Law for Business Managers: Types of Business Structures, Elements of Contract Law, and Director's Duties

This article covers the different types of business structures, their advantages and disadvantages, essential elements of contract law, and director's duties and responsibilities. It also includes a case study on the formation of a valid contract and the impact of a director's actions outside his authority. Suitable for business courses in universities and colleges.

Law for Business
Managers

Table of Contents
INTRODUCTION ..........................................................................................................................2
PART 1............................................................................................................................................2
PART 2............................................................................................................................................6
PART 3............................................................................................................................................7
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Business engages itself in managing commercial and industrial activities and its law plays
a major role in managing the organisational departments. In this the goods and services are
created with the view to earn profits and generate revenues. Thus, businesses function on a small
scale or on a large scale with formation of different structures ranging from sole trader to a Multi
National Corporation. Whereas Contract law governs the formation of contract in the business
environment. It binds the companies with promises, obligations and creates legally binding
agreements(Cropley, 2018). This law also provides with roles and responsibilities which are
necessary to be fulfilled for the proper functioning of the business organisations. The main head
of a company is the director who has a lot of functions to perform with good faith and fairness.
The following project will cover in detail about various business types, their advantages and
disadvantages with reference to case 1, elements of making a valid contract with reference to
case 2 and directors sources of authority and his duties and responsibilities given in the company
law. It will also cover how a third party gets affected when the director acts outside his authority.
PART 1
Businesses operate with the view of producing and selling goods to reach their goals and
objectives with proper planning and formation of strategies. Business activities thus involve legal
obligations with the creation of business law which govern them. Businesses in order to have
positive financial gain amongst their competitors keep expanding their business from time to

time. In the case scenario 1, Mary and Gina wanting to set up a business are looking for the best
suitable business type for them where they can ignore the problem of debt and can earn more
revenues. The Various types of Business structures are:
Sole Trader-
This is also called as a type of self-employment where business is run and managed by a
single person. It is the most simple type where the business is easier to open, establish and
operate with the decision making in the hands of one person. In this the person doesn't need to
share profits and is the sole earner of all the revenues (De Lazzari, 2018). But it also creates
liabilities which in a type burden the owner due to single ownership. Thus it increases personal
risks. The sole person needs to file self assessment tax returns.
Its advantages are :
 Easier management and operation of business
 Simpler procedure of taxation and easier creation of balance sheets of income
 Start up and establishment costs are low
 The sole person being the owner is the boss
Disadvantages:
 Personal and professional assets get mixed up creating unlimited debts and liabilities
 Owner has unlimited liability
 Creation of capital is difficult due to unreliable nature of business which is way investors
hesitate to give funds and invest in the business
 All the responsibilities are on the single person which burdens him
 Taking out personal time and holidays gets difficult
Partnership-
The business is called partnership when two or more people own and manage it. The
profits and losses incurred in the business are shared among the partners. All the partners have
roles and responsibilities to perform with the management of costs and risks which come while
running the business. Here each partner gets liable and accountable towards each other while
also sharing the liabilities (Douglas, 2018). The different skills of the partners leads to successful
performance of the business. The partnership is governed under the Partnership Act of 1890.
Advantages:
 Easier creation of more and more capital which is why the borrowing capacity increases

 Different skills and experience of the partners makes them high calibre owners
 There is legal distinction between private and business affairs
 Share of debts and liabilities which reduces personal risks
 external regulation gets reduced and limited
Disadvantages:
 The unlimited liabilities of the partners increases
 The partnership agreement makes each partner jointly and severely liable in managing
debts
 Increased chances of disagreements between the partners and decision making relating to
business
 One partners death leads to permanent dissolution of company
Limited Liability Partnership-
This type of partnership is kind of similar to a normal partnership but differs on the point
that here the obligation shared between the partners is limited to the amount of money that they
spend in the business. It is essential for it to get registered at the companies House. It creates
limited liability on the partners making them responsible for their own misconduct and
negligence that occurs while running a business. Due to the liability being limited there is no
collective responsibility but a registered office is essential for them in UK. Limited Partnership
Act 1907 governs this partnership. Due to their joint and severe liability towards finances and
debts they are also called as General Partners. The limited liability partnership is incorporated
with a written agreement.
Advantages:
 The minimum capital requisite cap is not there in limited liability partnership
 The registration cost is lesser than the other type of companies
 There is no amount of limit on having the maximum no. of partners for the business
 The personal assets of the partners are protected from the business or organisational
liabilities.
 Management and operation of the business is flexible
 Benefit of perpetual succession
Disadvantages:
 When the partners do not comply with the regulations they are penalised for it

