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Business Law – Problem Questions

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(i) Advise three friends what they should take into consideration when making up their minds if they should set up their business as a general partnership (unincorporated) or as a limited liability company (incorporated.)

The issues that should be taken into account in deciding on a solution for the appropriate business structure include the number of people involved, and the liabilities, such as tax, responsibility for business decisions, and debts, that each person would carry. A partnership is defines under the Partnership Act 1890, with Section 1 stating that persons carrying on a business or a profession in common with a view of profit will be counted as being in a partnership. One of the benefits for the three friends establishing a partnership is that they can create it without being required to legally establish it (French, 2014:10.) The friends should note that it is not actually the agreement alone that will create a partnership, but rather the carrying on of a business in a particular manner; furthermore, a partnership is deemed to come into existence only when the partners actually start to perform the business as in accordance with the agreement that they have made between them (French, 2014:10.)

The friends should also consider the purpose of their business, as the case of Khan v Miah (2000) is relevant for considering what constitutes a business; in this case the House of Lords held that the partnership had existed even though the business had not even opened by the time that the relationship between the parties was irretrievably broken. Therefore, the friends should consider that even if they do not take any income from their business, they will still be judged to be in a partnership together. Furthermore, as partners, they will be held liable for all debts of the business that have been incurred during membership of the partnership under Section 9 of the Partnership Act 1890, despite any agreement between them to the contrary. The friends should note that this is the primary difference between a partnership and an incorporated company, as members of a corporation are not personally liable for a corporation’s debts, unless the constitution of the company actually specifically imposes this. This was noted by Cave J in Re Sheffield and South Yorkshire Permanent Building Society (188:476), in which he stated, “persons who unite together for trading or for making profits in any way are, at common law, liable for all debts.”

Therefore, the friends must consider the issue of personal liability for debts if they go into partnership. This is also tied into the issue of responsibility for decisions; whilst in a partnership every partner is deemed both able to act for the firm in the course of its business, under Section 5 of the Partnership Act 1890, as well as liable for all its debts, this also means that the act or decision of any one member of a partnership will bind the partnership as well as all other partners. There are benefits of partnerships; for example, it is deemed easier to extract profits than in other business structures, and, in theory at least, the management structure is considered more flexible (Vinter and Price, 2006:66.) Additionally, a partnership is not liable under law to register its accounts, or its other interests (Vinter and Price, 2006:66), which means that there is less scrutiny from the law. Another benefit of a partnership is that it can be easily dissolved, simply by providing the other partners with notice, and so it is more casual and potentially more convenient. However, this can also be a disadvantage if, for example, there exists a lack of trust between the partners regarding one partner failing to carry out his duties and bear his share of the burden of the business.

The friends could also consider entering into a Limited Liability Partnership (LLP) under the Limited Liability Partnerships Act 2000. The LLP is considered under English law to be a corporate body and has a separate legal personality, under Section 12 of the 2000 Act, and it has unlimited capacity, according to Section 1. It is not subject to the law relating to partnerships, according to Section 1(5) of the Act, and is treated as a company, particularly where insolvency law is concerned, according to Regulations 3 to 5 of the Limited Liability Partnership Regulations 2001. This means that the friends will hold less responsibility for debts than would be the case if they formed a partnership. The LLP has a number of advantages to a partnership, as although under Section 6 of the 2000 Act every member will be considered an agent of the LLP, they will not bear personal liability for debts, because LLPs are incorporated and therefore have separated legal personality, under Section 1(2).

Unlike in partnerships, which do not have separate legal personality under English law (Stevenson and Sons: 2008), the friends would not have to be concerned about being personally liable for debts or for the decisions of other members. Furthermore, in an LLP the friends will be able to apportion beforehand their responsibility for profits and losses. One of the more cumbersome points of LLPs in comparison to partnerships ifs that they are subject to greater scrutiny and must observe more points of law, including in establishment, although under S.2 (1) (a) of the 2000 Act an LLP may be incorporated by two or more persons together with any other person who agrees to become a member and they will be subject to all provisions of the 2000 Act, although according to Section 5(1) they can create their own rules concerning the relationship between themselves. One of the negative points of the LLP is that under Section 6(1) of the 2000 Act, a member who has no authority to act on behalf of the partnership can still bind it by his actions, unless the third party concerned specifically knows that he has no authority, according to Section 6(4).

Therefore, the partnership is the business vehicle that will offer the friends the greatest flexibility as well as privacy (Hillman and Lowenstein, 2015:7), and it is ruled by only one Act, which can be altered by agreement between partners. However, whilst an LLP is subject to more law and accountability; it provides members with liability from debts. One problem is however that LLPs are not yet fully tested by the courts, which mean that it is still a more uncertain vehicle than a partnership (Hillman and Lowenstein, 2015:7).

