Company Law-Answer

Table of Contents 1       Sole proprietorship. 3 The advantages of a sole proprietorship: 3 The disadvantages of a sole proprietorship include: 3 2       Partnership. 4 Advantages of a General Partnership: 4 Disadvantages of a General Partnership. 5 3       A limited partnership. 5 Advantages of a Limited Partnership. 5 Disadvantages of a Limited Partnership. 5 4       Corporation. 7 Advantages of a Corporation: 7 Disadvantages of a Corporation: 7 5       Limited Liability Companies. 7 Advantages of a LLC: 7 Disadvantages of a LLC: 8 Company v/s Corporation. 8 I        Company. 8 II       Corporation. 8 A       Possible Type of the company. 9 Characteristics of Company. 9 The company has a separate legal identity. 9 Limited Liability. 9 There can be tax benefits. 10 Personal assets are covered. 10 Company given more credibility. 10 Protection of your Business name. 10 Higher take home pay. 10 Funding. 11 Shareholders. 11 Succession. 11 Professional 11 The owners’ liability is limited. 11 Exit from the business. 11 B       Responsibilities of Directors. 11 C       Can Kylie and Imad be the Employees of company. 12 One of the best source of earning for a person can be form entrepreneurial activity i.e. to start and manage one’s own business. However, the business is a legal body which is created by law and there are some certain complexities every businessman has to face regarding the structure and types of business that he is just going to start. The issue become more complex in case when there are two participant who are going to start a new business. However, followings are the options that I would be suggesting Kylie and Imad.

1       Sole proprietorship

The sole proprietorship is the simplest business form in which one person can operate whole business. The sole proprietorship is not a legal entity. A sole proprietorship can operate under the name of its owner. The sole proprietorship is a popular business form due to its simplicity and less cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. The owner of a sole proprietorship typically signs contracts in his or her own name, because the

The advantages of a sole proprietorship:

  • Owners can establish a sole proprietorship directly, easily and inexpensively.
  • A sole proprietor need not pay unemployment tax on himself or herself
  • Owners may freely mix business or personal assets.
  • Easier to start up and lower cost because there are no required filing fees.
  • Few documents are required at start up.
  • Owner is free to make own decisions concerning the business operations.
  • Owner pays only personal income taxes on the profits.
  • Owner receives all profits.

The disadvantages of a sole proprietorship include:

  • Owners are subject to unlimited personal liability for the debts, losses and liabilities of the business.
  • Owners cannot raise capital by selling an interest in the business.
  • Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
  • Owner alone is responsible for all liabilities incurred by the business; if the business bears any kind of loss then personal assets of owner will sold for payback the amount

2       Partnership

It is a legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships. There are three essential elements to a general partnership:
  • A sharing of profits and losses.
  • A joint ownership of the business.
  • An equal right in the management of the business.
If your business will be owned and operated by several individuals, you’ll want to take a look at structuring your business as a partnership. Partnerships come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations.

Advantages of a General Partnership:

  • Easy to establish.
  • There is an increased ability to raise funds when there is more than one owner
  • Wider pool of knowledge, skills, and contacts.
  • Simplified Tax Filing
  • Improved management with more than one owner.

Disadvantages of a General Partnership

  • No Separate Business Entity from Partners
  • Partners’ Personal Assets Unprotected
  • Partners Liable for Each Others’ Actions
  • Partnership Terminated Upon Death or Withdrawal of One of the Partners

3       A limited partnership

This is another option available which has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.

Advantages of a Limited Partnership

  • Unlimited Shareholders
  • Certain Tax Advantages
  • Utilization of Financial/Managerial Strengths of Partners
  • Unlimited Cap on Capital Acquisition with Partnership Agreement
  • Liability Protection for Limited Partners

