Business Law: Types of Business Structures, Elements of Valid Contract, and Duties of Directors

This article covers different types of business structures, recommendation on best type, elements of valid contract and the duties and responsibilities of a director. It also covers how the third party gets affected when the director acts outside his authority. Recommended for students studying business law.

BUSINESS LAW

Table of Contents
INTRODUCTION ..........................................................................................................................2
TASK ..............................................................................................................................................2
PART 1:......................................................................................................................................2
PART 2:......................................................................................................................................6
PART 3:......................................................................................................................................8
CONCLUSION ...............................................................................................................................9
REFERENCES................................................................................................................................9

INTRODUCTION
Business is any type of activity which engages itself in commercial or industrial sectors
and business law manages the operations of an organisation. Businesses are established for
revenue generation and for earning profits. Business involves goods and services created on a
small scale or on a large scale for its benefit. Thus there are various types of business structures
emerging in the market. Whereas Contract law governs the agreements created for the effective
running of a business(Bennett, Smith and Montebruno, 2020). A contract is formed for binding
the business by promises and obligations which are lawfully binding on the parties. On the other
hand the Companies Act provides the provisions and procedures which should be followed by
the heads and members of a company like laying down the duties of director. This project will
cover different business structures, recommendation on best type, elements of valid contract and
the duties and responsibilities of a director. It will also cover how the third party gets affected
when the director acts outside his authority.
TASK
PART 1:
Production and sale of goods and services is the primary goal of any business which
operates with proper plans and strategies so that its objectives can be achieved with high profits.
Business law creates legal obligations in business activities. Positive financial gain amongst the
competitors in the market is the top most priority of any business. Because of these expansion of
the businesses happen from time to time by changing different business structures (Brahma,
Nwafor and Boateng, 2021). In the given scenario of case 1, Mary and Gina want to set up a
business and are looking for a suitable option and thus require recommendations so that they can
higher revenues for themselves.
The different types of business structures are as follows:
Sole Proprietorship- Sole trader is a type of business where a person is generally referred to as
self employed. In this a single person run and operates a business. That person single handedly
manages the business due to its simple structure. This type is easier to open and establish and
operates on a small level. Making decisions is easier due to a single person taking them. They are
the sole earner of all revenues and profits. But this structure also creates liabilities due to the

burden of debts and responsibilities on a single person. Filing self assessment tax returns is the
legal need when a person chooses this type of business structure.
Advantages:
 Small scale business makes its easier to function, operate and manage
 Taxation procedures of this type are simple which makes it easier to create balance sheets
of income
 The costs of setting up the business is low
 Sole earner of all the profits
 Single person is the boss and the owner
Disadvantages:
 Unlimited debts and liabilities are created on the owner when the personal and
professional assets get mixed
 The unreliable nature of the business makes it difficult to get investments and funds and
thus it is very difficult to create capital
 The owner being a single person gets burdened with the responsibilities
 Managing personal time is difficult
Partnership- Partnership is referred to as a business agreement between two or more
individuals. They own the business and manage it on their level by sharing the profits and losses
which are incurred in the business (Bull, 2018) . The partners share the roles and responsibilities
which they have to perform by sharing the costs of management and the risks which are
involved. Partnership is thus governed by the Partnership Act of 1890 which makes each partner
liable and accountable towards each other. It is believed that in this structure the different skills
and experience of the partners makes the business more successful.
Advantages:
 Increased borrowing capacity due to easy investments and creation of capital
 The performance of the owners is highly skilled and experienced due to their different
talent and knowledge
 Personal and business affairs get a legal distinction
 Personal risks get reduced to a minimum due to sharing of all costs and liabilities
Disadvantages:
 There is increase in the unlimited liabilities of partners

