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The Concept of Entrepreneurship Under English Law in England Essay (Article)

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Updated: Sep 12th, 2022

Why it is interesting to study English law (from a Russian law point of view)

The English law has had a lot of influence on the establishment of many legal regimes in the world. Many enacted Acts of Parliament, written decisions of courts, and constitutions all over the world have borrowed many aspects and precedents from the law applied in the UK. This has largely been brought about by the fact that many nations in the world were colonies of the British at some point (such as the Commonwealth countries) in their history, where a lot of legal influence was borrowed by these nations in their creation upon acquiring independence.

This may also be partly attributed to the standing that the English law has amongst legal regimes in the world, where many nations regard it as a beacon of justice and equity with a lot to be borrowed from it. Decisions of renowned judges in England, such as Lord Denning and Lord Diplock, have provided precedence to many decisions made in the world on matters of equity and have been a huge stimulant to a myriad of drives for legal reform. This torch bearing effect of the English law in the world has made it quite interesting for many to study it (Harris 2000).

Despite the socialist history of the country, the influence of English law has similarly had an effect on the establishment and structure of Russian law up to this day. Adopted in 1993, the Russian constitution is considered quite progressive and enshrines human rights, as well as social justice aspects, which are largely borrowed from the English legal system. This, therefore, makes it interesting for Russians to study English law due to the similarity that it shares with their own law.

Russia lacks a legal requirement for the creation of legal precedent between courts of similar or lower levels. However, just like the English law, Russian lower courts follow and are bound by the decisions of higher courts as law on them. For these reasons, the English law is generally considered interesting to study from a Russian perspective (Bowring 2013).

Entrepreneurship law in the UK

Entrepreneurship basically refers to the process in which a business is started. In this process, the entrepreneur creates a business model that stipulates the nature of the business he intends to create. He embarks on finding and engaging the resources required in rolling out the business and duly establishes the business as required by the law through the registration of the business and acquisition of the required licenses and permits (Marcum & Blair 2011).

The entrepreneur takes responsibility for the success or failure of his business, where his capacity in the liability is determined by the different capacities that he may have, depending on the nature of the business. The UK law creates various forms of entrepreneurship, which carry with them varying rights and obligations of the owners of the businesses. These are discussed below:

Sole proprietorship

The sole proprietorship form of business is one that is exclusively held and run by a single individual, where no distinction exists between the trade and its owner (Singh, Chaudhary, & Arora 2014). This means that the business operation is regarded as one and the same thing to the owner and all matters undertaken by the business may be regarded as having been done by the owner. The sole proprietor is eligible for all acquired profits. He is also solely responsible for the debts and losses suffered. Payment of taxes in this form of business is also done by the owner in his individual capacity (Harris 2013). This is done by way of submitting all the business’s periodic income or losses and expenses to the authorities, which are used in computing the taxes (Lovell 2012).

According to the law of the UK, the status of a sole proprietor may commonly be inferred from the circumstances and the sole proprietor may not be required to formalize it to obtain the status. This means that by default, where a person is found to operate a business creation in an individual capacity with profits and losses being personally borne by him, then the same is taken to be a sole proprietorship.

Nevertheless, the formal process of registration involves one obtaining the essential permits and licenses. However, the procedures for the attainment of the permits differ from one government to the other. Additionally, the sole proprietor may choose to run his business in his own name or adopt an appropriate pseudonym. As such, the name must be registered by the government upon satisfaction that the name does not represent initials, is not immoral, and the name is not in use by another party.

The benefits of a sole proprietorship comprise the ease and inexpensive way in which the business is conducted, the far-reaching control that the proprietor has over his entrepreneurship, as well as the simplicity of preparing and calculating tax, which is less bureaucratic compared to the other forms of entrepreneurship (Harris 2013). The unrestrained liability of the proprietor is a key disadvantage owing to the heavy liability he bears in times of losses (Bain & Nowak 2013).

Partnership

Partnerships are individually conducted businesses comprising of two or more people through the division of ownership (Morse 2010). It is a business that is run by 2 to 7 persons through a properly defined system of sharing of profits and losses, in which liability of the business is carried by the partners personally. The partners similarly contribute to the daily running of the business, as well as other aspects of the business, which comprise of money matters such as taking business loans, partnership assets, and other issues concerning the business. Partners carry individual liability in place of the business as the business owners.

This form of business is registered through the registrar of businesses under the UK government, where the government keeps records of all registered partnerships in the country to aid in the monitoring and planning of government programs. Just as the sole proprietorships, a business name is required to be created, which by default is designed by joining the last names of the partners together. The right legal documents such as licenses are supposed to be obtained for the partnership to start operating (Cavitch 2001).