 The accounts of the company get publicly disclosed by the companies house which asks
for the records of the company
 The LLP gets dissolved when one partner leaves it
Limited Company-
Private operation and management of a business comes under the title of limited
company (Hemingway and Gunawan, 2018). The shareholders own the company and it is run by
the directors. The legal rights and obligations are governed as a type of separate legal entity. The
company is thus registered by the Companies Act 2006. It has the image of a corporate and legal
personality. The directors duties are codified in the act which creates legal obligations. But here
the company can be established as a company limited by shares or a company limited by
guarantee.
Advantages:
 The personal liability is minimum in this type which is why the personal assets are
secure even in time of financial problem of company
 The professional image and status of the company improves creating a impression in the
market as an established company
 Investors get attracted due efficiency in tax planning and thus it is easier to get funds for
the business or to get investments when needed
 Limited Company gets a separate legal identity in the market
 flexible nature of incorporating a limited company and complying with the provisions
 Shareholders have liabilities which are limited in nature
Disadvantages:
 Setting up a company is a little complex as compared to the other types
 Accounting of the financial records is a little time consuming
 There are certain limitations and restrictions due to the name of the company
Recommendation-
Mary and Gina are advised to choose Limited Company business type as the structure for
their business establishment due to the various benefits attached to it. In this type they will be
able hire more staff and use their skills for the overall development of the business. Its tax
efficient nature makes it a better option and due to Gina's record of unpaid debts, it is easier to
gain capital in this type. Investment is easier and is thus preferred by the investors which can

prove to be of great benefit to both of them (Marano and Noussia, 2020). In this the law also
protects the personal finances of the owners and thus their interests get protected. Identification
as a separate legal entity provides the ease of taking legal actions. Thus they are advised to go
ahead with the option of Limited Company for their business.
PART 2
A business runs smoothly and effectively with the understanding and creation of contract.
A contract binds various companies and businesses with an agreement. That agreement includes
promises and obligations making the contract law legal based on the provisions of contract law
of UK. Thus it can be called as a promise enforceable by law. So it can be said that a contract is
an agreement between two parties. It protects interest of the parties legally by ensuring that
something of value is exchanged between them making it binding in nature. Contract can be in
the written or oral form. It is created when the parties agree on a common point that is when a
statement of terms and conditions is formed between them which leads to the creation of an
agreement or contract. If there is no binding nature in an agreement it cannot be said that the
formation of contract is taking place. The statute of contract law thus governs the case Catherine
who went to a shop for purchasing a guitar and want to understand if valid contract was formed
or not. For the formation of a valid contract there are various elements which are needed to be
fulfilled.
The essential elements of contract law are:
Offer- A contract begins with one party making an offer to the other party. In this the terms of
the agreement are proposed by the offerer. The party to whom the offer is made is known as
offeree. The terms of the agreement are willingly expressed in the offer by the party so that the
other party accepts and recognises it. When the contract is accepted and recognised it becomes
legally binding on the parties creating obligations (McKendrick, 2014).
Acceptance- When the party agrees to the offer and accepts it, then it becomes a contract. It is
expression of assent to the terms of the contract. Thus this second factor is very essential to make
a contract legally effective. But it is very essential that the acceptance is communicated to the
offerer.
Consideration- If the consideration is not fixed between the parties then the contract remains
incomplete. With the inclusion of Consideration, the contract becomes binding. It implies that

something of value is exchanged between the parties which successfully enforces a promise that
is made in a contract. It is generally monetary in nature.
Intention- A contract should have a legal intention for the creation of contractual relationship
between the parties. This is the reason why social arrangements are not called a contract due to
no involvement of legal intention. Lawful purpose is an essential requisite of contract formation.
Thus legal implication of a contract in proper manner is essential.
Invitation to treat- In this a person doesn't directly make an offer but invites the other
party to do it. Intention is the factor which determines if an offer is made or there is Invitation to
Treat. Thus it includes all kinds of displays and advertisements. It is the general invitation for
offering. Thus action is taken for invitation which includes work to invite offers, tenders, display
of goods, advertisements, etc. These are the methods by which Invitation to Treat is done and
offers are invited. In the famous case of Harris vs Nickerson 1873 it was held by the court that
advertisement is not an offer, but rather only an invitation to treat declaring the intent of inviting
someone to create an offer (Medway, Roper and Gillooly, 2018). In this the defendant had placed
an ad of furniture for the purpose of auction and after reading that claimant spend time and
money to bid for the furniture but later the auction was withdrawn due to which claimant filed a
case against the defendant.
Thus in the case scenario 2, when the shopkeeper placed the guitar in the shop it was not
an offer but an invitation to treat. Catherine willingly went into the shop to buy something so she
cannot sue the shopkeeper for the different prices that was stated on the guitar which had a price
tag of £1200 and that was said by the shopkeeper which was £2200 because of the sole reason
that there was no contract framed between the parties. If contract is only not formed then the
question of validity does not arise. The final decision whether the contract has to be made or not
rests with the shopkeeper. Thus it is clear from the case that a valid contract was not made
between the parties involved.
PART 3
The Companies Act 2006 of UK provides provisions which defines the duties of Director
and determine the responsibilities which he has to perform (Moore, 2018) . Thus it is a very
important legislation governing the companies and the heads involved in it by the name of

