178 12: Corporations and legal personality Part D The formation and constitution of business organisations
Study guide
Intellectual level
D The formation and constitution of business organisations^
3 Corporations and legal personality
(a) Distinguish between sole traders, partnerships and companies 1
(b) Explain the meaning and effect of limited liability 2
(c) Analyse different types of companies, especially private and public
companies2(d) Illustrate the effect of separate personality and the veil of incorporation 2
(e) Recognise instances where separate personality will be ignored (lifting the
veil of incorporation)2Exam guide
You must be able to compare and contrast companies and partnerships, and to identify which business
vehicle would be the best form of business organisation in a particular situation.1 Sole traders' and companies' legal identities
In a sole tradership, there is no legal distinction between the individual and the business.1.1 Sole traders
A sole trader owns and runs a business. They contribute capital to start the enterprise, run it with or
without employees, and earn the profits or stand the losses of the venture.
Sole traders are found mainly in the retail trades (local newsagents), small scale service industries
(plumbers), and small manufacturing and craft industries. An accountant may operate as a sole trader.1.2 Legal status of the sole trader
Whilst the business is a separate accounting entity the business is not legally distinct from the person
who owns it. In law, the person and the business are viewed as the same entity.
The advantages of being a sole trader are as follows.
(a) No formal procedures are required to set up in business. However, for certain classes of business
a licence may be required (eg retailing wines and spirits), and VAT registration is often necessary.
(b) Independence and self-accountability. A sole trader does not need consult anybody about
business decisions and is not required to reveal the state of the business to anyone (other than the
tax authorities each year).
(c) Personal supervision of the business by the sole trader should ensure its effective operation.
Personal contact with customers may enhance commercial flexibility.
(d) All the profits of the business accrue to the sole trader. This can be a powerful motivator, and
satisfying to the individual whose ability/energy results in reward.FAST FORWARD