FLK Business Law for SQE1
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Business Law and Practice: A Comprehensive Guide for the SQE
Chapter 1: The Architecture of Business – Vehicles and Formation
The functioning legal knowledge required for the Solicitors Qualifying Examination (SQE) in Business Law and Practice is not merely a collection of statutes; it is the operating system of the commercial world. For a newly qualified solicitor, the ability to navigate this system—from the birth of a business entity to its governance, financing, taxation, and eventual termination—is the baseline of competence. We begin our comprehensive review with the fundamental choice that dictates the legal life of a business: the vehicle through which it operates.
The most elementary form of business is the sole trader. This is an individual trading in their own name, or perhaps under a business name. The legal reality of the sole trader is one of total unity; there is no distinction between the individual and the business. The assets of the business are the personal assets of the trader, and, crucially, the debts of the business are the personal debts of the trader. While the administrative burden is low—principally involving registration for Self Assessment with HM Revenue & Customs (HMRC) if income exceeds the trading allowance—the risk is unlimited. If the business fails, the trader’s personal home and savings are on the table.
In contrast, the partnership arises automatically where two or more persons carry on a business in common with a view to profit, as defined by Section 1 of the Partnership Act 1890. It is a creature of fact, not formality; one can stumble into a partnership without signing a single document. Like the sole trader, the general partnership lacks separate legal personality. The partners are the agents of the firm, and liability is joint and several. This means a creditor can pursue any single partner for the entirety of a partnership debt, leaving that partner to seek contributions from the others—a perilous position if those others are insolvent. While partners are taxed individually on their share of the profits, the firm itself is transparent for tax purposes.
To mitigate these risks, the law offers the Limited Liability Partnership (LLP), governed by the Limited Liability Partnerships Act 2000. The LLP is a hybrid: it retains the tax transparency and flexible internal culture of a partnership but possesses separate legal personality and limited liability for its members. The price of this protection is transparency; the LLP must file accounts and details of its members at Companies House, and it must appoint at least two “designated members” to bear the burden of statutory compliance.
However, the dominant vehicle in the UK economy remains the registered company, governed by the Companies Act 2006. Upon incorporation, a company becomes a separate legal person, distinct from its shareholders and directors—a principle enshrined in the seminal case of Salomon v Salomon & Co Ltd. This “corporate veil” means the company can own property, sue, and be sued in its own right. For the shareholders, it offers the shield of limited liability; their risk is capped at the amount they have paid or agreed to pay for their shares.