In the calculation of taxes, partnership firms ought to file their reports of income as “annual information return”, their returns and losses occurring from the business, as well as the deductions required, if any (Harris 2013). Nonetheless, taxes imposed on a partnership are not imposed on it as a body, but on the partners as persons. As a result, whatever returns are realized as profits or losses are ultimately shared among the partners. A major benefit of this trade is that it enjoys a mutual financial responsibility, even in terms of structure and operation. Nevertheless, the nature of the business in its ability to have the losses shared out amongst partners may similarly be viewed as a disadvantage because profits are shared out in a similar manner (Callison & Sullivan 2012).

Limited Liability Company

A limited liability company (LLC) is a commercial enterprise operated disjointedly and distinct from its owners. Its liability may not be visited on its members personally, but entirely borne by the entity as a corporate body. The business has a legal personality with capacity to sue and be sued, to own property, to trade, and to enter into contracts as an entity. The business is created by choosing an appropriate business name, which must be unique and conformed, drafting, and filing of the articles of association, which represent the constitution of the company, creating a working agreement within the enterprise, and finally obtaining licenses and certifications for the business operation.

Taxes levied on LLCs, unlike partnerships and sole proprietorships, are levied directly on the shareholders of the company. These are paid from the shareholders’ income taxes upon filing tax returns as required by the UK government authorities (Murray & Hwang 2011).

A major benefit of LLCs is that there is limited liability of the company members, where losses incurred by the business are exclusively carried by the firm as an entity and not the shareholders. On the other hand, the tax system of LLCs is considered highly unfavourable due to the fact that members are subjected to income taxes in place of the company, besides other taxes levied on them such as the self-employment taxes (Harris 2013).

Corporation

A corporation is quite similar to an LLC discussed above, save for the fact that corporations are entirely distinct from the members even in matters of taxation. Its creation begins after the registration of a suitable business name and thereafter the articles of organization are filed. After registration, permits and licenses from the government authorities are obtained to allow the running of the business in a given region. Tax payment in this form of business is done separately from its members, thus paying income taxes on their proceeds (Harris 2013). Revenue collections are submitted to the tax authority, where taxes are paid (Balotti & Finkelstein 2010).

A great advantage of a corporation is that the liability of shareholders is limited in matters such as debts and faults of the company. The corporation is legally regarded as a body that is separate and distinct from the members, with authority to play roles that may be played by legal personalities. The administration of tax on corporations is similarly conducted on the business in a separate manner, which is quite advantageous to the shareholders. On the flip side, nonetheless, setting up this mode of business is rather expensive and bureaucratic due to the much paperwork needed.

Legal protection of entrepreneurs in the UK

In the UK, the law has largely served to give protection to entrepreneurships. Major decisions made by the courts in the UK in the past strongly tilted in favour of protecting the sanctity of businesses and allowing them to operate, despite there being a strong likelihood that such decisions might not be in the interest of other parties. A major reason for this development may be inferred from one of the key roles of the law, which is to foster economic and social development of the community.

In the law of contracts, the law permits the use of display of items in shops with varying price tags from the factual sale prices, with the understanding that the same constitutes an invitation to treat rather than an offer (Furmston et al. 2012). This was well articulated in the case of Fisher v Bell [1961] 1 QB 394, where a shopkeeper was taken to court and prosecuted for having offered an illegal weapon for sale, which was against the law forbidding the offering of flick knives for sale. The court stated that the display of the knife in the shop by the defendant had been legal due to the fact that this did not constitute an “offer” as suggested by the then law.

It was averred by the court that the display by the shopkeeper had been an invitation to treat, thus there had been no breach of the given law. In essence, from the common understanding of business, the defendant’s action may be regarded as constituting an offer as the display had been intended for sale. However, the court went out of its way to introduce a new legal principle of invitation to treat in businesses to protect the sanctity of business as a distinct creation. This expresses the strong determination of the courts in protecting entrepreneurships from liability.

On the other hand, the ruling of the court in the landmark case of Carlill v Carbolic Smoke Ball Co Ltd [1893] 1 QB 256 served to make businesses liable for offers they make in the course of their promotion of trade. The plaintiff made a purchase of a medical product from the defendant, which was supposed to prevent the users of the product from catching influenza upon applying it in a given way. This aspect of the medicine had been published in a newspaper, promising 100 Pounds in case it failed. The plaintiff applied it in the specified manner, but caught influenza and went ahead to sue the defendant company for having misled her.

The issue to be determined by the court was whether there had been an offer by the company through the newspaper publication. The court found the defendant liable and ordered the defendant to pay the plaintiff as there had been an offer made to the plaintiff (McKendrick 2014).

In the law of companies, the UK law has similarly demonstrated a strong protection of human rights. The corporate veil of companies is strongly protected and validated by the law, save in circumstances where there is a clear violation of the law by persons hiding behind a corporate veil. In the case of Salomon v Salomon and Co Ltd [1897] AC 33, the plaintiff had been in the leather business for a long time.

