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Legal Entities

Before entering into a contract of any kind it is important to know who it is you are contracting with and the type of legal entity it is. Failure to do so could be extremely costly, not only in terms of recovery of sums due, but also expenses – more so, if you inadvertently go after the wrong legal entity.

The below is but a sample of some of the legal entities in the United Kingdom:

Unincorporated legal forms:

The distinguishing feature of unincorporated forms is that they have no separate legal personality. In other words, in terms of debt recovery, for example, the individual(s) remain personally liable. There are five main forms:

Sole Trader
This is the simplest way to set up and run a business: ownership and control of the business rests with a single individual. Being a Sole Trader is inherently risky because the individual is not separate from the business and has sole unlimited personal liability for the business, its debts and contractual obligations, and any claims against it. They own all the assets of the business and can dispose of them as they wish, and may employ staff and trade under a business name.

Regulation for the Sole Trader is minimal: there is no requirement for a formal constitution for the business, and no need to register or file accounts and returns with Companies House.

Unincorporated Association
Unincorporated Associations are groups that agree, or ‘contract’, to come together for a specific purpose. They normally have a constitution setting out the purpose for which the association has been set up, and the rules for the association and its members. They are typically governed by a management committee. All members of the management committee will again have unlimited personal liability, unless they are specifically indemnified in the constitution.

Partnership
A partnership is a relatively simple way for two or more legal persons to set up and run a business together with a view to profit. A partnership can arise, without any formal agreement, when people carry on a business in common, but typically there is agreement to trade as a partnership. Partners will usually draw up a legally binding partnership agreement, setting out such matters as the amount of capital contributed by each partner and the way in which they will share the profits (and losses) of the business.

Again the Partnership has no separate legal personality. Partners share the risks, costs and responsibilities of being in business. Because partners generally bear the consequences of each other’s decisions, partners usually manage the business themselves, though they can hire employees.

Legal persons other than individuals – such as Limited Companies or Limited Liability Partnerships – can also be partners in a partnership. They are treated like any other partner except that they have additional tax and reporting obligations – for example companies must pay corporation tax rather than income tax on their profits from the partnership.

Limited Partnership
Not to be confused with a Limited Liability Partnership (see below) – a Limited Partnership has two sorts of partner: general partners and limited partners. The form is similar to a partnership, with the main differences being that the limited partners may not be involved in the management of the business and their liability is limited to the amount that they have invested in the partnership. Note that limited partners are different from ‘sleeping’ partners in a partnership or Limited Partnership, who do not take part in running the business but remain fully liable for its debts. Limited Partnerships must register at Companies House, and do not come into existence until they are registered. Changes to the partnership must also be registered.

Trust
Trusts are unincorporated and have no legal identity of their own. They are essentially legal devices for holding assets so as to separate legal ownership from economic interest. A trust holds assets on behalf of an individual or another organisation and governs how they are to be used. A trust is run by a small group of people called trustees who are legally responsible for the administration of the trust and personally liable for any debts or claims against it that cannot be met out of the trust’s own resources. Trusts make their own set of rules – enshrined in a trust deed – which sets the trust’s objectives and may be used to ensure that assets and profits are used for a particular purpose. Trusts do not typically raise finance – they simply manage assets and do not distribute profits. Trusts are often used in conjunction with unincorporated associations, which cannot themselves own property.

Incorporated legal forms

Limited Company (LTD)
The Limited Company is the most common legal form in use for running a business. Companies are ‘incorporated’ to form an entity with a separate legal personality. This means that the organisation can do business and enter into contracts in its own name.

On incorporation under the Companies Act 2006, a company is required to have two constitutional documents:

  • a Memorandum, which records the fact that the initial members (the subscribers) wish to form a company and agree to become its members. The Memorandum cannot be amended; and
  • Articles of Association – often just referred to as the Articles – which are essentially a contract between the company and its members, setting the legally binding rules for the company, including the framework for decisions, ownership and control. The Companies Act 2006 provides significant flexibility to draw up articles to suit the specific needs of the company, provided it acts within the law.

A Limited Company is owned by its members – those who have invested in the business – and as the name suggests they enjoy limited liability – i.e. the company’s finances are separate from the personal finances of their owners and as a general rule creditors of the business may only pursue the company’s assets to settle a debt. The personal assets of the owners are not at risk.

Lifting the veil of incorporation, sueing directors, recovery of allocated but unpaid share capital and personal guarantees are not covered by this section and require specific advice.

A company Limited by Guarantee (Majority are by shares) is where members of the company give a guarantee to pay a set sum if the company should go into liquidation.

Directors may be a shareholder, thus the simplest form of Limited Company is a single member who owns the whole company and is also its sole director. A company must have at least one director (public companies described below must have two) and at least one director must be a real person.

Public Limited Company (PLC)
The key difference between a LTD company and a PLC is that the Public Limited Company is permitted to offer shares for sale to the public. Public Limited Companies usually begin life as Private Limited Companies but later go public for the advantage that this provides in raising finance. A Public Limited Company must have at least two directors and a qualified company secretary. It must have issued shares to the public to a value of at least £50,000. Public companies attract stricter regulation than private companies to ensure transparency and protection for the public investor.

Limited Liability Partnership (LLP)
A Limited Liability Partnership is a body corporate with a separate legal personality similar to a company. Unlike in a normal partnership, the members of an LLP enjoy limited liability as the name suggests – liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. Each member takes an equal share of the profits, unless the members’ agreement specifies otherwise.

LLPs must register and file accounts and annual returns at Companies House. At least two members must be “designated members” who hold additional responsibilities – it is they who appoint auditors and sign off and file the accounts at Companies House.

ENGLAND/WALES Charitable Incorporated Organisation (CIO)
SCOTLAND Scottish Charitable Incorporated Organisation (SCIO)

Both CIO and SCIO are relatively new legal forms for registered charities. Currently there is no provision for this form of legal entity in Northern Ireland.

The type of legal entity can enter into contracts, employ staff, incur debts, own property, sue and be sued. They are required to file accounts with the respective regulators.

Co-operative Society (Co-op)
A Co-operative Society is a membership organisation run for the mutual benefit of its members – serving their interests primarily by trading with them or otherwise providing them with goods, services and facilities – with any surplus usually being ploughed back into the organisation, although profits can be distributed to members. A Co-operative Society may or may not be a social enterprise, depending on its activities and how it distributes its profits.

A Co-operative Society is incorporated – and so has a separate legal personality – and must register and submit annual accounts to the Financial Services Authority (FSA) rather than Companies House. As with a company, the members’ liability is limited to the amount unpaid on shares. They have a principle of open membership and can therefore raise funds by issuing shares to the public.

Financial Mutuals
There are three other types of mutual form, not covered in detail here, that specifically exist to provide financial services. These are also registered with the FSA.

  • Building Society Building Societies are mutual financial services institutions, primarily providing residential mortgage lending, but also other financial services such as other forms of lending and investment, money transmission services, banking and insurance services. They are funded substantially by their members.
  • Credit Union A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of providing credit at reasonable rates, and providing other financial services to its members.
  • Friendly Society A friendly society is a voluntary mutual organisation whose main purpose is to assist members financially during sickness, unemployment or retirement, and to provide life assurance.

The content of this website is for general information only and should not be relied upon. It is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Contains public sector information licensed under the Open Government Licence v3.0.