Legal Trading Entities

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Legal Entities, Trading Names and Companies

When selecting a trading style for a business, there are great advantages to selecting to trade as a company rather than as a sole proprietor or partnership. In this feature we give an examples of the differences between trading as a sole proprietor, partnership and as a company.

When it comes time to decide to start a new business or restructure a business, the structure of business which is to be adopted makes a significant difference to the potential liability of those owning and controlling the business.

As well as this, there are important legal requirements for naming a business from a legal perspective. It is important to appreciate the difference between trading names, sole proprietorship and companies.

Sole Traders

If a person wants to go into business, they are entitled to do so in their own name. A person named “John Doe” who is over the age of 18 years of age is entitled to trade as “John Doe”. In cases such as this John is trading “in his own name”. John is the “legal entity” or “legal person” running the business. This means that John is entitled to enter into contracts in his own name, buy property, sell property and sue customers for failures to pay and be sued. John enters into contracts in his own name.

Suppose as a business, John develops software licences others to use that software. John would be legally liable if he negligently developed the software such that it was defective or if he did not pay creditors sums borrowed to establish the business. He would be personally liable for judgments against him. John is the legal entity with whom members of the public do business when they engage him.

Trading Names

John could also adopt a trading name. If John was mechanic, he might want to adopt a trading name to reflect the fact that he was a software developer. Accordingly, he could adopt a trading name, such as “John’s Software Developers”. John would then say that he is “John Doe trading as John’s Software Developers” or in an abbreviated form “John Doe t/as John’s Software Developers”. Adopting a trading name such as this does not change the “legal entity” or “legal person” trading. John would still be the person buying the property and selling property; if a customer did not pay for his services, he would be bring legal proceedings in his own name (but named “John Doe t/as John’s Software Developers”. Equally, John could be sued in his own name, giving rise to personal liability.

This personal liability creates real problems in terms of exposure to liability. If John was sued, all of his assets (whether used in his business or not) would be available to judgment creditors. This liability is not limited, and all of the assets of the entity are available.

Partnerships

Partnerships are comprised of two or more persons carry on a business in common with a view to profit. The persons may be individuals, companies, trusts, limited liability partnerships or any other form of legal entity. There also does not need to be a formal agreement between the persons forming a partnership. The Partnership Act 1890 deems partnerships to exist where legal entities carry on a business in common with a view to profit.

The participants in a partnership are not separate legal entities (see below) to its participants. Each partner carries on the business as a principal of the business. As well as this, each partner is the agent of each of the other partners. This means that each partner has the legal capacity to legally bind each of the other partners.

In the same way as a sole trader, each partner has unlimited liability with every other partner for all the debts and other obligations of the partnership.

The consequence of this is that each partner in a partnership is liable for the debts of the partnership, whether or not they were incurred by him directly or by another partner. The liability of the partners is not limited, in that all of the personal wealth of each partner is available to creditors for debts of the partnership.

Limited Liability Partnerships (LLPs)

What is an LLP?

It is an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the members will be limited.

What sort of organisation can become an LLP?

Any new or existing firm of two or more persons can incorporate as an LLP.

Can I incorporate an LLP in Scotland or Northern Ireland as well as England/Wales?

Yes.

Can I convert from being a limited company to an LLP?

The LLP legislation does not allow for a ‘conversion process’ – in the way that a limited company can convert to PLC status under the Companies Act, for example. Anyone with a current limited company wishing to transfer their existing company name to a new LLP should contact the LLP Team Leader. The process will involve a closely controlled company change of name and an LLP incorporation. Establishing contact prior to submitting the necessary forms will help ensure that this process is completed as smoothly as possible.

What are the LLP disclosure requirements?

They are similar to those of a company. LLPs are required to provide financial information equivalent to that of companies, including the filing of annual accounts. Among other things, they are also required to:

  • File an annual return
  • Notify any changes to the LLP’s membership
  • Notify any changes to their members names & residential addresses
  • Notify any change to their Registered Office Address

What are the duties of a designated member?

Designated members are responsible for carrying out certain duties including some of those that would normally be carried out by a company director or secretary. They include such things as:

  • Signing the annual accounts
  • Filing the annual accounts and annual returns with Companies House
  • In the event of Insolvency proceedings, providing any statement setting out the affairs of the business i.e. assets, debts and liabilities.

Will LLPs be available to charities?

No. LLPs are only available to any lawful business that is carried out with a view to a profit.