Thereafter, he formed a limited liability company together with his family members and sold the business to the company at an apparently inflated price. At the winding up of the company after it had faced immense financial challenges, some creditors argued that Salomon’s company was non-existent as it was he and the same thing. They also argued that as a secured creditor, he was not entitled to payment because it would basically amount to paying himself.

The House of Lords, however, found that the company indeed existed and that Salomon was entitled to his share of debentures. The House of Lords, while overturning the decision of the lower court, said that in the circumstance of the creation of the company coupled with the fact that there had been no fraud in creating the company, the entity was valid under the law and that there had been a valid securing of debentures by Salomon. This case illustrates the point of legal protection of entrepreneurship by the courts in the UK.

The House of Lords made this decision with the awareness that a ruling in the contrary would disable many businesses from operating, as the corporate veil in corporations was a critical aspect of their existence. The court in this case opted to protect the business. However, this principle is not devoid of exceptions. The law often permits courts to lift the veil of incorporation and attack the persons owning the company.

For example, under Section 24 of the Companies Act of 1985, personal liability of members of a company is permitted where a company trades with less than two members. Section 229 requires a group of associated companies to prepare consolidated accounts, failure to which the veil may be lifted. This position was also articulated under common law. In the case of Gilford Motor Co Ltd v Home [1933] 1 Ch 935, a worker of a company had created a restrictive covenant, where he agreed not to solicit the customers of his former employer. Upon leaving his employment, he went on to open a business similar to that run by his former employer and began soliciting customers in contravention of the agreement.

The party sought to argue that the solicitation had been conducted under a company, rather than by himself as an individual and that the principle of the corporate veil separated his acts from those of the company. However, the court found that it was proper to pierce the corporate veil in this scenario in order to find out whether such actions had been conducted by the party in the contract because the corporate veil was not to be used to cover up illegalities. This case illustrates the fact that despite the protection accorded to corporations in their business, decisions may similarly pierce legal protection in specified cases; therefore, the protection of the law is not absolute (Kershaw 2012).

Conclusion

It is clear that the English law has been very influential in the formation of many other legal systems in the world, given that most nations were colonized by the British. Consequently, most business contracts and the legal procedures governing business start-ups in these countries are largely similar to the English law governing businesses. As observed above, the law has largely been a protector of entrepreneurships in the UK, opting to side with the sanctity of businesses rather than going against social-economic development in the country.

This has been evidenced in the various cases cited above, such as Fisher vs. Bell where the court protected a businessman who had displayed an illegal item for sale and Salomon vs. Salomon, where a company formed by a family was held as legal. However, this right is not absolute and is subject to exceptions, such as those given in the case of Calill vs. Carbolic Smoke Ball, as well as Gilford Motor Co Ltd v Home, both of which differed on the prior position.

Reference List

Bain, PL, & Nowak, K 2013, New York practice guide: Business and commercial, Matthew Bender, Albany, New York.

Balotti, RF, & Finkelstein, JA 2010, The Delaware law of corporations & business organizations statutory deskbook 2011, Aspen Publishers Online, Alphen aan den Rijn, South Holland.

Bowring, B 2013, ‘The constitution of the Russian federation: A contextual analysis, by Jane Henderson (Oxford: Hart Publishing, 2011)’, European Public Law, vol. 19, no. 3, pp. 607-613.

Callison, JW, & Sullivan, MA 2012, Partnership law and practice: General and limited partnerships, West Publishing, Eagan, MN.

Cavitch, Z 2001, Business organizations with tax planning, Lexis Nexis, London.

Furmston, MP, Cheshire, GC, & Fifoot, CHS 2012, Cheshire, Fifoot and Furmston’s law of contract, Oxford University Press, Oxford.

Harris, P 2013, Corporate tax law: Structure, policy and practice, Cambridge University Press, Cambridge.

Harris, R 2000, Industrializing English Law: Entrepreneurship and Business Organization, 1720-1844, Cambridge University Press, Cambridge.

Kershaw, D 2012, Company law in context: Text and materials, Oxford University Press, Oxford.

Lovell, M 2012, BUS 645-01, Taxation of business organizations, Fall 2012, Rhodes College, Memphis, TN.

Marcum, TM, & Blair, ES 2011, ‘Entrepreneurial decisions and legal issues in early venture stages: Advice that shouldn’t be ignored’, Business Horizons, vol. 54, no. 2, pp. 143-152.

McKendrick, E 2014, Contract law: Text, cases, and materials, Oxford University Press, Oxford.

Morse, G 2010, Partnership law, Oxford University Press, Oxford.

Murray, J & Hwang, EI 2011, ‘Purpose with profit: Governance, enforcement, capital-raising and capital-locking in low-profit limited liability companies’, University of Miami Law Review, vol. 66, no. 1, pp. 2-51.

Singh, S, Chaudhary, S, & Arora, M 2014, ‘Intellectual property rights in sole proprietorship form of business’, International Journal of Advanced Research in Management and Social Sciences, vol. 3, no. 6, pp. 16-24.

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