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Alley in the City of London began publishing a list of stock and modity
prices called ‘The Course of the Exchange and other things’； the business of
stock exchanges really got under way。 By 1761 a group of 150 stockbrokers
and jobbers had formed a club at Jonathan’s to buy and sell shares。 In 1773
the brokers erected their own building in Sweeting’s Alley； with a dealing
room on the ground floor and a coffee room above。 Briefly known as ‘New
Jonathan’s’； members soon altered the name to ‘The Stock Exchange’。
It was not until 1791 that the United States had its first bourse when
the Philadelphia traders organized a stock exchange。 The following year；
21 New York traders agreed to deal with each other under a bu。。onwood
tree on Wall Street。 By 1794 the market had moved indoors。 India’s premier
stock exchange； Bombay Stock Exchange （BSE）； can also trace its origin
Business History 173
back as far as 125 years when it started as a voluntary non…profit…making
association。 In the 1870s； a securities system was introduced in Japan and
public bond negotiation began。 This resulted in the request for a public
trading institution； and the ‘Stock Exchange Ordinance’ was enacted in
May 1878。 Based on this ordinance； the ‘Tokyo Stock Exchange Co。； Ltd’
was established on 15 May 1878 and trading began on 1 June。
These early stock exchanges were gentlemen’s clubs governed only by
a few house rules。 Trading rarely started before 10。30 and was over by
15。30。 No records were filed； no rules governed the case of a trader who
could not deliver what he had sold and nothing prevented prices being
manipulated。
Limited liability panies
From the earliest trading times to the present day； the most popular legal
structure under which to operate has been as a sole trader； which in effect
means every man for himself。 In the beginning； a merchant always risked
his own money； if he had any to invest： if he travelled； as most did； he risked
his life on the journey。 The caravan trade of Asia； Asia Minor； and North and
Central Africa ploughed their way through the sands that separated distant
cities and seaports。 The largest caravans prised thousands of camels
and required careful administration。 They also stimulated people to band
together in partnerships； pooling protection costs and profits to spread the
risks。 The partnerships would usually last only for the particular journey。
Later on； older merchants who had made money from earlier ventures
could join such expeditions by pu。。ing up money； without the hardship of
making the trip themselves。 This could be seen as an early form of limited
partnership。
As the ventures became more costly and of longer duration； partnership
structures of fixed duration between 1； 3 or 5 years became mon； with
an ever…increasing range of partners with differing shares in the venture。 To
add to the plications these partners could join and leave； perhaps for
no more sinister reason than death； at different times。
The concept of limited liability； where the shareholders are not liable； in
the last resort； for the debts of their business； changed the whole nature of
business and risk taking。 It opened the floodgate； encouraging a new generation
of entrepreneurs to undertake much larger…scale ventures without
taking on themselves all the consequences of failure。 As the name suggests；
in this form of business liability is limited to the amount you contribute
by way of share capital and； in the event of failure； creditors’ claims are
restricted to the assets of the pany。 The shareholders of the business are
not normally liable as individuals for the business debts beyond the paidup
value of their shares。
174 The Thirty…Day MBA
The concept itself can be traced back to the Roman Empire； where it
was granted； albeit infrequently； as a special favour to friends for large
undertakings by those in power。 The idea was resurrected in 1811 when
New York State brought in a general limited liability law for manufacturing
panies。 Most US states followed suit and eventually Britain caught
up in 1854。 Today； most countries have a legal structure incorporating the
concept of limited liability。
Business law
。 Forms of business
。 Employing staff
。 Innovation issues
。 Tax legalities
。 Trading regulations
。 Rules on mergers and acquisitions
Some business schools take law very seriously； for example； at Northwestern
University’s Kellogg School and George Washington University；
MBA students can take a joint MBA and JD （juris doctor）； the basic professional
degree for lawyers。 Babson in Wellesley； Massachuse。。s has law
as one of its core subjects。 Penn State； on the other hand； offers only an
optional module in the second year on ‘Business Law for Innovation and
petition’。
Nevertheless； lawyers dominate big businesses in the United States and
both Congress and the Senate。 In the UK around 12 per cent of MPs are
either barristers or solicitors； the largest professional grouping in the House
of mons。 Other than very large businesses； it is not usual to have either
a qualified lawyer or a legal department in businesses in the UK。 Such
services are usually bought in on either a contractual or ad hoc basis。 Law
is an imprecise field。 As Henry L Mencken； the American journalist and
critic； so succinctly expressed it： ‘a judge is a law student who marks his
own examination papers’。
The plexity of mercial life means that； sooner or later； you will
find yourself taking； or defending yourself against； legal action。 It may be a
contract dispute with a customer or supplier； or perhaps the lease on your
premises turns out to give you far fewer rights than you hoped。 A former
employee might claim you fired them without reason。 Or the Health
and Safety Inspector will call and find some aspect of your machinery or
working practices less than satisfactory。
6
176 The Thirty…Day MBA
Ignorance does not form the basis of a satisfactory defence； so every MBA
needs to know enough law to know when they might need legal advice；
however high their standard of ethics and social responsibility may be。
CORPORATE STRUCTURES
As an MBA it’s highly likely that you will be working for a conventional
pany； private or public （see Chapter 2 for more on public panies）。
There are； however； a number of distinct forms that a business can take； the
choice of which depends on a number of factors： mercial needs； financial
risk and the need for outside capital。
Each of these forms is explained briefly below； together with the procedure
