Corporate Structure Flashcards
(28 cards)
What is a Partnership
A partnership is “the relationship which subsists between persons carrying on a business in common with a view to profit.”
Key Characteristics:
Must involve two or more persons
Must be aimed at making a profit
Governed by common law and relevant statutes
Types of Partnership
There are 3 main types of partnerships:
General (Ordinary) Partnership – governed by the Partnership Act 1890
Limited Partnership (LP) – governed by the Limited Partnership Act 1907
Limited Liability Partnership (LLP) – governed by the LLP Act 2000 & LLP Regulations
General Partnership
Governing Law: Partnership Act 1890
Legal Status: Not a separate legal entity
Liability: Partners have unlimited personal liability
Practical Points:
No formal registration required
Partners own assets jointly
Profits shared; partners pay income tax individually
Dissolves automatically if a partner leaves (no perpetual succession)
Affairs are private, unlike companies
What Duties do Partners Owe to Each Other
Partners must:
Act honestly for the benefit of the firm
Disclose all relevant information
Account for profits and firm assets
Not compete with the firm’s business
These duties arise automatically under the law, not just from agreement.
Law v Law
Facts: Two brothers were partners. One failed to disclose certain partnership assets.
Legal Principle:
Reinforces the duty to disclose between partners.
Courts upheld the principle that full transparency is required.
Used to illustrate how legal duties apply even in close personal partnerships.
Sct 24 Partnership Act 1890 Default Rules
If no express agreement exists, the following apply:
Equal profit sharing among partners
No partner entitled to remuneration
Every partner has a right to take part in management
Changes in partnership require unanimous consent
Right to interest on loans (but not capital)
Partners must be indemnified for firm-related liabilities
Majority vote may be sufficient for expulsion in some cases
What other rights do Partners have?
Partners have the right to:
Share profits equally
Inspect books and records
Be indemnified for liabilities incurred for the firm
Receive interest on firm loans
Participate in management
Block new partners (unanimous consent needed)
Expel a partner by majority (if agreed or default allows)
These rights form the baseline rules unless partners agree otherwise.
Partners and Third Parties (Authority to Bind the Firm)
Partnerships have partners acting as agents of a firm meaning the actions of one partner legally binds the entire firm, as long as its in the usual course of business:
-third parties like customers of suppliers can deal with one partner and it can be assumed they’re dealing with the whole partnership
-this is even if the other partners dont agree
Mercantile Credit v Garrod (1962)
A garage business partner sold a care, despite internal agreement with partners not to
HELD: Partner was bound by the contract, selling the car is the usual scope of a business and third party didn’t know of internal restrictions
Legal Principle:
Third parties are protected if they reasonably believe partner has authority
Internal agreement s dont limit partner ability to bind firm unless outsiders know of restrictions
Dissolution of a General Partnership
Dissolution means the legal end of the partnership, followed by winding up of its affairs.
Unlike companies, partnerships do not have perpetual succession. The firm ends if certain events happen.
A general partnership may be dissolved due to:
Expiry of a fixed term (e.g., a 2-year partnership)
Completion of a specific purpose (e.g., a single project)
Notice by any partner (in partnerships at will)
Death or bankruptcy of a partner
Illegality of the business (e.g., changes in law make it unlawful)
Key Rule:
When dissolution happens, the partnership must wind up (settle debts, distribute assets)
What is a Limited Liability Partnership
An LLP is a corporate body with limited liability and its own separate legal personality.
Governed by: LLP Act 2000 & LLP Regulations 2009
Created via incorporation
Combines flexibility of partnerships with limited liability of companies
Key Features of LLPs
✅ Separate legal personality
✅ Limited liability for members
✅ At least two designated members (legally responsible for filings etc.)
✅ Members share capital and profits equally (unless otherwise agreed)
✅ Internal books and records must be available for inspection
✅ Expulsion of a member can occur by majority vote
✅ Other default provisions apply unless varied by agreement
Types of Registered Companies (Companies Act 2006)
The Companies Act 2006 recognises various company types:
Private companies (e.g., Ltd)
Public companies (e.g., PLC)
Limited companies:
By shares
By guarantee
Unlimited companies (no limit on member liability)
What is a Company Limited by Shares
A company limited by shares is a company where:
Shareholders’ liability is limited to the unpaid amount on their shares
The company is a separate legal person
Ownership is with shareholders, management is by directors
Example:
If you bought shares worth £1 each but only paid 20p, your max liability is the unpaid 80p per share.
