesaretraded
i.e.anyoneis allowedto buythem.Forthesecompanies thereis a minimum amountof capital
andtherearedifferentrequirements regarding directorsandaccounting procedures.

DtDYOUrlOW?

TheBritishandAmerican Engtishtermsfor business

structures
vary.Theestablished in the
structures
UnitedKingdom aresoletraders,generalpartnerships,
andtimitedcompanies. Soletradersand
partnerships areoften(butnotalways)smallbusinesses. Limitedcompanies areusedby businesses of
all sizes,fromtheverysmallto the verylarge.Thesmalleronesareoftenprivatecompanies andhave
Ltdor Limitedin theirname.Largerlimitedcompanies oftenchooseto be publiccompanies andhaveptc
in theirname.Sincezoorin the U.K.,a fourthbusiness the limitedliabititypartnership
structure, or LLP,
hasexisted.
ln the U.S.,the abbreviationslnc andCorpareverycommon,buttheyarejustthe abbreviations
acceptabte in attU.S.statesfor a company that hasregistereditselfas a separate
legalidentity.
TheU.S.
limitedliabititycompany or l[C is a differenttypeof company whichcombines thetaxflexibitity
of a
partnership withthe personal liabitityprotectionof a corporation.
Besureto checkandusethe correcttermin the rightjurisdiction: 1 on pages5-6 witl helpyou
exercise
do t his .
 U N I T1 S e t t i n gu p a b u s i n e s s| 7

2 Hereare somepoints of view about dlfferent legal aspectsof the companytypes presented
above.What do you think?

A limited liability partnershipis a reallygood ideo nowadays.

Youcan't expectlaw firms, orchitects,tox advisersand so on to
acceptunlimitedliability in traditionalpartnerships.lf a big
contractgoeswrong,it cancosttensof millions.

It's veryimportantfor a public companyto

haveminimumequitytHowcan onyone
haveconfidence in a companyof thissort
if it doesn'thoveony capitalof its own?

I can't see why the law in the U.K.requiresa company

to registeritself beforeit startstrading,but doesn't
requirea sole traderor a partnershipto registerat
that paint. They'reall businesses,aren't they?

I feel verysorryfor entrepreneurswho form a limited company.

Theideabehindthistypeof companyis that yourpersonal
assetsshouldn'tbe at risk.However, as soonos the ownersgo to
the bonkfor stort-upcapital,the banksecuresany loonsit makes
againstthe owners'personal ossets- usuallytheirhome.

AUDIO
g\
v} 3 DeborahFlynnhas a meetingwith her client Miya Osborne,a fapanesewomantiving in the U.K.

andanswerthequestions.
Partr: Listento the firstpartof the meeting

r Whendid sheformhercompany?

z Whatis the natureof MivaOsborne's

business?

doesshenowwantto moveintoandwhy?
3 Whatareaof business

4 Whatplansdoesshehavefor oneor two of hercolteagues?

advicefromDeborah?
5 Whatotherreasondoesshehavefor seeking
8 | uNlTl' Settingup a business

AUDIO

a7
Partz: ListenandcompleteDeborahFlynn'swrittennotesfromthe meeting.

lvltya Osborrtt u currextly ruvutivg her ivnport bwinus as a soletraobr and has
2 ernployu^r.

Shz has fauvtd a possible v1r.wproperty to ure ar a shtp owd wants to yrwke aw
ffir to buy tt imnediatdy. Rtskt We dow't Ww whether shc.wLu be oillav,led to
chavge its we/rorn an ^ buildivg to a shtp. Ne*d to find o,tt
tnore.

She'sftwrved tUz bwLnzrsup ta wv,/wtvg the ! of tt^e

bwirizss and satu&sawvEs.she has 3 rusow
for formtvg ot coynpqnyww:
1. to rev'/ardthe loyalty of h", Z stdf by gtivtg thzm a ,Lw
thz bwivtzss

2. otko
toreNard
thLym;trffi:tr-fuure bymakbs
them

3. thz. bwLnzs.ryrxds to apand qnd thue b a possihlencw

who wowtt share^sin thz bwirizrs

She doerw't woM, to borrow monzyfrorn the bank becausethe bq* wiil qsk hr-r
f the toawpersavuillyand that wtII put her htme
at rirk qs
thz laqyLwill be seturd ovt,her hnwe.