Director. The authority which the Director derives to act on behalf of the Company is from the
Companies Act which acts the source of its power. The director's duties are as follows:
 Raise and upgrade the successful performance of the company- Here the director
needs to act in good faith towards the employees of the company and towards the clients
on behalf of the company. The growth of the company is ensured when each director acts
towards its benefit by also ensuring that it run for a longer period. But there are certain
criteria provided by the legislation which need to be followed. They provide for the
consequences when director does not act in good faith and with honesty, it also implies
that the best interest of the employees should be protected and the operations of the
company should have a positive impact on the environment and society(Okoye, 2019) .
 Act within the powers and authority given in legislation- Due to this legislation every
director should act in accordance with the constitution of the company. Because he is
bound by the Memorandum of Association (MOA) and Article of Association (AOA)
given in it. And if any director acts outside his authority he will have to face
consequences because of it.
 He should possess experience, skills, care and diligence- It is the duty of every director
to act on behalf of the company in a certain manner according to the procedures of the
company which is acted by any reasonable diligent person(POOLE, Devenney and Shaw-
Mellors, 2019) . Which means that the best interests of the company should be seen and
its goals and objectives must be achieved with the use of the skills, knowledge,
experience and diligence by the director.
 He must exercise independent judgement on behalf of the company- the director
should have independent judgement and decision making which benefits the company
and makes it successful.
 Duty to avoid any disputes or conflicts which arise in the company- He should
resolve any conflicts which arise and try to resolve them on time so the members and
employees can function with ease.
 Duty to not accept benefits and favours from third parties- The director must not
accept benefits from any other company for personal gains and must always act on behalf
of the company and for the company(Shah and Napier, 2019).

 Duty to make declaration of the interests in the proposed arrangement- The director
must declare if he has any interest in the company's proposed transaction or arrangement.
The director also has certain liabilities which should be seen by him while acting upon
his authority due to the very reason that the third parties are affected when the director acts
outside his authority. The liabilities of the directors arise in following situations which are
when he works dishonestly affecting the interests of the company then he can be held liable
under breach of fiduciary duty and can affect the third parties who can be clients of the company.
The other situation is when he acts outside the limits of his authority he conducts a situation of
ultra vires act. When the director fails to act with care and diligence then he can be held for the
negligent act which affects the third parties involved. Due to the very reason that it hurts the
interests of the clients and the company. Malafide intention and conduct can make a director
liable due to the breach of the trust that the company members have on the Director (Taylor and
Taylor, 2021). Although the directors are not personally liable for the third parties but they are
liable on behalf of the company. The directors have statutory duties along with the common law
duties implied on their post. The Director can be sued by the company if it suffers any losses due
to his personal intentions and unethical gains. Also the court can order injunction where the
director might be asked to refrain from acting in a certain way which badly affects the company
or third party because he acts outside his authority or outside the provisions or limits given in the
name of Director's power, thus he must act in the manner prescribed.
CONCLUSION
It can be summarized from the project that the affairs of the business environment are
managed well with the help of business law and the agreements which are created in a business
are governed by the Contract Law. These laws help in the day to day management of an
organisation with the provisions which define the roles and responsibilities which need to be
followed for smooth and effective functioning of a company or business. It is also clear that the
elements defined in the contract law are essential for a valid contract law. Thus it is clear that the
best suitable option for setting up a business for Mary and Gina is Limited Company which has a
lot of benefits and advantages. Also, Catherine in the second case cannot sue the shopkeeper on
the very fact that there was no formation of contract only presence of Invitation to Treat. With

these the Companies Act also is an important legislation to govern the companies. It is the law
which provides for the duties and responsibilities of the Director in the company.

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