to follow on se。。ing them up。 You can change your ownership status
later as your circumstances change； so while this is an important decision it
is not a final one。
Sole trader
Over 80 per cent of businesses start up as sole traders and indeed around
55 per cent of all businesses employing fewer than 50 people still use this
legal structure。 It has the merit of being relatively formality free and； unless
you intend to register for VAT； there are few rules about the records you
have to keep。 There is no requirement for your accounts to be audited； or
for financial information on your business to be filed at panies House。
As a sole trader there is no legal distinction between you and your business
– your business is one of your assets； just as your house or car is。 It
follows from this that if your business should fail； your creditors have a
right not only to the assets of the business； but also to your personal assets；
subject only to the provisions of the Bankruptcy Acts。 The capital to get the
business going must e from you – or from loans。 There is no access to
equity capital。
Partnerships
Partnerships are effectively collections of sole traders and； as such； share
the legal problems a。。ached to personal liability。 There are very few restrictions
to se。。ing up in business with another person （or persons） in partnership；
and several definite advantages。 By pooling resources you may have
more capital； you will be bringing； hopefully； several sets of skills to the
business； and if you are ill the business can still carry on。
There are two serious drawbacks that you should certainly consider。
First； if your partner makes a business mistake； perhaps by signing a disastrous
contract； without your knowledge or consent； every member of the
Business Law 177
partnership must shoulder the consequences。 Under these circumstances
your personal assets could be taken to pay the creditors even though the
mistake was no fault of your own。
Second； if your partner goes bankrupt in his or her personal capacity；
for whatever reason； his or her share of the partnership can be seized by
creditors。 As a private individual you are not liable for your partner’s private
debts； but having to buy him or her out of the partnership at short notice
could put you and the business in financial jeopardy。 Even death may not
release you from partnership obligations and in some circumstances your
estate can remain liable。 Unless you take ‘public’ leave of your partnership
by notifying your business contacts and legally bringing your partnership
to an end； you could remain liable。
The legal regulations governing this field are set out in the Partnership
Act 1890； which in essence assumes that petent businesspeople should
know what they are doing。 The Act merely provides a framework of agreement
that applies ‘in the absence of agreement to the contrary’。 It follows
from this that many partnerships are entered into without legal formalities
– and sometimes without the parties themselves being aware that they have
entered a partnership！
The main provisions of the Partnership Act state：
。 All partners contribute capital equally。
。 All partners share profits and losses equally。
。 No partner shall have interest paid on his capital。
。 No partner shall be paid a salary。
。 All partners have an equal say in the management of the business。
。 Unless you are a member of certain professions （eg law； accountancy；
etc） you are restricted to a maximum of 20 partners in any partnership。
It is unlikely that all these provisions will suit you； so you would be well
advised to get a ‘partnership agreement’ drawn up in writing by a solicitor
at the outset of your venture。
Limited partnerships
One possibility that can reduce the more painful consequences of entering
a partnership is to form a limited partnership bining the best a。。ributes
of a partnership and a pany。
A limited partnership works like this。 There must be one or more general
partners with the same basic rights and responsibilities （including unlimited
liability） as in any general partnership； and one or more limited partners
who are usually passive investors。 The big difference between a general
partner and a limited partner is that the limited partner isn’t personally
178 The Thirty…Day MBA
liable for debts of the partnership。 The most a limited partner can lose is the
amount that he or she： paid or agreed to pay into the partnership as a capital
contribution； received from the partnership a。。er it became insolvent。
To keep this limited liability； a limited partner may not participate in the
management of the business； with very few exceptions。 A limited partner
who does get actively involved in the management of the business risks
losing immunity from personal liability and having the same legal exposure
as a general partner。
The advantage of a limited partnership as a business structure is that
it provides a way for business owners to raise money （from the limited
partners） without either having to take in new partners who will be active
in the business or having to form a limited pany。 A general partnership
that’s been operating for years can also create a limited partnership to
finance expansion。
Limited pany
Of the 4。5 million businesses trading in the UK； over 1。4 million are limited
panies。 As the name suggests； in this form of business your liability is
limited to the amount you state that you will contribute by way of share
capital； though you may not actually have to put that money in。
A limited pany has a legal identity of its own； separate from the
people who own or run it。 This means that； in the event of failure； creditors’
claims are restricted to the assets of the pany。 The shareholders of the
business are not liable as individuals for the business debts beyond the
paid…up value of their shares。 This applies even if the shareholders are working
directors； unless of course the pany has been trading fraudulently。
Other advantages include the freedom to raise capital by selling shares。
Disadvantages include the cost involved in se。。ing up the pany and
the legal requirement in some cases for the pany’s accounts to be audited
by a chartered or certified accountant。 Usually it is only businesses
with assets approaching ￡3m that have to be audited but if； for example；
you have shareholders who own more than 10 per cent of your firm they
can ask for the accounts to be audited。 The behaviour of panies and
their directors is governed by panies Ac