4 In prlncipte, lllya Osbornehas a potentiatly good ldea, but there are a lot of issues to consider.
Work in smatl groupsand discussthese quest:ons.
. ShouldMiyaOsbornegivesharesin the newcompanyto hertwo loyalemptoyees? Whatarethe
risksfor her?Arethereanyotherways of rewarding
loyalty
that are lessrisky?
r Whatotherstructures Whydo youthinkDeborahdid not suggest
for Miya'sbusiness?
areavailable
them?
. lf youwereadvisingMiyain yourowncountry,
wouldyouradvicebe the sameor differentfrom
Deborah's?Why?

Lookat Deborah'slist of issues.What should tlya do and why? Usethe following phrases:

I would(wouldn't)adviseherto .... She(realty)

oughtto ....
| (don't)thinksheshould.... Shecouldalways....
 UNITl S e t t i n g u p a b u s i n e s| s9

5 A daylater DeborahFlynnsendstliya Osbornethe followingtetter. Putthe six paragraphsinto

the correctorder.

Dear Mrs Osborne

New businessproposals

a) Accordingly,I must stressthat a bank will usuallyask you to guaranteethe loan personally,which
it might make to your companyand take your houseas security.This would mean that, if the
companydefaultedon the loan, the bank would requireyou to repayit. If you could not afford
to do so,the bank would take legalproceedingsto sellyour houseand recoverits money.

b) I look forward to meetingyou againnext weekasarranged.Meanwhileif you haveany questions

about the mattersI haveraisedin this letter,pleasedo not hesitateto contactme on my direct ling
which is setout at the top of the page.

c) Following our meetingthis morning, I write to summarizemy adviceand setout the stepswhich
you shouldtake now.

d) As you explained,your businesshas now reacheda point wheie it needsto expandand requires
externalfunding to do this. Your choicesare betweendebt (that is, a bank loan) and equity (that
ig financingthrough sharesbought by an investor).Bank loansareavailableto you asa soletrader
and would also be availableif you wereto form a company.You explainedinitially that you were
interestedin obtaining a bank loan to pay for someof the expansion,but that you wereworried
about the effectthat this might haveon your personalassets,particularlyyour house.

e) If you decideto incorporatethe businessas just described,then you will be under more legal
obligationsthan you wereas a soletrader.Theseobligationsrelateto the waysin which you can
take money out of the company,and the waysin which you make valid decisionson behalf of
the company.I enclosea copy of our firm's booklet Runningyour newcompanywhich givessome
examplesof theseobligationsand explainsa little about the constitution of the company.
f) Turning to financingthroughshares, this option is not availableto soletradersor partnershipsand
is only possibleif you form a company.Sincean externalinvestoris alreadyinterestedin investing
in your business,I would advisethe formation of a privatecompanyasthe most practicaloption.
The assetsof the businesswould be transferredfrom you astheir ownerto the companyand shares
would be issuedto you and the other shareholders.

Yours sincerely

Deborah Flynn

Solicitor

A n s w e r sr I: z[ 3I rl \i 6I
10 | UNII1 settingup a business

O Work In small groupsand discussthese questions.

r Howdoesthis advicecomparewith the adviceyou gavein exercise 4?

z WhatphrasedoesDeborahuseto meana bankloan'tWhatadvantages anddisadvantages does
Deborahmentionin relationto thistypeof finance?Canyouaddanymorefromyourexperience?
3 What phrasedoes Deborah use to meanmoney raisedby sellingsharesin a company?What
advantagesanddisadvantages doesDeborah mentionin relation Canyou
to thistypeof finance?
addanymore?
4 Deborah'sletterwarnsthatrunninga company is morecomplicated thanbeinga soletrader.From
yourexperience,canyousuggestwhyshesaysthis?

