ACCA F4 - Corp and Business Law (ENG)

Part D The formation and constitution of business organisations  12: Corporations and legal personality 179

The disadvantages of being a sole trader include the following.

(a) If the business gets into debt, a sole trader's personal wealth (for example, private house) might

be lost if the debts are called in, as they are the same legal entity.

(b) Expansion of the business is usually only possible by ploughing back the profits of the business as

further capital, although loans or overdraft finance may be available.

(c) The business has a high dependence on the individual which can mean long working hours and

difficulties during sickness or holidays.

(d) The death of the proprietor may make it necessary to sell the business in order to pay the

resulting tax liabilities, or family members may not wish to continue the business anyway.

(e) The individual may only have one skill. A sole trader may be, say, a good technical engineer or

craftsman but may lack the skills to market effectively or to maintain accounting records to control

the business effectively.

(f) Other disadvantages include lack of diversification, absence of economies of scale and problems

of raising finance.

1.3 Companies

A company has a legal personality separate from its owners (known as members). It is a formal

arrangement, surrounded by formality and publicity, but its chief advantage is that members' liability for

the company's debts is typically limited.

A company is the most popular form of business association and by its nature, it is more formal than a

partnership or a sole trader. There is often substantially more legislation on the formation and procedures

of companies than any other business association.

The key reason why the company is a popular form of business association is that the liability of its

members to contribute to the debts of the entity is significantly limited. For many people, this benefit

outweighs the disadvantage of the formality surrounding companies, and encourages them not to trade as

sole traders or (unlimited) partnerships.

1.4 Definition of a company

For the purposes of this Study Text, a company is an entity registered as such under the Companies Act

2006.

The key feature of a company is that it has a legal personality (existence) distinct from its members and

directors.

1.5 Legal personality

A person possesses legal rights and is subject to legal obligations. In law, the term 'person' is used to

denote two categories of legal person.

 An individual human being is a natural person. A sole trader is a natural person, and there is

legally no distinction between the individual and the business entity in sole tradership.

 The law also recognises artificial persons in the form of companies and limited partnerships.

Unlimited partnerships are not artificial persons.

Corporate personality is a common law principle that grants a company a legal identity, separate from the

members who comprise it. It follows that the property of a company belongs to that company, debts of

the company must be satisfied from the assets of that company, and the company has perpetual

succession until wound up.

Key terms

Key term

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