Disadvantages of a Limited Partnership

  • Extensive Documentation Required
  • Lack of Legal Distinction for General Partners
  • General Partners’ Personal Assets Unprotected
  • General Partners Liable for Each Other’s Actions
  • Less Protection from Excessive Taxation
  • Partnership Terminated Upon Death or Withdrawal of One of the Partners
  • More Advantages by forming a Limited Liability Company
Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities. If you have two or more partners who want to be actively involved, a general partnership would be much easier to form. One of the major advantages of a partnership is the tax treatment it enjoys. A partnership doesn’t pay tax on its income but “passes through” any profits or losses to the individual partners (Wooldridge, 2011). If you decide to start your business as a partnership, be sure you draft a partnership agreement also called partnership deed that details how business decisions are made, how disputes are resolved and how to handle a buyout. You’ll be glad you have this agreement if for some reason you run into difficulties with one of the partners or if someone wants out of the arrangement. The agreement should address the purpose of the business and the authority and responsibility of each partner. It’s a good idea to consult an attorney experienced with small businesses for help in drafting the agreement. Here are some other issues you’ll want the agreement to address:
  • How will the ownership interest be shared?It’s not necessary, for example, for two owners to equally share ownership and authority. However, if you decide to do it, make sure the proportion is stated clearly in the agreement.
  • How will decisions be made?It’s a good idea to establish voting rights in case a major disagreement arises. When just two partners own the business 50-50, there’s the possibility of a deadlock. To avoid this, some businesses provide in advance for a third partner.
  • When one partner withdraws, how will the purchase price be determined?One possibility is to agree on a neutral third party, such as your banker or accountant, to find an appraiser to determine the price of the partnership interest.
  • If a partner withdraws from the partnership, when will the money be paid?Depending on the partnership agreement, you can agree that the money be paid over three, five or 10 years, with interest.

4       Corporation

A corporation is a separate legal and tax entity created by shareholders who offer money, property or both for the corporation’s capital stock. The corporation remains separate from the people who manage and control the operations of the business.

Advantages of a Corporation:

  • There is a pooling of capital from many investors and it is therefore easier to get the business up and running.
  • Shareholders are not personally liable for the debts of the corporation. If the corporation fails, shareholders may lose their investments in the corporation, but are not personally responsible for the corporation’s debts.

Disadvantages of a Corporation:

  • Have to file Articles of Incorporation and a filing fee.
  • Double taxation. The profits of the corporation are taxed as they are earned at a corporate level, and the profit is also taxed to the shareholders when it is distributed out as dividends.
  • Shareholders that control and own a significant amount, or majority, of the corporation’s voting stock have a dominant voice in the management of the business in comparison to shareholders that do not own as much stock.

5       Limited Liability Companies

LLCs are viewed as a hybrid between a partnership and a corporation because it offers the limited liability of a corporation but has the tax advantages of a partnership.

Advantages of a LLC:

  • Profits pass through the LLC and taxes are paid personally by the members (owners) of the company.
  • Liability of the members is limited to the amount of their investments.
  • Members are allowed to participate fully in management of the company.
  • Corporations and partnerships can be LLC members.
  • No limit on the number of members for a LLC.
  • A LLC can have just one member.
  • Offers a large amount of flexibility (Permwanichagun et al., 2014).

Disadvantages of a LLC:

  • Increased complexity in business formation; a LLC may be classified as a sole-proprietorship, a partnership, or a corporation for tax purposes.

Company v/s Corporation

All corporations are companies, but not all companies are corporations. Company is a much broader term than corporation, and it encompasses a lot of different types of businesses. These are a few of the key differences between a company and a corporation.

I       Company

A company is any entity that engages in business. Companies can be structured in different ways. For example, your company can be a sole proprietorship, a partnership, or a corporation. Depending on which different type of company you’re dealing with, it may be owned by one person or a group of people. Liability in most types of company is assumed by the owners, and can either be limited or unlimited depending on the type.

II     Corporation

Corporations are different from other types of company in that they exist separately from their legal owners. That means that liability is separate as well. With corporations, liability is limited to the holding of shares. In fact, shareholding is a major difference between corporations and other types of companies. With corporations, the shareholders each own a small piece of the larger corporate structure. Most companies are typically owned by one or a small handful of people, while corporations can be owned by thousands of different individuals. By knowing all this in detail about the kinds of the business I suggest to start a company because of following reasons:

A       Possible Type of the company

From the above given points, I would highly recommend Kylie and Imad to go for LLC. This company is best for those people who are just to start their business as beginners.