0tD:YOUlKr{tU?

r In the U.K.,the constitution

of a company consistsof its memorandum of association,
which
givesinformation aboutthe locationof the company andits objectsor legalpurposes,
and
r its articlesof association,
whichcontaininternalrulesabouthowthe companyis
organized. Boththe memorandum andthe articlescanbe readby the publicat Companies
House,the centralregister of companies.
In the U.S.,the articlesof incorporationis the documentthat hasto be filed with the
relevant state.Thisdocumentis requiredof incorporated andnon-incorporated firmsalike.

7 f n her letter DeborahFlynn uses some verb + noun pairs, e.g. to set out detoJls.The following
yerb + noun pairs are commonwhen tettlng started in buslness.Try to makepalrs.

VERB NOUN
r register/ run a restrictions
z raise/ contribute b debts/ costs
3 submit/ reject c the registerof companies
4 drawup d business
5 impose e capital
6 incur f shares
7 view/inspect g acompany
8 obtain h a certificate
of incorporation
9 issue/ hold i an application (forentryin a register)
10 conduct j acontract/apartnershipagreement

8 Hll In the gaps using the verb + noun pairs above.Youmay haveto modlfy the verb.

r Inthe U.K.anymemberof the publicis allowedto at

Companies Houseto getinformation
abouta particular
company.

z A plccanextendits equitybaseby

3 Undernormalcircumstances
a company
shouldnotcommence
tradinguntilit has

4 A soletraderdoesnot needto registerhisor heractivitiesin orderto

 UNITt S e t t i n g u p a b u s i n e s| s11

5 TheCompanies Housecan if the proposedname

for registration
is too similarto a namethatalready
of the company exists.

in a general
6 Thelawdoesnotrequirepartners partnership
to
wouldrecommend
but mostsolicitors this.

7 Whena company triesto , the bankofteninsistson securing

any
the personal
loanagainst assetsof thecompany's
owners.

8 In a general the partners

partnership, bearpersonal
tiability
for any whichthe

partnership
might

GIVIt{G ADVtCEA1lD tAr !il G RECO

ll t{ E1{DAT|O1lS

for givingadviceandmakingrecommendations
Someexpressions requirea gerundandsomean infinitive.
NB:Somephrasesareappropriatewhenspokenbut arenotappropriate
in a formatwritten
context.
Gerund(-ing) lnfinitive

I (would/wouldn't) suggest/recommendmoking lthink you should tell me a bit moreabout the business.
an offer at this stage. I (strongly)odviseyou to talk to a propertyexpert
How/What about talking to a prapertyexpert about this.
aboutthis?(spoken) Youcouldalwaysmokean offerwhenyou knowa
bit more.(spoken)
Youought to make an offer whenyou know a bit more.
(spoken)
Whydon't you makean offerwhenyou knowa bit
moreT(spoken)

NB:All the abovephrases canbe usedwhenyouareadvisingsomeone lf you arediscussing

directly. what
he I she I they shoulddo, usethe phraseslistedin exercise4.

lf you wouldliketo userecommendandsuggestfor a third party,the structureis as fotlows:

/suggestthat he /she should+ infinitive

I recommend

9 look at an ext]actfroma letter froma client whosepartnershlphasgot into difficulty,to

their lawyer.

De a r ...

... I formed an accountancypartnership with David B. five years a-eo.

specializingin accountancy servicesand tax advice for small businesses.
My partner has now informed me he wishesto leaveour firm in order to
accept a partnership with a large firm specializingin accountancy for large
corporations. My problem is that I do not think I can afford to buy him out
right now. What is more, the new firm is not very far away.I mention this
becauseour partnership agreementstatesthat if a partner leaves,he should not
do businesswithin a S-mileradius of his old firm. I am. of course.worried that
David B. misht take someof our existinsclientswith him to his new firm. ...
1 2 | U NIT l Se tting up ab us ines s

tlatch the beginningsin A with the endingsin B to rebuild the lawyer'ssuggestionsbelow:

AB
Youcouldalways... ...worryaboutthecostof buyingyourpartneroutyet.Your
partnership agreement statesthatthispayment wouldonlybe
I suggest...
dueat theendofthe nextfinancial year.
Youreallyought... ...ascertain the precisevalueof thefirm.Thenyouwil[know
howmuchit wiltcostto buyyourpartnerout.
I wouldn'tadviseyou...
...tryingto cometo a bindingagreement aboutexisting clients.
5 I don'tthinkyoushould... Youwilllosesomeclients, but don'twantto losetoo many.
...to terminate partnership
theexisting withimmediate effect.
6 I don'trecommend...
DavidB.is notgoingto actin yourfirm'sinterests anymore.
...bringing in a newpartnerstraightaway.Waitandseehow
muchbusiness youhavebeforeyourushintosuchan
imoortant decision.
...to invokethe five-mileradiusclause.lt's probablynot
enforceable anyway.

ls there any adviceyou don't agreewith? Doyou haveany other advicefor the client?
. ..a..|:l
;4pefruunvrsSfrfr .,,,...i11
ascertainfind out
binding (odj)whichmustbe obeyedbecauseit is acceptedin law
buy s.o. out to poy s.o.for theirsharein a business,usuallyin orderto
get controlof the businessyourself
due owed,payable
enforceable(odj)a clausewhichis enforceobleis one whichcanform the
bosisof a court action,if the promisecontainedin the clauseis broken
with immediateeffect ot once,immediatelv

DtDYOUrlOW?

Lawyeris a generaltermwhichwe useto referto someone who has

learntthe lawandhasa licenceto practise. Inthe U.S.,lawyersare
oftencalledattorneysor attorneys-at-law. In EnglandandWales,the
legalprofession is not unified,so a distinction is drawnbetween
solicitors,who haverightsof audience in onlysomecourts,and
barristers,whospecialize in advocacy (i.e.the art of presenting
cases
in court)andwho havea rightof audience in all courts.Generally,
a
soticitor
will consultwith hisor herclientandpreparea brief.Thisbrief
is thenpassedon to a barrister whowill oresentthe casein court.
Successful anddistinguished barristers areofteninvitedto becomea
Queen's Counsel. Suchbarristers alwaysuseQCaftertheirname.

1O A clientconsultsa lauryeraboutforminga company.

Beforeyoubeginyourconsultations,
agree
the countryof jurisdictionwith yourpartner.
P artnerA Fi l eor, p.7o
PartnerB Fiteor, p.75

Uselanguagefor making recommendations and giving advicein your consultation.

After you have finished the activitn telt the class what you agreedto do.
 | 13
U N ITl S etti ngupabusi ness

GIVIl{G '
REASOTS
ATDE)(PtAllAiloils

It is oftenimportantto givereasons
andexplainthingsstepby step.
Note:Wordslikefirstlyandfirstof all aren'tusedin the sameway.
reasons
Enumerating ExplainingthestepsInvolvedin a procedure

Firstly, the companyis investingwith minimum Firstof oll, we need to discussthe business
risk... relationship between ...
Secondly,the investorreceives757oof any rent Next, I wouldsuggestdepositing...
obovetheminimum. Following that, it would be yourjob to persuade....
Thirdly,... Lostof oll, we would notify the tax office...
Finolly,...

NB.Becarefulwithat first.Weusethisto express

the factthatwe thoughtsomething
initiattyandthen
ourmi n d s .
c hanged

Example:At first it seemeda good idea to form a company.Laterwe realizedthat this would be too
expensiveand too complicated.

tl Readthe extractsfroma presentation the gaps

aboutbusinessformatsin the U.K.Gomplete
with expressions
for orderinganexplanation
fromthe languageboxabove.

' I'dliketo provideyouwith a bit of background on

business formatsin this countrvandthe rationalebehindthesedifferent
formats. ', I'dliketo go on to lookin moredetailat the plc
or to giveit its moreformalname,the publiccompany.
I'dliketo lookat thetimescalefor converting a privatecompany intoa
publiccompany. q,ld liketo discuss withyousome
examples of listedplcs:oneswhichcanselltheirshareson globalstock
exchanges.