Companies

The invention of companies changed this and introduced the concepts of a separate legal entities and limited liability. Following the example above, John is able to incorporate a company and become the shareholder and director of the company. Rather than trading in his own name, the company is the legal entity or legal person which is the business. John could name the company John’s Software Developers Limited.

When John incorporates the company, the “Limited” suffix or the abbreviation “Ltd” is used to designate the difference between John trading in his own name and the separate legal entity of the company. John is no longer trading as a sole trader. He is a director of a company. Customers enter into contracts with the company to maintain servers and write software. Because the company is the legal entity that is maintaining servers and writing software, customers are invoiced by the company and the customers owe the company the sums invoiced, rather than John. The company is the legal entity which sues customers who fail to pay invoices. The company is sued by customers when the software is defective, and creditors sue the company and not John (or any other shareholder or director, if there are any) when invoices are not paid.

Separate Legal Entities and Companies

For these reasons, a company is a separate legal entity to its directors and shareholders. The directors and shareholders have the benefit of limited liability for the liabilities and debts of the company, rather than (in the case of a sole proprietor or partnership), the full extent of their personal wealth.

Forms of Companies

Companies may be registered in a variety of forms. The most common are companies limited by shares. Companies may also be unlimited or limited by guarantee.

Limited Liability

In a company limited by shares, the liability of shareholders (known as “members” in the Companies Act 2006) is limited to the nominal value of the shares issued to them in the company. So, if a shareholder is allotted 100 shares of £1.00 each, the maximum liability of the shareholder is £100 (100 x £1). Shareholders may not be required to pay for shares when they are allotted; when they are paid for they are said to be fully paid up, and the shareholder owes no further liability to the company for its debts and liabilities.

The liability of members in a company limited by guarantee is limited by the sum specified to be payable by the members in the company’s constitution in a winding up of the company. Frequently, the sum is specified to be £1.00, but there is no reason why this needs to be the case. The liability of members in an unlimited company is not limited. Similar principles apply to limited liability partnerships.

Signing on Behalf of a Company

The use of the suffix “limited” or “ltd” is essential to indicate that the company is the relevant legal entity dealing with members of the public. Due to provisions of the Companies Act, business trading as “Acme Limited” is a different legal entity to a business trading as “Acme”. For this reason, directors of companies should ensure that they sign documents on behalf of the company with a reference to the company name, which includes the “Limited” or permitted substitute “Ltd” extension.

Failures to do so expose directors and other people signing documents to claims that they themselves were trading in their personal capacity and not for and on behalf of the separate legal entity of the company. The signing provisions of contracts should specify the company name, which at all times includes a reference to the “Ltd” or “Limited” (or plc, if a public limited company).

Rights to Company Names and Trade Marks

Simply registering a company name at Companies House does not give the registrant any rights in respect to the name. The Companies Act allows existing companies to object to the registration of names which are similar to their own by commencing proceedings in the Company Names Tribunal, which is administered by the Intellectual Property Office.

When a company starts marketing activities and selling products and/or services, it will begin to accrue goodwill for the purposes of the law of unregistered trade marks. It is almost always more difficult to prevent competitors copying trading names or using similar trading using while a trading name remains unregistered.

The better approach is to apply for a registered trade mark for the trading name. Registered trade marks result in the trading or business name being listed on a public searchable register at the Intellectual Property Office. Registration grants the trade mark owner exclusive use of the trade mark in the form that it is registered, as well as trade marks which are considered to be similar at law.

For these reasons, new businesses should check the Register of Trade Marks in order to ensure that there is no business coming before it that already uses the trade mark. Failing to spot a registered trade mark already in use exposes the new business to allegations of trade mark infringement. If these allegations are sustained by court action, the new business may be required to pay damages to the prior trade mark owner and be required to stop using the trade mark if the court sees fit to impose an injunction to prevent further use of the trade mark.

Conclusion

Trading as a sole proprietor or partnership exposes the owners of the business to personal liability, and unlimited liability at that. Companies on the other hand shelter the directors, shareholders and others doing the business of a company from personal liability.

There are other reasons for adopting a trading style of a company, including the ease with which investment can be made by third parties by issuing shares in exchange for working capital. When sizing up the risks of engaging in business activity, more often than not, companies are the better option. When doing the business of a company, individuals signing documents need to ensure that they make it clear form documents that they sign represent that the company is entering into the contract and not the individual.

At IAIS we can guide you through all your options and trading styles and advise on the legalities of each option.

 

 

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