Running a business highly depends on its structure. The form of business determines such points as liability, admission of new holders, tax payments, and paperwork. Moreover, the business structure has a considerable influence on the individual risk. However, the key to a success is not only a business entity that a person has chosen for the firm but also his/her efforts and reliable business partners. The paper discusses the law aspects of the partnership in terms of the partners’ liability and the duty of good faith, provides a comparison between different forms of the business entities, and outlines the process of a company formation under the provisions of the law.
The first issue to be discussed is to decide whether a partnership business between Fred and Anne exists. A partnership is a single business of two or more people with a view to a profit. It is a form of business vehicle that does not need many formal procedures but works when people conduct business automatically. According to the statute, it is obvious that a partnership between Fred and Anne exists. Nevertheless, a firm can exist in one of the two special forms of partnerships. The first type, a limited partnership, differs from an ordinary one in that it has one or a couple of owners, who are not involved in the firm’s running. Therefore, the owners’ responsibility is restricted to the amount of the invested funds. The second type, a limited liability partnership, was introduced because of the concerns associated with the professional business partnerships about its being vulnerable to unlimited liability for the numerous professional disregard claims. The partners are liable for the losses, debts, and obligations of the firm according to the amount of money they invest. As any details were not mentioned in the case scenario, it is assumed that Fred and Anne have a general form of partnership.
Another issue to be considered deals with the liabilities of both partners. The Partnership Act (1890) states that each partner is liable with other co-owners for all the credits and expenses of the firm in equal parts. Furthermore, the statute provides that, in the case of incorrect acts or lapses made by a partner acting in the usual path of the business, the firm is legally responsible for the loss or injuries caused. It follows that the partnership carries legal responsibility for any negligent acts to the third parties with whom it has signed the contracts. The business entity risk here far prevails upon the advantages as, if co-owner does something wrong, another partner will be entirely liable for the debts, regardless of how much he/she invested in the business. Therefore, both Fred and Anne are liable for the rotten floor and Lisa’s injured leg unless there is an express or implied agreement to the contrary. The liability of each partner is divided into equal parts. The only way to limit personal liability is through the assignments in the agreement.
The third issue to be discussed is the duty of good faith that shows that the partners must act in the firm’s interests. The statute provides that the partners have to inform each other of any information about the clients or business opportunities for the firm (Murray 2014). This point is reinforced in the case of Aas v Benham (1891) by the following judgment, “It is clear law that every partner must account to the firm for every benefit derived by him without the consent of his co-partners from any transaction concerning the partnership or from any use by him of the partnership property, name or business connection”. In such a manner, Anne was to inform Fred about an opportunity to buy a building. Nevertheless, it was not beneficial for Anne to share with Fred the idea of the Cheap and Cheerful Ltd. For this reason, Anne formed a private company on her husband. Consequently, Anne gets profit, and Fred seeks a way to revenge.
The fourth issue in the case to tackle is to determine the most attractive form of business structure for the renovation flat business. What business structures the entity employs can have a considerable influence on the individual risk. Moreover, it will affect the amount of tax payments, potential for profit, etc. Fred is to choose between two business vehicles: either a partnership or a private limited company.
A partnership is easy to form and run. One of its benefits, besides the cheapness and simplicity, is common efforts of the partners that can lead to the better results. Moreover, the partnership means pooling together the experience, skills, and strengths of each partner. However, the risk of complete personal liability far prevails upon the advantages.
In the case of a private limited company, the firm completely becomes a separate legal business. It means that the business must be created and registered at the Companies House. The company also has to have a definite list of standard documents that outlines the range of the company’s activities and industry niche. The company is owned by people, who have its shares. However, a person can keep all the shares for him/herself, allocate shares to a spouse or any number of people, or sell them in order to increase the funds. Running a limited liability company does need a professional accountant, as it requires more administration than an ordinary partnership.
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A limited liability company provides significant advantages, which comprise the following issues.
- there is a possibility to get income in the form of both salary and dividends;
- the debts of the company are separate from that of the shareholders;
- the limited company tends to convey a more proficient image of the business;
- running the companies is easier and more flexible in terms of involving new investors and shareholders.