I....t
ld liketo moveon nowto talkaboutthe plcin moredetail.
t, youmightthinkthattherearen'tmanyadvantages to
becoming a plc.Butwhenyoureadcompany legislation
andthe rulesof
the LondonStockExchange, therearethreeclearreasonsfor doingso. " it'sillegalto
offersharesto the publicif youarenot a plc. z,the AlternativeInvestment Market
(wheresharesin youngcompanies aretraded)is onlyopento plcs. ', for more
established companies,the MainMarketof the London StockExchange is alsoonlyopento plc
shares. And e,somemightsaythatbecoming a ptcis goodfor marketing.'

t2 Thespeakersaysin herpresentation that therearethreereasonsfor becoming a plc in the U.K.,

but it is not a sultableformatfor everybusiness.Howslmilaris this situationto theiurisdlction
In yourcountry?
1 4 | uN lT l Se tting up ab us ines s

t3 Herels a comparlson tableshowingthe fourformsof businessstructurein the U.K.Comptete

a-f In the tableuslngthe notesbelow.

* Two
- Snallbusiness
6anklaansor profrlaof bueiness
* Ke1ianratlonfee. k1ietaalion formahties.
Canatibutionaldocumentsrequiredand muel beopento public.
- Yes
Unlimited

Business
structure Sole tnder Limitedcompany LLP Generalpartnerchip
: (Ltd or ptc)

Raising
money ' Bankloansor profits Bankloans,profits Bankloansor profits
of business of business
or of business
I sellingsharesin the
j company

NB:onlyplcscan
selltheirshareson a
largescale

Suitablefor Anysizebusiness Anysize Anysize

(largerbusinesses
chooseplcs)

Minimu mn um berof O ne One Two C

peopte

Minimumcapital No d Yes No
requirement?

Setup costsand Noregistration

fee. Registration
fees; No registration fee.
formalities i Noformalities
to set administrative No registration
up.Noconstitutional costsgreaterfor formalities.
i documentsrequired. plcs.Registration Constitutional
i formalities. document not
Constitutional required but if one
documents required is used,thereis no
andmustbeopento obligationto makeit
public. opento public.

Liabitity f Limitedto capitaI Limitedto capital Unlimited

contribution contribution

Completethe advantagesand disadvantagesof eachbusinessstructure.

ano but areliableto the

havefewformalities
debtsof the business
withouttimit.
2 ano havelimitedtiabitity
andbankloansmaybe
easierto obtainbuttherearemoreformalities.

t4 A lawyerglyesa cllentlnformationon forminga company.

tYorkwith a partner.

PartnerA Fiteoz, p.7o

PartnerB File02, p.75
 UNITl Settingup a business| L5

Readthese readers'letters to the editor of the law supplementof TheTlmesnewspaper.

What advlcewould you give them?

Letterr

Dear Sir
After I was made redundant from a job in a luxury hotel three years ago, I started
doing some work with an ex-colleague.We agreed to work part-time for the
businessbecauseboth of us were already working separately on other projects.We
invested several thousand pounds each in our new business and agreed to divide
the responsibilities between us. I dealt face-to-facewith customersand he worked
mostly with our suppliers and did the paperwork.
Things went smoothly at first, but when my colleague'sother projects started to do
better, he just stopped doing any work for our business and handed everything back
to me. I took over his responsibilities, but it was too much for one person to manage.
As a result I lost two major customers and had to wind the business up, losing all
of my capital investment.
Can you advise?
Yours faithfully
Simon Braithwaite

Letter z

Dear Sir
My husband and I were partners in a small manufacturing business until our
retirement, The business is still going strong in the hands of the remaining two
partners, but we have not had any involvement in it, financially or managerially,
for over a year. We have now found out that a claim is being made against the
firm in relation to a debt incurred just after the date of our retirement. We have
been named in the claim along with the other two partners, because our narnes
were not taken off the firm's letter head until two months after we retired, even
though we repeatedly asked for this to be done earlier.

'vVhatdo you advise?

Yours faithfully
Ann Richardson

Nowgo to page96 andreadat the bottomthe repliesto theselettersthatwerewrittenby experts.

. Doyouthinkthe lawis beingfairto thetwo peoplewhowrotethe letters?
o Arethereanydifferencesbetweenthe legatpositionas exptainedin the two repliesandthe legal
positionin yourownjurisdiction?