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The concept of limited liability； where the shareholders are not liable； in
the last resort； for the debts of their business； changed the whole nature of
business and risk taking。 It opened the floodgate； encouraging a new generation
of entrepreneurs to undertake much larger…scale ventures without
taking on themselves all the consequences of failure。 As the name suggests；
in this form of business liability is limited to the amount you contribute
by way of share capital and； in the event of failure； creditors’ claims are
restricted to the assets of the pany。 The shareholders of the business are
not normally liable as individuals for the business debts beyond the paidup
value of their shares。
174 The Thirty…Day MBA
The concept itself can be traced back to the Roman Empire； where it
was granted； albeit infrequently； as a special favour to friends for large
undertakings by those in power。 The idea was resurrected in 1811 when
New York State brought in a general limited liability law for manufacturing
panies。 Most US states followed suit and eventually Britain caught
up in 1854。 Today； most countries have a legal structure incorporating the
concept of limited liability。
Business law
。 Forms of business
。 Employing staff
。 Innovation issues
。 Tax legalities
。 Trading regulations
。 Rules on mergers and acquisitions
Some business schools take law very seriously； for example； at Northwestern
University’s Kellogg School and George Washington University；
MBA students can take a joint MBA and JD （juris doctor）； the basic professional
degree for lawyers。 Babson in Wellesley； Massachuse。。s has law
as one of its core subjects。 Penn State； on the other hand； offers only an
optional module in the second year on ‘Business Law for Innovation and
petition’。
Nevertheless； lawyers dominate big businesses in the United States and
both Congress and the Senate。 In the UK around 12 per cent of MPs are
either barristers or solicitors； the largest professional grouping in the House
of mons。 Other than very large businesses； it is not usual to have either
a qualified lawyer or a legal department in businesses in the UK。 Such
services are usually bought in on either a contractual or ad hoc basis。 Law
is an imprecise field。 As Henry L Mencken； the American journalist and
critic； so succinctly expressed it： ‘a judge is a law student who marks his
own examination papers’。
The plexity of mercial life means that； sooner or later； you will
find yourself taking； or defending yourself against； legal action。 It may be a
contract dispute with a customer or supplier； or perhaps the lease on your
premises turns out to give you far fewer rights than you hoped。 A former
employee might claim you fired them without reason。 Or the Health
and Safety Inspector will call and find some aspect of your machinery or
working practices less than satisfactory。
6
176 The Thirty…Day MBA
Ignorance does not form the basis of a satisfactory defence； so every MBA
needs to know enough law to know when they might need legal advice；
however high their standard of ethics and social responsibility may be。
CORPORATE STRUCTURES
As an MBA it’s highly likely that you will be working for a conventional
pany； private or public （see Chapter 2 for more on public panies）。
There are； however； a number of distinct forms that a business can take； the
choice of which depends on a number of factors： mercial needs； financial
risk and the need for outside capital。
Each of these forms is explained briefly below； together with the procedure
to follow on se。。ing them up。 You can change your ownership status
later as your circumstances change； so while this is an important decision it
is not a final one。
Sole trader
Over 80 per cent of businesses start up as sole traders and indeed around
55 per cent of all businesses employing fewer than 50 people still use this
legal structure。 It has the merit of being relatively formality free and； unless
you intend to register for VAT； there are few rules about the records you
have to keep。 There is no requirement for your accounts to be audited； or
for financial information on your business to be filed at panies House。
As a sole trader there is no legal distinction between you and your business
– your business is one of your assets； just as your house or car is。 It
follows from this that if your business should fail； your creditors have a
right not only to the assets of the business； but also to your personal assets；
subject only to the provisions of the Bankruptcy Acts。 The capital to get the
business going must e from you – or from loans。 There is no access to
equity capital。
Partnerships
Partnerships are effectively collections of sole traders and； as such； share
the legal problems a。。ached to personal liability。 There are very few restrictions
to se。。ing up in business with another person （or persons） in partnership；
and several definite advantages。 By pooling resources you may have
more capital； you will be bringing； hopefully； several sets of skills to the
business； and if you are ill the business can still carry on。
There are two serious drawbacks that you should certainly consider。
First； if your partner makes a business mistake； perhaps by signing a disastrous
contract； without your knowledge or consent； every member of the
Business Law 177
partnership must shoulder the consequences。 Under these circumstances
your personal assets could be taken to pay the creditors even though the
mistake was no fault of your own。
Second； if your partner goes bankrupt in his or her personal capacity；
for whatever reason； his or her share of the partnership can be seized by
creditors。 As a private individual you are not liable for your partner’s private
debts； but having to buy him or her out of the partnership at short notice
could put you and the business in financial jeopardy。 Even death may not
release you from partnership obligations and in some circumstances your
estate can remain liable。 Unless you take ‘public’ leave of your partnership
by notifying your business contacts and legally bringing your partnership
to an end； you could remain liable。
The legal regulations governing this field are set out in the Partnership
Act 1890； which in essence assumes that petent businesspeople should
know what they are doing。 The Act merely provides a framework of agreement
that applies ‘in the absence of agreement to the contrary’。 It follows
from this that many partnerships are entered into without legal formalities
– and sometimes without the parties themselves being aware that they have
entered a partnership！
The main provisions of the Partnership Act state：
。 All partners contribute capital equally。
。 All partners share profits and losses equally。
。 No partner shall have interest paid on his capital。
。 No partner shall be paid a salary。
。 All partners have an equal say in the management of the business。
。 Unless you are a member of certain professions （eg law； accountancy；
etc） you are restricted to a maximum of 20 partners in any partnership。
It i