Keenan and Riches’BUSINESS LAW

Chapter 4Classification and survey of types of business organisation

on the house of the sole trader, or houses of the partners.

It should be borne in mind that lenders such as banks

will not advance the full market value of the property

offered as a security. For example, a lender may lend up

to, say, 70 per cent of the value of freehold land and

buildings. The figures for borrowing are less than the

asset value because of the impact on that value of the forced

sale that takes place when a lender calls in the security, if

the loan cannot be repaid.

Interest rates can differ according to the deal given

by the bank. Interest may be variable and change with

the base rate, as is the case where the bank allows the

organisation to overdraw a bank account up to a certain

amount. The alternative is a loan at a fixed rate of inter-

est. These are usually more expensive but may be better

than an overdraft facility if the loan is taken at a time of

low interest rates.

A partnership can, of course, attract more capital by

admitting new partners. There was a limit of 20 partners

in a partnership. This was designed to force the larger

partnership to become a registered company where there

was greater statutory control of its business affairs. The

Regulatory Reform (Removal of 20 Member Limit in

Partnerships, etc.) Order 2002 (SI 2002/3203) removed

entirely the 20-partner limit from all unlimited and lim-

ited partnerships. Many of these partnerships including

those of accountants and solicitors were already exempt

under previous legislation. The restriction was never

applied to the number of members in a limited liability

partnership. These Regulatory Reform Orders can be used

to reform any legislation, even a statute that imposes a

burden on business. There is no need for primary legis-

lation, i.e. an Act of Parliament.

Companies

Here the capital structure is more complicated. If two

people wishing to form a private company and be its

directors contribute £10,000 each to form the company,

each of the two members taking 20,000 shares of £1

each, then:

1 all the company’s current capital is issued;

2 the £20,000 cash received by the company is its paid-

up capital.

Under previous legislation, a company had to be reg-

istered with a stated authorised capital and no capital

could be issued beyond this limit unless the authorised

capital was increased by a resolution of the members.

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Community interest companies

These companies are not involved in business as such
and are included here for the sake of completeness. They
are designed for use by social enterprises wishing to
operate under a corporate structure.
They are intended for use by non-profit distributing
enterprises providing benefit to the community. Organisa-
tions active in areas such as child care, social housing,
leisure and community transport may wish to make use
of the corporate structure of a community interest com-
pany (CIC) given the relative freedom of a non-charitable
company form but with a clear assurance of restricted
profit distribution status.
A CIC is subject to the general framework of com-
pany law and to the Companies Act 2006. There are two
forms of CIC: a company limited by guarantee (CIG); or
a company limited by shares (CIS). CICs are registered
with the Registrar of Companies and are subject to cor-
porate regulatory constraints, including oversight by the
Companies Investigation Branch (CIB), part of the regu-
latory arm of the Department for Business, Enterprise &
Regulatory Reform (BERR).
Although a non-profit distributing organisation may
use the CIC form and carry on a policy of not paying
dividends, a CIC limited by shares can pay a dividend on
those shares if it wishes. There is a cap on the amount,
which will be set from time to time by the Community
Interest Company Regulator whose office is located in
Companies House in Cardiff. The cap can be fixed by
reference to a rate fixed by an outside body, e.g. the Bank
of England’s minimum lending rate, from time to time.
This control on dividends is referred to as the ‘asset lock’.

Raising business finance

• generally

Sole traders and all partnerships

All businesses need money to begin trading: some kind
of start-up finance. Sole traders must either put in enough
of their own money if they have it or put in what they
have and try to borrow the rest. Partners are in the same
position. Certainly, a bank will not lend 100 per cent of
the finance.
Usually the best place to try for a loan is one of the
large banks. The bank will want some security for its
money and this may mean giving the bank a mortgage