 The partners are jointly and severely liable in the management of debts
 Due to differences of opinion between the partners their disagreements increase and
further lead to delayed decisions
 The company gets permanently dissolved due to death of any partner
Limited Liability Partnership- There are a lot of similarities of this type with a general
partnership but it is completely different with respect to obligations. It states that the partners
have limited obligations with respect to the amount of money that is shared and spent on the
business. But in LLP it is important to register at the Companies House(Choi, Scott and Gulati,
2021) . The partners are liable for their own negligence and misconduct. Limited liability
removes the essentialism of collective responsibility. But for this partnership to work a registered
office is important. An LLP is governed by the 1907 Limited Partnership Act. With respect to
finances and debts they have joint and severe liabilities which makes them being referred to as
General Partners. A written agreement or contract is essential to incorporate an Limited Liability
Partnership.
Advantages:
 The requirement of minimum capital is not an essential requirement of LLP
 The amount of registration is less compared to others
 There is no cap or limit on the maximum no. of partners that can be involved in the
business
 Protection of personal assets from organisational risks
 Flexible and manageable administration of business
Disadvantages:
 Penalties on partners for non compliance with the rules and regulations
 The companies house checks the records and publicly discloses the account statements of
the business
 Dissolving an LLP is easier when one partner leaves it
Limited Company- When the company is not public and is privately operating and running the
operations of the business it is termed as a limited company. The owners of the company are
shareholders and thus its head is a director who runs the company. The companies Act 2006
governs the company by registering it which creates legal rights and obligations(Djurovic and
Janssen, 2018). The legal nature gives it a identification of separate entity. This act codifies the

duties of the director which must be abided by them while being on the post. A limited company
can be divided into a company limited by shares and limited by guarantee.
Advantages:
 The personal assets of the owners are safe and secure due to minimum personal liabilities
which are attached to this business type
 Financial securities during the financial risks of the company
 Benefit of image as a professional company which improves its status in the market
 Efficiency in tax planning makes it easier to attract investors and get funds from time to
time
 Creation of a separate legal identity of the company in the marketplace
 Limited Liabilities of the shareholders in the company affairs
Disadvantages:
 Complexity in setting and establishing a limited company
 Managing the accounts and the balance of the company is time consuming
 Limited company creates restrictions and limitations due to its big name
Recommendation-
Limited Company seems to be the best type to choose as a business structure for Mary
and Gina while setting up their business. Hiring staff is easier and thus responsibilities can be
shared among the employees. They can also make use of their talents and skills for the growth of
the business and future developments in it. Gina's history of unpaid debts is also an area of
concern but it can be solved with the efficient nature of taxation of limited company type. It is
easier to get funds and manage capital in this structure. The legal identity appeals to the investors
thus they take interest in investing into a limited company (Yeoh, 2019). This can benefit both
the company and its owners in the longer run. A limited company also ensures protection with
respect to finances and thus interest of the owners are protected. The owners can take legal
actions when necessary. Thus Mary and Gina are advised to go forward with limited company as
a business structure for establishing their business.
PART 2:
The laws of Contract plays a very crucial in the effective and smooth functioning of a
business as it helps in binding and governing various business with an legally enforceable
agreement. The said agreement comprises of various elements such as promise, acceptance and

consideration which are also the basic essential elements in order to constitute a contract. The
Contract Act of UK is the sole regulation which regulates such arrangements. The primary
definition of the same is that, it is an agreement between the two parties which is enforceable by
law is called contract. The primary aim of this legislation is to secure the interest of the parties
against whom the breach has been made by the other party who is at fault by making the said
agreements legally binding in nature (Durovic and Janssen, 2018). And if there stands the case
where there is no clause regarding the legality, then same cannot be considered as legally
constituted. The given case of Catherine, also comprises of the elements of the Contract law as
who wants to know that is there exists the scenario of constitution of a valid contract in case
when one went to shop in order to purchase a guitar.
The elements which are required to be fulfilled for the creation of a valid contract are as
follows-
Offer: The start of any valid contract begins with the offer or proposal which needs to be
made by one party to the other. In simple terms, it is an proposal which consists of all the terms
and conditions made to the interested party. The person who makes an offer is called the
“Offerer” and the person which is the other party who accepts the said proposal is called the
“Offeree”. Further the said agreement takes the shape of legally binding contract when it gets
recognised by both the parties creating a legal obligation on them to fulfil their part of promise.
The other aspect is of Acceptance: This is mere an unconditional assent to the made
proposal and should be made by the concerned party only to whom the offer has been made. This
is one of the major factor as without this the contract cannot be constituted (Erdoğan, 2018) .
Also, it is very much required to communicate the made acceptance to the offerer in order to
proceed with the said arrangement.
Further, the Consideration: it makes the contract binding. Consideration can be anything
as per discretion of the concerned parties but at the same time it must have some value in the
eyes of law. Very often it is of monetary nature, but other than that it can also be of some types.
Intention: Every agreement which is formed must have a basis of legal intention of the
parties to enter into such contract. The reason being of absence of legal intention, the social
arrangements are not considered as the legal contracts. It is an essential requirement for its
constitution therefore, in the proper manner, the legal implication of contract is very much
required.

