3.1 Business Organisations, Personality and Limited Liability

Choosing a business vehicle is a liability decision, not a branding exercise. A newly qualified solicitor in England and Wales is asked, almost weekly, who will be sued if the lease, the supplier invoice, or the negligent piece of work goes wrong. Functioning knowledge for SQE1 Business Law and Practice requires a working comparison of sole traders, partnerships, limited liability partnerships (LLPs), private companies, and unlisted public companies. This OpenExamPrep chapter is independent study material covering those FLK1 topics. From 1 September 2026, FLK1 excludes the Listing Rules, prospectus rules, the Disclosure Guidance and Transparency Rules, and other FCA or London Stock Exchange market rules or codes. Public-company questions in this topic stay inside the Companies Act 2006. They do not become a listing or prospectus exercise.

Why personality and limited liability are different questions

Separate legal personality asks whether the law recognises an entity distinct from the humans behind it. Limited liability asks whether those humans can be made to pay the entity's debts merely because they own or manage it. The two ideas travel together in companies and LLPs, but they are not synonyms. A director of a cash-rich company has no "limited liability" in the member sense if they never held a share; they are simply not the debtor. A 1890 Act partner has neither personality nor limited liability. Mixing those ideas is one of the most reliable ways to drop a Business Law item.

Scottish partnerships are a different tradition. For SQE1 in England and Wales, treat an ordinary partnership as not a legal person.

Sole traders

A sole trader carries on a business on their own account. No incorporation step creates a new person. The trader is the business: they own the stock, they take the lease, they employ the staff, and they sue or are sued in their own name. Trading as "Rose Garden Design" on a van does not create an entity. VAT registration, a unique taxpayer reference, and a current account in a trading name are administrative facts. They do not manufacture personality.

Unlimited liability follows automatically. If the supplier is unpaid, the claim is a personal claim against the trader. After business assets are exhausted, personal savings and (subject to enforcement and insolvency exemptions) an interest in a home remain in view. There is no veil, because there is nothing to hang a veil on. The commercial attraction is speed and residual profit: the trader can start today and keep what is left after tax and bills. On an exam stem, do not invent a company merely because the individual used a brand name or employed staff.

Partnerships under the Partnership Act 1890

Section 1 of the Partnership Act 1890 defines partnership as the relation which subsists between persons carrying on a business in common with a view of profit. Two dentists who share patients, staff, and net profit can be partners even if they never signed a deed. Section 2 supplies evidential pointers: receipt of a share of profits is prima facie evidence of partnership, though it is not conclusive.

English law does not confer separate legal personality on an ordinary partnership. Section 4 uses firm as a convenient label for the partners collectively. Partnership property is held by the partners (often on trust for the firm). Contracts are the partners' contracts. Every partner is liable jointly with the other partners for debts and obligations of the firm incurred while they are a partner (s.9). For wrongful acts in the ordinary course of the firm's business, and for misapplication of money received for the firm, liability is joint and several (ss.10–12). An incoming partner is not liable, merely by admission, for old debts (s.17). A retiring partner remains liable for obligations incurred while they were a partner unless the creditor agrees to a release, typically by novation.

Do not confuse this vehicle with an LLP. Do not confuse it with a limited partnership under the Limited Partnerships Act 1907 (general partners plus limited partners). That 1907 vehicle is not the FLK1 core list of sole trader / partnership / LLP / private and unlisted public company.

Limited liability partnerships

An LLP is a body corporate with legal personality separate from its members (Limited Liability Partnerships Act 2000, s.1(2)). It has unlimited capacity (s.1(3)). It exists because it is incorporated, not because two people shook hands. Third parties contract with the LLP. Subject to any personal guarantee and to winding-up contribution rules, a member is not liable for the LLP's debts solely by reason of being a member. Partnership law does not apply to LLPs except as the 2000 Act or another enactment provides (s.1(4)–(5)).

Two caveats keep the shield honest. First, members remain liable for their own torts and for obligations they undertake as individuals (guarantees, indemnities, a deed they execute personally). Second, the LLP agreement can require capital contributions. That is a claim inside the LLP, not a shortcut for a trade creditor to treat members as 1890 Act partners. If a stem says "the partners of Green & Co LLP", slow down. An LLP is not a partnership. Liability analysis starts with the LLP as the legal person.

Private companies and unlisted public companies

A company registered under the Companies Act 2006 is a legal person from the date on its certificate of incorporation (ss.15–16). Salomon v A Salomon & Co Ltd remains the foundation: even a one-person company is not the member's alias. Limited liability for members is a statutory incident of a limited company (s.3). If the company is limited by shares, a member's exposure is capped at any amount unpaid on their shares. If it is limited by guarantee, exposure is capped at the amount they undertake to contribute on a winding up. Fully paid shareholders can watch the company fail without writing a further cheque as members.

A private company must not offer its shares to the public (s.755). It may have a single member (s.7) and a single director, provided at least one director is a natural person (ss.154–155). It need not have a company secretary (s.270). An unlisted public company is still a CA 2006 public company: the plc name (ss.58–59), at least two directors, a company secretary (s.271), allotted share capital of not less than the authorised minimum of £50,000 with at least one quarter paid up (ss.763, 586), and a trading certificate before it carries on business or exercises borrowing powers (s.761). Those are company-law characteristics. They are not Listing Rules, prospectus content, or DTR disclosure. Leave market codes out of this topic.

Directors are not hidden partners and not automatic guarantors. Office does not make them liable for company debts. They can still be liable on a personal guarantee, for a personal tort, or under later insolvency provisions such as wrongful trading (taught with insolvency, not as a rewrite of Salomon).

Personality in contract and in tort

Personality tells you who the proper party is.

Contracts

If a director signs a supply agreement for and on behalf of Widget Ltd, and they had authority, Widget Ltd is the buyer. The unpaid seller sues the company. The seller reaches the director only if the director gave a personal guarantee, signed in a way that attracted personal liability, or undertook some other personal obligation. Owning 100% of the shares does not make the shareholder a party. The opposite trap is pre-incorporation contracts: a company that does not yet exist cannot be a party. Section 51 CA 2006 makes the person purporting to act for the company personally liable, subject to contrary agreement. Personality cannot be backdated by optimism.

Torts and the veil

A company can commit torts through human actors and can be vicariously liable for employees. Limited liability does not mean nobody is ever liable in tort. A director or member who personally deceives a counterparty, or who personally assumes responsibility for a statement, can be a concurrent tortfeasor. What Salomon blocks is the lazy claim: "I lost money dealing with the company, so I will sue the shareholders as if they were the company."

Piercing the corporate veil is exceptional. At functioning-knowledge level, Prest v Petrodel Resources Ltd is the modern map. The court may disregard the company's separate personality where a person uses the company to evade an existing legal obligation (the evasion principle). Using a company from the outset to hold assets, which merely conceals who is interested, is usually solved by ordinary doctrines — trust, agency, or a personal tort — not by pretending the company does not exist. Do not advise that "the court will ignore the company if it would be fair." Fairness is not the test.

Exam traps to lock in

• 1890 Act partners: unlimited personal liability for firm debts incurred while a partner.
• LLP members: not liable for LLP debts merely as members; still liable for personal commitments and personal wrongs.
• Company members: limited to unpaid capital or the guarantee; 100% ownership does not destroy personality.
• Directors: not automatically liable for company debts.
• Veil language: identify the contracting party and the tortfeasor first; piercing is last resort.

When a client asks "can they come after me?", answer with the vehicle, the document they signed, and whether the claim is against the entity or against them as an individual. That is the functioning-knowledge method.