RULES OF FORMATION OF A BUSINESS CONTRACT
INTRODUCTION
The report shall bring light upon the queries of the local businesses about the process of contract formation and business structures in the UK. Contract is an essential part of any business and one shall be aware of all the classifications of contracts and the rules of the formation of contracts. Many local businesses do not possess enough information about contracts which lead to stagnant growth or even loss in several cases because a contract can make or break a company due to many of its legal aspects. The situation of getting trapped in a binding or unfair contract can be avoided by diligently learning about all the contract formation techniques and reading the terms and conditions carefully before signing it. This study will dive deep into the concept of the business contracts and establish a reliable understanding of them.
A business contract is a legally binding agreement between two or more persons or entities. (Franco, 2024.) It creates an obligation of performing or not performing a particular duty in exchange for a benefit. It defines the terms of the relationship between the parties and sets out the rights and obligations. A contract may be oral or written, but it must be clear and ambiguous. But it is always best to have written agreements to avoid misunderstandings of any sort.
ELEMENTS OF A CONTRACT
The elements of the contract play a critical role in the process of preparing a legally enforceable contract. While creating a contract offer or accepting it, both the parties must come to a common point of understanding to agree with each other and the terms of the agreement. The commonly known 4 P’s of contract must be kept in mind while drafting these contracts – Persons, Price, Property, and Particulars.
RULES OF A BUSINESS CONTRACT
Pre- contractual Negotiation –
This is the first and most basic rule but forms the foundation of a strong and reliable contract. (Rahim et al., 2023.) As one cannot make any offer finalize a contract without prior discussion and negotiation where both parties lay off their terms and conditions and clarify their expectations to create a common ground and build trust for steering clear of misunderstanding in the long run.
This is essential to avoid any ill-conceived or unreasoned contract which might have to be modified a number of times or later terminated.
Offer –
This rule allows a party to make a legal proposal to another party, where the party presenting the offer is called the OFFEROR and the party to whom the contract is being presented is called the OFFEREE. It is required to state clear and comprehensible terms in the offer. This rule ensures the fairness and transparency of a contract.
Acceptance- It is the agreement by the Offeree to the terms proposed by the offeror. (Turitsyn et al., 2020.) If the offeree wishes to revise the of the offer, this rule provides the party with an opportunity to make such decision, a new and revised offer will be made if the offeree demands any change and the previous one will be considered annulled. It ensures that both the parties are provided equal say in the formation of the offer and to lay their terms and conditions uniformly.
Consideration –
This plays a significant role in ensuring that the contract is an equivalent exchange of goods and services with money or something else that is valuable. It establishes that both the parties are getting a valuable asset from each other and that the contract is entertained by both the parties equally.
Intention to Create Legal Relations –
This rule is necessary to enforce the seriousness of the contract and distinguish it from informal discussions and casual business arrangements. (Giliker, 2022.pp.175-202) It concludes that both the parties agree to recognize it as a legally enforceable agreement.
Capacity to Contract –
It is vital to know that both the parties involved in the contract are competent and legally allowed to be a part of such contract, they should have a clear background and must not be held restricted by the law for making legal relations due any reason.
Legal Purpose –
This is to guarantee that only legal and ethical business practices are approved and held legally enforceable by the law. This rule prevents any contract which involves any illegal activity or unfair practices from and towards any party and contributes in the formation of a fair and legal contract.
Formalities, Certainty, Completeness-
It makes sure that the contract is complete in all aspects. (Macchiavello, 2022. pp.337-362) It should contain all the crucial elements and complies with all legal requirements before both the parties are bind in the said contract.
CHALLENGING PHASES OF CONTRACT
Disputes- Some disagreements may arise regarding the interpretations of the terms of contract which might even lead to disputes. This can be challenge the validity or enforceability that the contract holds, and may require resolving the disputes through further negotiation.
Modification- The parties must revisit the offer and modify the contract accordingly if they decide to revise their terms and renegotiate some of the aspects of the deal due to changed circumstances.
Termination- Any of the involving parties may decide to terminate the contract due to various reasons like the opposite party’s inability to comply with the obligations or if they demonstrate a breach in the contract.
RULES OF CONTRACT ARE FAVORABLE TOWARDS SELLERS OR BUYERS
There are several factors of the contract which affect the buyers and sellers in different manners. (Soni, 2023.) So it is not considered fair to judge whether the rules are biased for one party over the other.
While the sellers have the upper hand in contract formation and stating their clauses, the government has introduced Consumer Rights Act 2015 which governs consumer protection against unfair deals and compromised quality of goods, The Unfair Contract Terms Act in 1977 which regulates exclusion clauses and unfair terms in contracts. These help in regulating and maintaining good relations between the buyers and the sellers and crafting fair business contracts for both the parties.
CONCLUSION
This study concludes that formation of any contract demands several conditions to be fulfilled and for all the elements of the contract to be present and agreed upon by both the parties involved. There are different types of contracts based on their time, nature and strictness.
The sellers may have some advantages in the contract formation. (Spooner, 2024.pp.257-285) UK law system has also ensured that the buyers are protected against unlawful practices by the sellers and manage to get a fair deal. They have established a definite balance between advantages for buyers as well as the sellers.