Characteristics of Company

The company has a separate legal identity

A limited company has its own legal identity.  So third parties contract with the ‘company’ and not the individual directors and shareholders.  This means companies survive the death of the owners and it’s possible for the directors and shareholders involved with the company to change over time.  A company’s existence will only cease if it is formally dissolved, liquidated or by other order of the courts or Registrar of Companies (Ding, 2009).

Limited Liability

As the name suggests, if you run a limited company, you are protected in case things go wrong. Assuming no fraud has taken place, you will not be personally liable for any financial losses made by your limited company.

There can be tax benefits

Sole trader ship and partners in a partnership pay income tax while companies pay corporation tax. While corporation tax rates are lower than income tax rates the advantage may lie with incorporation. As well as salary payments to employees, a company can also pay dividends to its shareholders. A shareholder director will therefore often choose to receive the most tax efficient mix of salary and dividends. Provided a minimum level of salary is taken, the director retains entitlement to certain State benefits without any employee or employer National Insurance Contributions being payable (British company supports Privacy Partnership campaign, 1998).

Personal assets are covered

As a non-limited business, personal assets can be at risk if the business fails, but this is not the case for a limited company. As the shareholder you cannot be held personally liable for the debts of a limited company, meaning your personal assets are not at risk.

Company given more credibility

Operating as a limited company often gives suppliers and customers a sense of confidence in business and quite often other companies prefer not to deal with non-limited businesses.

Protection of your Business name

Once your proposed company name is registered as a limited company, the name is protected by law and no one else is allowed to use it, waiting to register your company could mean you lose the name you had initially wished to trade under.

Higher take home pay

You’ll typically take home around 75% – 80% of your contract by working through your own limited company, you can take home as much as $15,000 per year more on a $350 daily rate compared with using an Umbrella Company.

Funding

Finding funding can be difficult for all types of businesses in the current climate. But because a limited company is a distinct entity from its owners it may be a little easier for a company to secure business finance than it is for their sole trader counterparts.

Shareholders

A limited company can issue various classes of shares. This means you can easily sell stakes in the company, or transfer ownership of shares. If your limited company has more than one shareholder you should get a Shareholders’ Agreement.

Succession

If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure.

Professional

In some businesses and industries, having a limited company can provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.

The owners’ liability is limited

The shareholders of a company have a limited or capped liability for the debts of the business.  The extent of their liability is the amount paid for their shares plus, if they have any, the unpaid amount on any nil or partly paid shares.  In practice it is usually just the amount paid for the shares plus any unsecured loans made to the company. This limit on the shareholders’ liability contrasts with the situation for partnerships and sole traders where there is potentially unlimited personal liability for the debts of the business.

Exit from the business

Registering a business as a limited company can aid the possibility of selling it in the future, which can be difficult to achieve with other business structures.

B       Responsibilities of Directors

Followings are the Duties of the Directors of LLC
  • The directors are not supposed to activity and intentionally deceive anything from any stakeholder of the company, including other directors, employees, customers or other parties.
  • They are legally bound, not to use their authority for their personal advantage
  • They are to make sure that their company is performing its business according to and in the jurisdiction of law
  • They have to ensure the implementation of articles and memorandum of association of the company and performed their activates in due course of business accordingly
  • If they are doing something in their personal capacity, they have to make sure not to disclose about their position which they have in the company

C       Can Kylie and Imad be the Employees of company

Yes, they can be the employees of the company under the provision of law and are also entities to get salary out of it. In a case referred as Stack v Ajar-Tec Ltd, the court has decided that the shareholders can be the employees of the company. It was further decided that the stack was also entitled to get salary for the period he has worked as an employee of the company.

References

British company supports Privacy Partnership campaign. (1998). Computer Fraud & Security, 1998(11), p.2. Ding, A. (2009). A Study on the Tendency of Sole Proprietorship for American-Funded Investment in China and Our Countermeasures. IJBM, 4(9). Permwanichagun, P., Kaenmanee, S., Naipinit, A. and Sakolnakorn, T. (2014). The Situations of Sole Proprietorship, E-Commerce Entrepreneurs and Trends in Their E-commerce: A Case Study in Thailand. Asian Social Science, 10(21). Wooldridge, F. (2011). The German private company limited partnership. ac, 2006(64).