If one has to choose between a partnership and a limited liability company, the last one is a much safer business vehicle for the flat renovation business. Nevertheless, there is one more type of the business entities that can be successfully applied in this sphere. It is a limited liability partnership that also has some features of a company. Under the Limited Liability Partnership Act (2000), the partners in an LLP are not personally responsible for the business’s obligations. Their liability is limited to the invested funds. The partners’ duties and percent of the profits are stated in the agreement. There are no fiduciary duties between the LLP members. In the case of F&C v Barthelemy and Culligan (2011), the High Court stated that the members of a limited partnership do not have duties of good faith to either themselves or the firm, unless expressly spelled out in the LLP agreement. The limited liability partnerships are usually used by professional firms such as architects or accountants. Together with some other partners who are proficient in the flat renovation business, Fred might create a limited partnership. Moreover, a partner may be both a person and a company. Fred can draw the bulk of the income gained each year due to significant tax savings. In the case the profit is to be re-invested in the firm, a private company could be a better option because there is no payment out to the shareholders, and the only responsibility is a corporation tax. The rate of corporation tax in the United Kingdom is quite low as compared with the other liabilities. In each situation, the figures need to be examined in order to find out accurately which way is the best one. The comparison of a business partnership, a limited partnership, and a company is shown in the table 1. These data will help Fred make the most effective choice.
Comparative characteristics of an ordinary partnership, a limited liability partnership, and a limited liability company
|Business partnership||Limited liability partnership||Limited liability company|
|number of members||the minimum number is two||the minimum number is two||no limit|
|level of liability||personal responsibility for the business||limited liability of the owners to the contributed sum of money||limited liability of the members according to the value of shares they own|
|flexibility in profits||under the valid legislation, the partners are entitled to divide the capital and revenues of the firm equally||there can be different apportionment of the profits between members||all shares of the same class in a company have a dividend at the same level for each share|
|taxation||personal taxes of the partners||personal taxes of the members||corporate tax on the company’s profits plus income tax on the dividends|
The final issue to be considered concerns the process of incorporating a new business. Fred will need to observe a variety of formalities in order to form a limited liability company under the Companies Act 2006. First of all, Fred can choose between two options: registering the company or buying a ready business off the shelf. The process of registering a company comprises various documents that must be sent off to the Companies House. In order to incorporate a company, a person may use one of the three ways: electronic filing, web service, or paper filing. The necessary list of documents required includes
- Memorandum of association that forms the business.
- Application for registration that provides the company’s basic details: name, address, etc.
- Articles of association that represents the business’s constitution.
- Statement of the capital and initial shareholdings.
- Statement of the proposed officers. It is assumed that Fred will be the company's first director so his name, address, and consent to act should be applied.
- Statement of compliance with all the registration requirements.
Fred also has to pay a special registration fee, which is now £40 for the paper and £13 for the electronic registration (Companies House 2015). In addition, there are several important requirements and restrictions for the company’s names under the Companies Act 2006, Part 5. If everything is in order, the registrar will register Fred’s company and issue a Certificate of Incorporation under the Companies Act 2006, s. 15. The Certificate is the final evidence that the registration process has ended, and the company now exists. It shows the company’s number and date of creation.
If a person does not want to experience the routine of preparing and registering the documentation with the Companies House, he/she can buy a shelf company, which can be used straight away. A shelf company is the one that have been already formed by a special formation agent. It costs more to buy a shelf company then register a business; however, it is still not costly. There are probable some drawbacks to buying a shelf company as it will not be in precisely the form that Fred might have selected, so he should modify the articles to avoid the troubles afterwards. A shelf company may not have the desired name, but an owner can change the name if he/she wants to via a special resolution, or he/she could leave the company's name untouched and work under a different business name (Judge & Moore 2014).
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In addition, before forming a limited company, Fred must choose its type. A private company can be limited by shares, by guarantee, private unlimited, or public limited company. However, the best option for Fred is to form a private company limited by shares. In order to raise the funding, Fred can sell some of the company’s share to various investors or allocate shares to people and re-invest into the business.
Finally, a partnership is a business entity that should be based on a deep faith and responsibility between the partners. If a person sets up a partnership, he/she must be ready to share not only the benefits but also the faults. Therefore, according to the valid legislation, Fred should mind the duty of a good faith. Whatever the type of business vehicle Fred chooses either a private company or a limited partnership, he should pay much more attention to the social work and search for the reliable and proficient partners or investors. Moreover, it is vital for Fred to realize that business requires attention and responsibility. Therefore, the things he is doing should be done at the best level in terms of the law provisions.