TYPES OF BUSINESS STRUCTURES IN THE UK
INTRODUCTION
To start any business, one must be adequately aware about the different types of structures of businesses. It is the most important building block in the process of establishing a business. Each type of business structure has its own pros and cons and the owners must be able to identify which is the most appropriate one for their business. For that, there is a need to consider and compare all the deciding factors for the structure of the business which involves the industry that the said business is in, the no. of owners, liability and tax implications and the defined plan for growing the business. The United Kingdom has four main types of business structures and this report will provide in depth information about each structure.
MOST COMMON BUSINESS STRUCTURES
Sole Proprietorship- This structure is also known as Sole Trader. (Spieth et al.,2021.pp.24-39) This is the most basic and initial stage of the business structure and during the beginning of any business, it is automatically considered for it to be a sole proprietorship type of business until it is registered under any other structure. It is considerably easy to set up and is the best option available for low risk businesses and requires minimum legal procedures. It is a great opportunity for owners who want to test their businesses before expanding and making it more formal.
PROS:
It does not involve any complex steps of administrative paperwork and is comparatively inexpensive and fast.
Owner has full control over the business and can savor all the profits.
CONS:
The owner has personal liability for all the debts of the company since the responsibility for all the funds lies with the owner.
The owner might end up paying a huge amount of tax if the business is making good profits (Ozoda, 2023.pp.133-141).
Banks hesitate to provide loans to sole traders, so it can be challenging to get loans from banks when needed.
Partnership- This type of business structure is used when there is more than 1 member involved in the ownership of a business and both will be responsible for the liabilities and profits of the company. Partnerships are considered to be more complex than sole proprietorship due to the involvement of more than 1 parties and that is why it is important to lay down defined rules for each partner to avoid any misunderstandings and disputes in the future.
TYPES OF PARTNERSHIPS-
General Partnership- All the partners are equally liable for the business debts.
Limited Partnership(LP)- This partnership allows both the general partners with full liability and limited partners with limited liability and also limited involvement in the business,
Limited Liability Partnership (LLP) - In this arrangement, all partners will be having limited liabilities. (Schoneveld, 2020.p.124062) Some or all partners can have limited involvement in the business management.
PROS:
Distributed responsibility between all business partners and additional support
Shared liabilities and profits
Easy to set up and requires less administrative work.
CONS:
It can be complicated to transfer ownership or leave the partnership.
Consequences of any partner’s mistakes have to be faced by others involved in the business.
Disputes are common due to differences in opinions.
Limited Liability Company (LLC) - This type of company structure provides clear separation between the company and its owners. The owner is not held responsible for the debts or liabilities of the company. It is a perfect blend of benefit of partnership and corporation. It can be useful for small business owners who require some liability protection and flexibility with taxes and management for their company.
This set up requires more administration work and responsibilities than a sole proprietorship or partnership. The organization is obliged to file its accounts and pay Corporation tax regularly (Shah et al., 2022.). There must be a strict documentation of all transactions and a detailed report of the finances.
PROS:
The business and personal finances are independent and the owner is not liable for any of the business costs.
A corporate structure can help in bringing more clients towards the business.
It is more tax efficient.
CONS:
Members of LLC have to register themselves as self-employed and must pay all taxes in order to get Medicare and Social Security.
Information is publically available so there are privacy concerns.
Heavy administration burden is present.
LIMITED LIABILITY PARTNERSHIP (LLP) – This structure is considered more complex than others and especially for the local businesses. It is an alternative corporate business form that combines a company’s limited liability while offering flexibility for partnership.
Each person or entity is entitled to a percentage of business profits which depends on the amount that is being invested by them in the business.
PROS:
Corporations can exist indefinitely (Lobo and Bhat, 2022.pp.14-25). They are independent of changes in ownership and in case if shareholders depart.
Each person is only liable for the debts relating to the amount invested by them.
Less tax to be paid than in the sole traders set up.
Simpler access to capital since corporations can issue stocks and bonds.
CONS:
It is more expensive than other business structures.
There is dilution of control since the shareholders of the company also hold the decision making power or the power to influence the decisions.
APPROPRIATE BUSINESS STRUCTURE FOR LOCAL BUSINESSES
Now coming to the main point of the discussion, for the local businesses in the UK, the most favorable and convenient business structure should be SOLE TRADER/SOLE PROPRIETORSHIP since most of these local businesses run on a small scale and owned by a single person. They are not proficient in handling the administrative work and do not have the privilege to hire professionals for handling their business administration work. (Moussetis and Cavenagh, 2021.pp.23-52) As the process to set up the sole trader business is easier, it makes things more convenient for the local businesses, it provides them a chance to take small steps to grow their businesses while taking calculative risks. Partnership can also be considered a fairly good structure for the small businesses, conditioned that the partners must have a legal contract of their rights and responsibilities in the business to avoid any disputes or misunderstandings in the future.
CONCLUSION
The report concludes that there are various business structures in the market, but it is to be kept in mind that each of them is meant for different types as well as different stages of development and growth of the businesses. Many multinational companies have started with sole trader and slowly built their way up, so it is important to compare all the aspects and then make a decision to go with the structure that best suits a particular business.
REFERENCES
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