Moreover, the Invitation to treat which is also called an invitation to offer. Here the
offer is not directly made by the party to other person, rather it invites them to come an make an
offer. It generally works in the cases of items which are showcased in the display of the shops for
the purpose of sell or the allocation of tenders, auction, etc. It is general invitation for offering
to the people at large (McCracken, McIvor, Treacy and Wall, 2018). Further the said concept was
more elaborated in the case of Harris v. Nickerson, where the defendant made an advertisement
for the purpose of auction. The claimant after knowing the same, showed interest and invested
some money. But at the later stage due top certain reasons the auction could not take place.
Claimant filed a case seeking the remedy against defendant. Here in this the court held that there
lies the elements of invitation to offer, as mere advertisement is not an offer.
Similarly, with respect to the case scenario, the display of guitar by the shopkeeper in his
his shop is not an offer rather it is an invitation to treat. Also as Catherine willingly went to the
shop, so cannot sue the seller for the stated prices that was $1200 and the prices stated by the
shopkeeper was $2200, having reason that there exists no formation of contract between the
parties. Further, the ascertainment of question that whether the contract is valid or not cannot be
made in the absence of a fact of its formation. Therefore, it can be concluded from the facts that
there lies no valid contract, in fact never was constituted, between the shopkeeper and
Catherine(Graziano, 2019).
PART 3:
The major legislation which talks about the various duties and responsibilities of directors
is the Companies Act, 2006 of United Kingdom. This law defines the obligations which every
director has towards its business as well as other members and employees which one need to
comply with. Also one is liable to fetch certain liabilities and actions, if there lies the case of
failure of performance of such duties. Some of the important duties of directors are as follows-
 To Act within the given authority and powers: Every director is bound to act within
the powers as mentioned in the constitution of the company which are the Article of
Association and Memorandum of Association along with complying to the given laws in
order to remain clean for the purpose of adverse consequences (Ong, 2018) .

 Measures to uplift the performance of the company: they are bound to ensure the
proper growth and success of the company while acting in a good faith. Directors are also
held responsible for taking out the best interest of the employees as this results in
ultimate growth of the company.
 To maintain harmony in the company: the directors are entailed with a duty to promote
the harmony in the workplace while ensuring that there does not arise any conflicts and
disagreements between the employees and employer(Pargendler, 2018).
 To not accept any favours and benefits from third parties: one must not take
advantages of personal gains other than which arise out of business affairs and must
always acts in the capacity of a representative of the company.
 Must possess certain skills, experience and and due diligence: Directors must act in
accordance with the due diligence which means that must only act in the best interest of
the company with an aim of achieving the desired goals while exercising his
knowledge,skills and experience (Qa’dan and Suwaidan, 2019) .
 To exercise judgements on behalf of company: they should take the independent
decisions making which benefits the company in making it more successful.
Furthermore, every directors also has certain number of duties to the third parties which
one needs to oblige to in order to escape from liabilities where they acts exceeding their given
authority(Roberts, 2018) . The very first can be of acting in fiduciary capacity, where the
liabilities of a director comes into effect when he dishonestly acts while affecting the interests of
the enterprise which results in affecting the clients of the company who are considered as the
third party. The second can be of the situations of acting in ultravires, where when they can be
held liable for the acts committed affecting the third parties. Also the acts committed with the
conduct of malafide intention and fraud can make a director liable for his acts but in this
situation the they alone are responsible for their acts as in such cases there stands no concept of
joint liability. The company also has rights to legally sue its directors in case there occurs any
losses arising as a result of personal benefits of the directors(Singh, 2021). The order of
injunction can also be made, where the director refrains from acting in certain way which results
in affecting any third party or company reason being his ultravires act.

CONCLUSION
From the above report, it can be concluded that with the help of business law along with
the provisions of contract and employment laws the affairs of the business can be managed in a
more efficient way. These law helps in regulating the daily affairs of the company and also
defines the duties and responsibilities of its members to which one is bound to perform. It is also
clear that various aspects defined in contract law are the essentials in order to constitute a valid
agreement. Further, out of the available option the best suitable one for Mary and Gina in order
to start their new business is of the limited company. Also with respect to the seconds case, there
stands no formation of a legal contract and hence Catherine cannot sue the shopkeeper for the
same. Moreover, the companies law is the major regulation which provides for the duties of
directors.
REFERENCES
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