(ii) A business associate, who has taken on a new role as operations Manager of a small business, has asked you to help her to explain the difference between an employee and an independent contractor to the Managing Director.

In the modern workplace, the difference between the two types of workers, the employee and the independent contractor has become a significant issue for both employees and employers. Employees have greater protection in law, as they have welfare and insurance benefits; they are entitled to receive statutory sick pay, and a state pension (Dooley and Dransfield, 2006:45.) However, the independent contractor has very little right to state welfare and enjoys no statutory sick pay (Dooley and Dransfield, 2006:45.) Furthermore, the income tax of employees are deducted at source, whilst independent contractors are liable for payment of their own tax and support and may be criminally liable if they fail to do this. (Dooley and Dransfield, 2006:45.) Additionally, employees are vicariously liable for the actions of their employees and for their safety, whilst independent contractors have no such protection, nor do they have the rights of employees, which include the right to receive redundancy pay, not to be unfairly dismissed, and to maternity pay (Dooley and Dransfield, 2006:45.)

Therefore, perhaps the greatest distinction is that employees are afforded significantly greater statutory protection. The difficulty is in determining the distinction in practice, as when, for example, an independent contractor works on a project for a long time, the differences may become blurred. The issue has been decided in the common law, which has taken into account the numerous types of situations to be found in workplaces. As Lord Denning stated in Stevenson & Others v. MacDonald and Evans, it can be difficult to distinguish. Although there is no statutory way of defining the difference, the courts have built up through cases a way of distinguishing the difference. The test of control is significant, as defined in Yewens v. Noakes, in which the judge stated that an employee is a servant who is “…subject to the command of his master as to the manner in which he shall do his work.” In the modern era, however, this test was viewed as inadequate, and it was developed in Ready Mixed Concrete (South East) Ltd v. Minister of Pensions and National Insurance (1968:520), in which it was stated, “control includes the power of deciding of how the thing is to be done, the means to be employed in doing it, the time when and the place where it shall be done.” Therefore, an independent contractor would probably not be subject to the same amount of control as would an employee, and would have greater autonomy. However, due to changes in the industrial environment, the control test was judged inadequate as the only distinguishing factor (Hillyer v. Governors of St Bartholomew’s Hospital, 1909.) As stated in Beloff v. Pressdram Ltd (1973:250), skill is also an important factor, as “the greater the skill required for an employee’s work the less significant is control in determining whether the employee is under a contract of service.” It is possible therefore that an independent contractor may have a certain skill that allows him greater flexibility and autonomy than an employee.

In 1952, Lord Denning noted industrial developments in Stevenson & Others v. MacDonald and Evans (1952), as he developed the integration test, which concerns the necessity of a person’s work to a business. However, although this integration test is used in addition to the control test, it can be difficult to ascertain what exactly is of necessity to a business, as businesses and their structures can be very different. Another approach is that of the test which defines whether it is another business that will gain or suffer the ultimate benefit or loss, as in Lee Ting Sang v. Chung Chi-Keung (1990), Lord Griffiths stated that a “skilled artisan earning his living by working for more than one employer as an employee and ... a small businessman venturing into a business on his own account as an independent contractor with all its attendant risks.” Market Investigation Ltd v. Minister of Social Security (1969) also tackled the question of whether a person is an individual working for himself of for the benefit of a company, whilst another test that has been developed consists of the court looking at the real relationship between the parties, rather than merely the label that they have placed on it, as in Young & Wood Ltd v. West (1980).

The courts now use a multiple test to distinguish between an independent contractor and employee, following Ready Mixed Concrete (South East) Ltd v Minister for Pensions (1968), which includes looking at the degree of control to which the worker is subject, whether he pays his own tax and national insurance contributions, is provided with holiday pay, in addition to other relevant terms. O’Kelly v Trusthouse Forte (1983) considered factors relevant to a contract of employment, such as whether an individual has invested capital, the performance of roles under the auspices of the company, whether an individual is considered to represent the company, whether the company provides for, or pays for clothing, whether the company deducts tax at source, and existing disciplinary procedures, among other factors.

Therefore, it is possible for a distinction to be made ; however, this distinction is not always clear, to the extent that no exhaustive list exists, and the courts have been required to develop distinguishing factors in case law over a number of years.

(iii) Your colleague has missed classes and asks you to help him catch up on the European Union (EU) elements of the module. Write a short report for him, explaining the significance of both monist and dualist legal systems and the difference between EU Regulations and Directives.

