Laws and Forms of Business Ownership - Essay Example

? Law for Business of the of the Law for Business Q. In the context of business liability, why is it advantageous to avoid unlimited personal liability on contracts? Why is the liability of a shareholder in a limited company limited in contrast to the liability of a partner in a partnership? Introduction The formation of a business enterprise is definitely not child’s play. There are a whole lot of different facets to be examined in some detail. What will be the nature of business ownership, how will it be financed and managed, what are the products and services to be offered, and how will they be sold to the customers? These are some of the important aspects to be covered. They should also have a good knowledge of its legal status, debts and obligations depending on the nature and form of the business and how it has been registered in the UK (Federation of Small Business Website, 2012, 1) Forms of Business Ownership While the form of business ownership to be adopted depends both on the number of owners and the funds, skills or both that they are willing to contribute and invest in the business, this can often be a very tricky though pertinent question requiring considerable thought. Any business student will be able to tell you that the usual forms of business ownership are the Sole Trader, the Partnership and the Private or Publicly held corporation. