Differentiating Public and Private Companies - Essay Example

Introduction Business organisations have taken up various kinds of structures and configurations in the modern marketplace. The various shapes taken by business organisations tend to attach differing kinds of operating parameters with businesses. The major operating parameters that are affected by business organisation structure include (but are not limited to) liquidity, manner of incorporation, financing, liability etc. The largest difference to the structure of a business organisation comes from how many people share the business liability. In the modern marketplace, a business can be owned by a single person or by hundreds of people depending on how the company was financed. This paper will look into a provided situation where some people want to start up a business using personalised sources of finance. The various configurations in which a business may be set up will be explored along with the associated legal implications. Types of Business Organisations Business organisations may be classified into four broad categories. The simplest business organisation is the sole proprietorship where one person owns the business and is liable for it. If two or more people commit to a partnership for business purposes with a view to make profit, the association is better known as a general partnership. In the case of a general partnership, all partners of the business share the liability jointly and equally. However, in case that the liability is split up in a partnership, the resulting structure is known as a limited liability partnership (LLP). Lastly, business organisations can assume the structure of registered companies where one or more than one person complies with registration requirements under law to form a registered company (Griffin, 2004). These business structures are discussed in greater detail below to elucidate which types of business structures suit which particular investing circumstances. Sole Proprietorship Under the sole proprietorship model of business organisations, one person starts up a business. The finance involved in such a business is typically the ownership of the sole proprietor. Since the involved finance belongs to one person so the entire profit is also reaped by the same person. However, for any sole proprietorship it must be kept in mind that any incurred liability is put squarely on the sole proprietor (Hicks, 1995). Under this model of business organisation structure, the sole proprietor is wholly responsible for all actions executed by the business and for the subsequently arising liability. Typically, small businesses where one person can manage the day to day affairs are structured as sole proprietorships. In the United Kingdom, most businesses are sole proprietorships especially businesses providing services. A sole proprietorship has to be registered under the Companies Act of 2006 as per Provision 41 and has to comply with Sections 1192 to 1208 of the subject act (Legislation UK, 2012 a). Advantages A sole proprietorship offers a number of advantages compared to other business organisation structures. This form of business is the easiest to launch since it requires a minimum of documentation. Moreover, the amount of finance required for sole proprietorships is low compared to other business structures. The proprietor of a sole proprietorship is in total control of all aspects of the business and requires no other inputs to make decisions. This tends to make the business decision making process as simple as possible. Additionally the profit made by a sole proprietorship is restricted to the proprietor alone. This means that the profit is conserved since it is not divided up. In turn, this makes it easier to reinvest the profit back into the business in order to grow it more. Among other advantages, sole proprietorships offer the owner the simplest terms to dissolve the business when compared to other forms of business organisation structures. Disadvantages The chief disadvantage of a sole proprietorship is the exposition of the owner to liability of all kinds. Business structures of this kind are considered to operate under unlimited liability. This indicates that the personal and business assets of the owner are at risk all the time. In case that a liability claim occurs or if a bad debt has to be settled, the law can acquire the business as well as the owner’s personal assets in order to settle the situation. In addition, raising additional funds for business is hard in a sole proprietorship since the owner has to use personal means to acquire funding. The small structure of the sole proprietorship also means that the brightest employees will always stay away. The lack of any opportunity to own the business means that potential employee cum partners will also stay away from such businesses. General Partnership As the name implies, a partnership is the business inclusion of more than one person in order to carry out business activities. The legal position of a partnership resembles that of a sole proprietorship in the sense that the law does not distinguish between the business and the individuals involved in it. Law under the Partnership Act of 1890, Section 1(1) as has defined a partnership as (Legislation UK, 2012 b): “… the relation which subsists between persons carrying on a business in common with a view of profit.” According to this definition, a business partnership needs to have two or more people engaged in business. The business conducted by these people could include any kinds of acceptable trade, occupation or other profession (Legislation UK, 2012 b). Since partnerships are composed of more than one person, there is a need to settle outstanding issues before a partnership based business is launched. The law provides that the people involved in a partnership type business must settle how decision making will be carried out in the business. In addition, the profit sharing between partners must be worked out in legal terms before the business is established to avoid disputes in the future. Legal provisions also provide dispute settlement techniques such as arbitration, mediation or court action to settle business disputes between business partners. However, the dispute settlement mechanism has to be settled and ratified before the business is actually carried out between partners. Legal stipulations also require the business partners to define methods through which new business partners would be admitted to an existing business. Standard legal documentation also provides for methods to buy out partners. This may take place in case a dispute proceeds to extents where dispute resolution is not possible anymore but business dissolution is not desired. Such a buyout may also take place in case that a partner wishes to withdraw his financial commitments to the business. Lastly, legal stipulations require that the partners of a business define the method(s) to dissolve the partnership if such circumstances arise. This ensures that during such a crisis matters do not escalate to horrific proportions and that issues are resolved within legal boundaries (Krishnaprasad, 2011). Under a general partnership agreement, all partners of the business tend to divide liability jointly and equally. All partners of the business are equally liable under the eyes of the law for any concerned matter. The partners in a general partnership business agreement tend to share unlimited liability equally. This liability could result from the businesses’ obligations to other parties or from debts and other such devices. Under Section 9 of the Partnership Act of 1890, all partners of a general partnership are equally liable (Legislation UK, 2012 b). Similarly, under Section 12 of the Partnership Act of 1890, all partners of a general partnership are equally liable for any torts that may arise from the conduct of business (Legislation UK, 2012 b). These legal stipulations apply equally to “sleeping partners” as well as the more active partners. The term “sleeping partners” is used to address partners of a business who are not actively involved in the management of a business. Under the law, the partners of a business are equally responsible for dealing with the day to day affairs of a business. However, for simplifying management and for promoting efficacy, the partners may decide to distribute business based decision making unequally among themselves. This may give rise to “sleeping partners” who are present onboard the partnership agreement but are not performing fully. In general partnerships all partners assume equal shares of the business unless specifically stated by an internal agreement. This mandates that the profit or loss incurred to the business be also shared equally between partners unless stated otherwise. In such an agreement, it is assumed by default that all partners of the business are performing actively (Lower, 2003). Limited Liability Partnership (LLP) The limited liability partnership (LLP) is a business organisation structure that affords greater flexibility than the conventional partnership arrangements. The purpose in creating a LLP is to allow the business to float its shares without significant changes in the overall partnership arrangement. Under the LLP arrangement, there are certain partners of a business who share the liability while there are other partners who do not share any liability for the business. The LLP concept means that most partners of the business have liabilities that are only limited to their principle investment in the business. Since the liability of such partners is limited in the business, these partners are not provided with strong roles in the management of the business. This tends to balance the overall investment environment where certain investing partners have limited liability and limited say in the day to day affairs of the business (Morse, 2006). This arrangement tends to attract short term investors and creditors who employ their finance in an organisation without gaining an effective say in the overall business management. The formation of limited partnerships is typically far more complicated than forming general partnerships. However, the flexibility in doing business under the LLP arrangement means that most large businesses in the modern marketplace are based on LLP doctrines. The LLP arrangement is endorsed legally under the Limited Liability Partnership Act of 2000 while the business regulation is carried out under the Companies Act of 2006. LLPs are managed as private limited companies whose management structure is affixed using the partnership agreement (Legislation UK, 2012 c). Registered Companies The last major form of business organisation structure is a registered company. Either one person or more than one people working together can create a registered company. The names of the involved people are subscribed to a Memorandum of Association (MoA) that is drafted up in line with guidelines from the Companies Act of 2006. Registered company structures offer the involved business people a number of flexibilities. For example, a registered company can choose to limit its liability or to go with unlimited liability. Generally, the liability of a registered company is limited using either a guarantee or by using the shares of the company. Companies that are registered and whose liability is limited by guarantees tend to fall into the domain of social work such as charitable organisations. Most businesses that operate as registered companies tend to limit their liability using shares only. This stands true for registered companies that are public or private (Slorach & Ellis, 2009). Differentiating Public and Private Companies Registered companies can be broadly classified into public and private companies based on their modus operandi. A private registered company is not listed on the stock exchange while a publicly registered company is listed on the stock exchange. Under the Companies Act of 2006 (CA 2006), this implies that public companies can invite the general public for subscription to their shares or for debentures. This is allowed under Sections 755 to 760 of the Companies Act of 2006 (Legislation UK, 2012 a). Public and private companies are also differentiable based on their certificates of incorporation under Section 4(2) of the CA 2006. This section states that all public companies must list this fact on their certificate of incorporation. Limits have also been prescribed for the amount of underlying capital for public companies. Private companies may be started with any amount of capital while public companies require at least 50,000 pounds (or their equivalent in some other currency) for being listed under Sections 761 to 767 of CA 2006. In addition, private companies need to have a minimum of one director while public companies need to have a minimum of two directors under Section 154 of CA 2006. Another large difference is the manner in which directors are chosen for public companies. While private companies nominate directors, public companies need the votes of shareholders in order to elect directors individually under Section 160 of CA 2006. The day to day affairs of private companies are regulated less stringently when compared to public companies. For one thing, public companies need to have a qualified company secretary under Sections 271 to 273 of CA 2006. In addition, public companies must undergo statutory audit while private companies are exempt from any such requirement under Section 477 of the amended CA 2006. These measures of simplified regulation allow private companies to operate more smoothly and with little regulation compared to public companies. It is typical for smaller businesses to be based on the private company model while larger businesses are based on the public company model (Legislation UK, 2012 a). Facts of the Current Circumstances In the current scenario, three parties Ann, Sheryl and Bryan possess 35,000 pounds that they have won from a lottery. On the other hand, there is a single party Rob who is in possession of 50,000 pounds from an inheritance claim. The total capital available to these professionals is 85,000 pounds that is enough to open up a public limited company. Alternatively, these professionals could choose to open up a private company and they could also pursue the option of a partnership. Since no cues have been provided at previous business experience on the part of any of the parties so it is assumed that none of the parties has any previous business exposure or experience. Legal Interpretation and Advice The parties have enough capital available collectively to form any kind of business association that they desire. Sole proprietorship is out of the question since four parties are looking to work together. The next option is a general partnership under which all four parties could combine their finance and open up a business. Under the general partnership arrangement, each partner would be represented in business in proportion to his or her shares. However, all partners whether active or sleeping would share the liability for the business in the same amount as their shares. Typically, a general partnership is very rare to find and given the liability arrangement under a general partnership, it is not highly advised. The exposition of the partners under the general partnership arrangement is too great given also the exposition to tort. Since the existing partners do not possess earlier business experience so problems may be expected in setting up a business. This may lead to liabilities that the nascent partners would not be able to handle. Another option would be to use the LLP arrangement. Under this structure, some partners would assume more liability than the other partners would. This would also mean that certain partners would not have very strong roles in the overall business management domain. In addition, this kind of a structure is more preferred for businesses where certain partners are short term investors. This structure could have been used where certain partners would sign up as creditors and investors and not as working partners. In the current scenario, all of the partners are IT professionals who are ready to work for the business. Using the LLP arrangement would tend to eclipse certain partners which is not recommendable. The last option would be to pursue a registered company. However, this would require choosing between a public company and a private company. If the parties are looked at in a segregated fashion, it becomes clear that Rob can open up his own private or public company while Ann, Sheryl and Bryan can open up their own private company. However, all four want to open up a business together. The amount of collective finance is enough to open up a private or a public company. If the partners decide on opening a public company, they would need to employ a qualified full time company secretary. In addition, their company would be subject to statutory audits and other such regulatory requirements that the nascent entrepreneurs may not be able to handle. It has to be kept in mind that the partners are IT professionals and not accountancy professionals or record keeping professionals. The strain of managing a public company could affect the business in the early stages. Moreover, the partners have enough cash to sustain their business so there is little need to float shares. This also discounts the idea that a public company would be a better option. Given these constrains, it would be advisable for the partners to open up a private company. The management required for a private company would be relatively lower in terms of legal regulations. Moreover, each of the four partners could be appointed as directors. A registered private company would also afford greater credibility to the budding business. Moreover, the legal instruments in place would allow for conflict management and dispute resolution if they were required. It is therefore suggested that the partners open up a registered private company to launch their business. References Griffin, S., 2004. Limited liability: a necessary revolution? Company Law, 24(4), p.99. Hicks, A., 1995. Reforming the law of private companies. Company Law, 16(6), p.171. Krishnaprasad, K.V., 2011. Agency, limited liability and the corporate veil. Company Law, 32(6), p.163. Legislation UK, 2012 a. Companies Act 2006. [Online] Available at: HYPERLINK "http://www.legislation.gov.uk/ukpga/2006/46/part/41" http://www.legislation.gov.uk/ukpga/2006/46/part/41 [Accessed 31 July 2012]. Legislation UK, 2012 b. Partnership Act 1890. [Online] Available at: HYPERLINK "http://www.legislation.gov.uk/ukpga/Vict/53-54/39/section/1" http://www.legislation.gov.uk/ukpga/Vict/53-54/39/section/1 [Accessed 31 July 2012]. Legislation UK, 2012 c. Limited Liability Partnerships Act 2000. [Online] Available at: HYPERLINK "http://www.legislation.gov.uk/ukpga/2000/12/contents" http://www.legislation.gov.uk/ukpga/2000/12/contents [Accessed 31 July 2012]. Lower, M., 2003. Whats an offer? A consideration of the legal forms available for use by small and medium sized enterprises in the United Kingdom. Company Law, 24(6), p.166. Morse, G., 2006. Partnership Law. 6th ed. Oxford: Oxford University Press. Slorach, J.S. & Ellis, J.G., 2009. Business Law. Oxford: Blackstone Legal Practice Course Guide Series. Read More