Company law – pre-reading - Legal forms of business

Legal forms of business

This element covers the main legal characteristics of the following forms of business:

Sole trader

Partnership

Limited partnership

Limited liability partnership

You will look at the main characteristics of public and private companies in the next element.

Introduction

Why businesses are set up

Businesses are generally set up to make a profit. A business generates income by selling products and/or services. In order to sell the products and/or services the business will incur certain expenses. Provided the income generated exceeds the expenses of the business, it will make a profit. Once a business has made a profit, a proportion of that profit is likely to be given to the owners of the business, and the rest will be retained in the business in order to help it grow.

Raising finance

Why do businesses need to raise finance?

A business is likely to need to raise finance for a number of reasons including the following:

to purchase premises from which to operate, plant and machinery, stock or raw materials, computer hardware and software in order to be able to manufacture and sell goods, or provide a service;

to employ staff to make the goods and/or provide the services to customers;

to obtain the advice of professional advisers from time to time, particularly accountants; and

to expand and grow, which it may do by acquiring other businesses, carrying out marketing activities e.g. advertising and investing in new premises and equipment.

How do businesses raise finance?

There are four basic ways in which a business can raise money:

the owners of the business may invest in it by making contributions of capital to the business;

outside investors may be prepared to make a capital contribution to the business in order to share in its future profits;

the business may borrow money, for instance, from a bank; and

as already mentioned, a proportion of the profit that the business has generated is likely to be retained within the business to help it grow, rather than being distributed to the owners and investors in the business.

Business models

In practice, lawyers may have to advise clients on the most appropriate business model for their business. In order to do this, you need to be aware of the different possible business models and the key considerations when forming a business and choosing a business model.

In order for you to understand the significance of companies, it is helpful to first consider the features of alternative business structures. This will enable you to put into context the advantages and disadvantages that the company structure offers for businesses.

In this element you will explore the legal features of the following business models:

Sole trader

Partnership

Limited partnership

Limited liability partnership (LLP)

In the next element you will consider the key characteristics of public and private companies.

Key considerations when forming a business

Costs - How much does this business model cost to set up?

Risk - Will the participants in the business have personal…