What is Separate Legal Personality
Once registered, a company is legally separate from its owners, directors, and employees.
This means:
It can own property
It can enter contracts
It can sue and be sued in its own name
It has perpetual succession (does not end if members change)
Why Separate Legal Personality Matters
✅ Protects shareholders’ personal assets
✅ Creates a “corporate veil”—personal liability is shielded
✅ Enables secure investment and risk-taking in business
✅ Key to the structure of both LLPs and limited companies
Salomon v Salomon
Salomon, a sole trader sold his business to a limited company he incorporated, became majority holder with £10K debentures
Company went bankrupt so creditors wanted to hold Salomon personally liable
HELD: Company was separate to Mr Salomon, so he didn’t have to repay company’s other debts.
Legal Principle:
Incorporated companies can be legally distinct from owners
Shareholders aren’t liable for company debts beyond their unpaid share capital
Lee v Lee’s Company
Lee was a chief pilot and died in a crash
Widow claimed workers compensation for his death but insurer denied saying he can’t be an employee and owner
HELDS: Mr Lee was an employee of company
Legal Principle:
A person can enter contract with their own company
Can still employ majority share holders/ directors (not possible in sole trader or partnerships)
Macaura v Nothern Assurance
Mr Macaura owned all shares to company, insured in own name but company was the legal owner
Timber was destroyed and he claimed compensation
HELD: No insurable interest, so timber was the companies not his
Legal Principle:
Shareholders dont own company asset
Company owns property independent of its members
What is ‘Lifting the Corporate Veil’
“Lifting” or “piercing” the corporate veil refers to a court disregarding the company’s separate legal personality and holding its members (e.g., shareholders or directors) personally liable for the company’s acts or obligations.
Why It Matters:
It’s an exception to the rule established in Salomon v Salomon, where the company is a distinct legal person. Courts will only lift the veil in very limited circumstances, typically involving fraud, evasion of legal duties, or abuse of the corporate form.
Grounds for Lifting The Veil
- Common Law Grounds:
Fraud or dishonesty
Sham or façade companies
Evasion of existing legal obligations
Agency relationships (subsidiary acting as agent of parent) - Statutory Grounds:
Wrongful trading (Insolvency Act 1986, s.214)
Fraudulent trading (s.213)
Director disqualification (Company Directors Disqualification Act 1986)
Gilford Motor Co Ltd v Horne (1933)
Facts:
Mr Horne, a former employee of Gilford Motor Co, had a non-solicitation clause in his contract. After leaving, he set up a new company to target and solicit his former employer’s clients, attempting to evade his contractual obligations.
Decision:
The court granted an injunction against both Mr Horne and the company.
Legal Principle:
The company was a mere cloak or façade to hide Horne’s breach of contract. The court lifted the corporate veil to prevent abuse of legal personality and enforce the contractual restriction.
✅ Veil lifted to prevent evasion of a legal duty.
Jones v lipman
Facts:
Mr Lipman entered a contract to sell land to Mr Jones but later changed his mind. To avoid specific performance, he transferred the land to a company he had created for this purpose.
Decision:
The court ordered specific performance, requiring the land transfer to go through.
Legal Principle:
The court found the company was a sham and used to avoid a legal obligation. It pierced the veil to ensure the contract was fulfilled.
✅ Veil lifted due to fraudulent purpose (evasion of contract).
Adams v Cape Industries plc
Facts:
Cape Industries, a UK parent company, had a US subsidiary which was insolvent and unable to pay creditors. Victims of asbestos exposure sought to hold the parent company liable for the subsidiary’s debts by lifting the veil.
Claimant’s Arguments:
The subsidiary was a sham or façade
The group functioned as a single economic unit
The subsidiary acted as an agent of Cape
It was just and fair to impose liability on Cape
Decision:
The court rejected all arguments and refused to lift the veil.
Legal Principle:
The court reaffirmed the Salomon principle — each company is a separate legal entity. The veil will not be lifted merely on grounds of justice or group operation. It will only be pierced in very specific and limited circumstances (e.g., fraud or agency).
❌ Veil not lifted — reaffirmation of strict corporate separation
