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baron CONSULTANCY CONSULTANCY Amar Khawaja & Safa Choudhury

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Amar Khawaja & Safa Choudhury 1 Tables of Contents TABLES OF CONTENTS...2 EXECUTIVE SUMMARY...3 ANALYSIS...4 PARTNERSHIP V. LIMITED COMPANIES...4 PARTNERSHIP PROPERTY...4 DURATION OF LIABILITY IN A PARTNERSHIP...5 GENERATING CAPITAL FOR A LIMITED COMPANY...5 DUTIES OF PARTNERS TO EACH OTHER...6 NON-JUDICIAL RESOLUTION OF A PARTNERSHIP...7 RELEVANCE OF THE LIMITED LIABILITY PARTNERSHIP ACT RECOMMENDATIONS...9 BIBLIOGRAPHY Executive summary There are various factors which should be taken into account, when a choice is made between the available business structures and the choice should be kept under review as circumstances may change (Limited Liability Partnerships Act 2000). There are a variety of options that could be adopted, each of which has advantages and disadvantages. The following factors have been considered when advising for the appropriate business medium. Risk of capital Management Internal flexibility Security of tenure Succession to the business Legal status of the business Publicity Raising finance A final evaluation and concluding advice are given in the Recommendations section. 3 Analysis Partnership v. Limited Companies A partnership in England and Wales is not a separate legal person, but a company is. Several advantages and disadvantages derive from this fact when choosing a limited company as the suitable business medium. Saloman v Saloman [1897] Macaura v Northern Assurance Company [1925] Both cases illustrate that once a company is fully incorporated it is a legal entity and has limited liability. An unlimited company has no limit on the liability of its members, whereas a limited company s liability is restricted by law to an amount fixed by the terms of issue of the share or by the company s constitutional documents. In an ordinary partnership every member has unlimited liability for the debts and obligations of the firm and can be sued jointly or severally. English Partnerships currently do not have legal personality; they are only relationships (Partnership Act 1890 s. 1 (1)). It is not as such an organisation in its own right with a separate legal personality. Unlike a company, therefore, a partnership cannot of itself make contracts, employ people, commit crimes or even by sued. Business mediums with limited liability have to, in return for which, to publish its accounts and comply with several other regulatory requirements adopted from company law. An ordinary partnership is not so required, and can keep its affairs secret from public scrutiny. Moreover procedures to set up a partnership under the PA [1890] are far less complex and time consuming as compared to the incorporation of a limited company. However, it is assumed that all partners will have a say in the management of the firm S 24 (5) PA [1890]. Whereas there is no requirement for shareholders to take part in the management of the business. Partnership property Assuming that a partnership is formed, it is of utmost importance to identify partnership properties and what belongs to the individual partner. In case of insolvency, the firm s debts are cleared by the partnership assets, whereas a partner s individual creditors are satisfied with respect to what belongs to the partners individually. Furthermore if an asset increases in value, the increase can then be decided to be attributed to either the partnership or the individuals. 4 The act itself only provides a basic definition of what amounts to partnership property (PA 1890 s 20) consequently any properties that are held contrary to the section in the act should be outlined in the partnership agreement. Duration of liability in a partnership Regarding your imminent retirement I considered it as being important to advise you on the duration of your liability. S. 17 (2) of the Partnership Act [1890] states that a partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations before his retirement. In the case Court v. Berlin [1897] the Court of Appeal held that the dormant partners were even liable after the date of their retirement. Under section 17 (3) of the PA [1890] a contract of novation between the creditor and the remaining can be formed by which the creditor accepts the new firm as taking over liability for the debt from the old firm. Such an agreement can either be express or inferred as a fact from the course of dealing between the creditors and the new firm. In addition s 36 (2) allows the retiring partner to place an appropriate announcement in the London Gazette to inform prospective clients about the retirement. No notice at all need be give under subsection (30), if the former partner has died or become bankrupt, or if the person dealing with the firm did not know him to be a partner. Tower Cabinet Co. Ltd v Ingram [1949] the judge held that Ingram did not knowingly represent himself as a partner and provided a complete defence to the claim. Irrespective of any rules, a person can always be liable as if he were a partner under s. 14 of the Act if he either allows himself to be represented as such by the other partners or indeed represents himself as such. Generating Capital for a limited company All business mediums require capital as to fund their business activities. Nevertheless, companies offer more and cheaper sources for generating capital. Shares and Debentures offer effective long-term methods for a limited company. In contrast to a public company, a private company can only raise funds only through private negotiation, since it is forbidden by law to shell its shares to the public (CA 1985, s 81). A public company (plc) can make direct offers to the public, usually called an offer for subscription, or involve an issuing house to allot its shares to the prospective shareholders. A public company must have a certain amount of capital, 5 that is not less than the statutory authorised minimum amount fixed by CA [1985], ss At present, the minimum is 50,000. Although the Stock Exchange offers a public accessible sharemarket it is subject to strict requirements and for a full official listing on the principal market the company must have an established business record for at least three years. However, the courts are vigilant in the protection of class rights as can be seen in the following case: Re Holders Investment Trust Ltd. [1971] Further sums may be raised by borrowing. To raise large sums of money, a company may wish to attract funds on the investment market. Each investor then subscribes for a debenture stock. Debenture holders, contrary to shareholders, are creditors of the company and have priority over other creditors. Floating charges can be used to secure large obligations. A floating charge is a form of security, giving a creditor such as a bank, finance company or individual lender the right to receive payment from a specific fund or from the proceeds of the sale of a specific item or property or asset of a business, should a borrower default. Duties of partners to each other Assuming, your choice of a business medium would be a partnership, it is important to note that all partners in this relationship would owe each other a duty of good faith. In Const v Harris (1824) Lord Eldon said: In all partnerships, whether it is expressed in the deed or not, the partners are bound to be true and faithful to each other. A partnership is above all a contractual agreement. Fiduciary duties, as implied by the Act, can either be excluded or amended and additional duties can be added s 19 PA [1890]. Amendments in the contract can either be done by express agreement or by the conduct of the partners as it has been shown in Khan v Miah [2000]. The Act itself provides for three fiduciary duties which reflect the three main aspects of mutual liability. Under section 28 partners are bound to honesty and full disclosure of information relevant to the partnership. Similarly, under section 29 every partner must share any benefits, deriving from unauthorised usage of partnership asset, with his partners. Don King Productions Inc. v Warren [1999] it was held that benefits deriving from agreements entered for a personal interest by one of the partners, had to be shared even after the partnership has been determined. 6 Section 30 states that a partner must not put himself in a position where his duty and his interest may conflict. This applies equally to fiduciaries and so to partners. (Morse, 2001:150) A clear example of a conflict is where a partner operates a business in competition with the firm. Non-judicial resolution of a partnership A partnership is a contractual agreement with the partners involved. It is therefore perfectly possible to provide express terms within the partnership deed as to when that agreement can be terminated. Section 32, subject to the agreement in the partnership deed, provides the following subsection for a non-judicial resolution. A partnership is dissolved: a) if it is entered into for a fixed term, by the expiration of that term b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking c) if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership Section 33 implies two further terms relating to a non-judicial resolution if none of the above applies. (1) Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner (2) A partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the partnership property to be charged under this act for his separate debt. It of utmost importance to mention that for a modern partnership to remain competitive and as a matter of convenience, partners should provide express terms in order not to be subject to the whole dissolution process under Section 33. It is customary to provide in respect of death or insolvency, at least the necessary contrary intention to negate the full effect. 7 Relevance of the Limited Liability Partnership Act 2000 Since 6 th April 2000 a real alternative for all businesses has been established under the Limited Liability Partnerships Act [2000]. The result has business medium, offering an alternative to an ordinary partnership and a private company. The new entity can be seen as Janus-faced, staring out at the world as a body corporate with limited liability and inwardly as a partnership. (Mason, 2001 in The Times) Section 1 of the LLP Act creates the LLP as a body corporate and from that springs its distinct legal personality. In a LLP the members contract as agents of the partnership, thus making the partnership liable, not the individual partners. However, forming an LLP is, like a company, the formation of a body corporate and involves a time consuming and rather complex incorporation process. With the creation of a limited liability partnership, legislation has called a protective veil, for many professional firms, into life. As David Mason has said in The Times: It is unlikely that Bob the Builder would wish to incorporate. 8 Recommendations After analysing the present situation, I arrived at following recommendations as to what business medium should be adopted. A Sole trader has, in advance, been considered as being inappropriate for your present situation due to the number of equal partners and the high-risk situation for a single proprietor. There is no need for you to incorporate a limited company since your capital requirements can be satisfied with a medium-term loan. Seasonal difficulties are a well-known phenomenon in every market segment and a small capital injection will help you to revive the business. Fixed charges on assets will help to secure loan capital. Business mediums with limited liability have to, in return for their separate legal personality, publish their accounts and comply with several other regulatory requirements adapted from company law. Incorporation procedures for a limited company or for a limited liability partnership are in no relation to the current risk situation. As your firm expands and starts to encounter high-risk clients and high-risk situation, incorporation of a limited liability partnership will be a convenient alternative to an ordinary partnership. The higher the risk, the more beneficial a LLP status could be. In a later stage, the possibility of a limited company to sell shares will generate an adequate amount of capital to fund expansion strategies. In order to incorporate a limited company you will be required to deliver the two constitutional documents which are the memorandum and the articles of association to the Registrar of Companies who will, in return, issue you with a 117ca certificate. For now you can benefit from the privacy of an ordinary partnership as you are currently not required to disclose any information with the Registrar. In addition, a formal documentation for the partnership should avoid potential litigations or conflicts with prospective or ceasing partners and disputes with third parties. You will find a sample partnership deed enclosed in the Appendix section. 9 Bibliography 1. Sealy, L S. (2001) Cases and Materials in Company Law, 7 th edition, London, Butterworths Tolley 2. McKendrick, E. (2000) Contract Law, 4 th edition, Houndsmills, Palgrave 3. Morse, G. (2001) Partnership Law, 5 th edition, London, Blackstone Press 4. Companies House [WWW] Available from: [Accessed 15 January 2003] 5. The Law Commission [WWW] Available from: [Accessed 15 January 2003] 6. The London Stock Exchange [WWW] Available from: [Accessed 15 January 2003] 7. Mason, D. (2001) An Act for modern times, The Times, Tuesday 3 rd April The Partnership Act 1890 (PA) 9. The Limited Liability Partnership Act 2000 (LLP) 10. The Companies Act 1985 (CA) 10
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