Monist legal theory advocates that the sovereignty of the state should be absolute and therefore ought not to be overruled by international law, or by the law of the European Union. This view advocates that as a member of the European Union, a state has willingly limited its own sovereignty (Blumann and Dubois, 2005:536.) Van Gend en Loos held that the EEC Treaty is “more than an agreement which merely creates mutual obligations between the contracting states…. it is also confirmed more specifically by the establishment of institutions endowed with sovereign rights, the exercise of which affects Member States and also their citizens.” The next significant case was Costa v. ENEL, in which the European Court of Justice established the doctrine of direct effect and the imposition of European Union law above the national law of Member States. Through the European Union, Member States have agreed to limit their own rights and powers. This was the in case of Amministrazione delle Finanze dello Stato v. Simmenthal, which stated (1978:21) that it is the obligation of every national court of all Member States to “apply European Community law in its entirety…and set aside any provision of national law which may conflict with it.” As Novoakovic (2013:805) has noted, this requires the courts of Member States to act as the agents of the European Union. This can be stated to be the definition of monism in the European Union.

In contrast, dualist legal theory requires that a country intervene to implement outside law into its own legal system. Monism in the European Union is, for the most part, the system that currently exists as it is only required that parliamentary approval exists for the ratification of a treaty (Novoakovic, 2013:805) and in fact, by belonging to the European Union, it is arguable that this ratification exists in advance and is not therefore formally necessary. In contrast, in dualist legal systems, a government must transpose new international or European laws. Dualist legal theory advocates that international law and national law are of equal value but should remain completely distinct, and should not interconnect, as they cover different legal areas. In European law, therefore, there exists a system in which national law is subservient to the edicts of European law, which is the opposite of dualism. The system that requires Member States to transpose the rulings of the European Union law into the national law of Member States has essentially made monism compulsory. One example of this is the system of immediate applicability of European Union Regulations, which is held necessary under Article 249 of the EC Treaty.

Regulations are a key example of the monist legal nature of the European Union, as they are transposed directly into the national law of Member States, without any requirement for ratification (Craig and de Burca, 2011:104.) In the Variola v Amministrazione delle Finanze the European Court of Justice stated (1973:10) that the “direct application of a Regulation means that its entry into force and its application in favour of those subject to it are independent of any measure of reception into national law.” In contrast, it is not necessary to direct Directives to specific Member States, and whilst they are binding as to the result to be achieved, States have a choice as to the forms of implementation, which gives them greater flexibility than Regulations (Craig and de Burca, 2011:106.) However, Directives are not, as Craig and de Burca (2011:106) note, “vague”, individuals are able to use them in the European Courts against Member States, which may be liable for any failure to implement a Directive.



Partnership Act 1890

Treaty establishing the European Union (Nice)

Limited Liability Partnerships Act 2000

Limited Liability Partnership Regulations 2001, SI/2001/1090


Yewens v. Noakes. (1881) 6 QBD 530

Re Sheffield and South Yorkshire Permanent Building Society (1889) 22 QBD 470

Hillyer v. Governors of St Bartholomew’s Hospital [1909] 2 KB 820

Stevenson & Others v. MacDonald and Evans [1952] 69 RPC 10

Case 26/62, Judgment of 5 February 1963, Algemene Transport- en Expeditie Onderneming van Gend en Loos v. Nederlandse Administratie der Belastingen, [1963] ECR 1

Case 6/64, Judgment of 15 July 1964, Flaminio Costa v. ENEL, [1964] ECR 585.

Ready Mixed Concrete (South East) Ltd v. Minister of Pensions and National Insurance [1968] 2 QB 497

Market Investigation Ltd v. Minister of Social Security [1969] 2QB173

Case 34/72 Variola v Amministrazione delle Finanze [1973] ECR 981

Case 106/77, Judgment of 9 March 1978, Amministrazione delle Finanze dello Stato v. Simmenthal SpA [1978] ECR 629

Beloff v. Pressdram Ltd [1973] 1 All ER 241

Young & Wood Ltd v. West [1980] IRLR 201, [1980] EWCA Civ 6

O’Kelly v Trusthouse Forte [1983] ICR 728

Lee Ting Sang v. Chung Chi-Keung [1990] ICR 409

Khan v Miah [2000] 1 WLR 2133

Stevenson and Sons [2008] EWCA Crim 273


Blumann, C. and Dubois, L. (2005) Droit institutionnel de l’Union Européenne, Lexis Nexis, Litec Paris

Craig, C. and De Burca, G. (2011) EU Law: Texts, Cases and Materials Oxford: Oxford University Press

Dooley, D. and Dransfield, R. (2006) BTEC Business Heinemann

French, D.; Mayson, S.; Ryan, C.L. Mayson, French and Ryan on Company Law Oxford: Oxford University Press

Hillman, R. W. and Loewenstein, M.J. (2015) Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations Edward Elgar Publishing

Monism and Dualism. University of Belgrade, Institute of Comparative Law and Institute of International Politics and Economics, Belgrade, Serbia

Novakovic , M. (2013) Basic Concepts of Public International Law:

Vinter, G. and Price, G. (2006) Project Finance: A Legal Guide Sweet & Maxwell

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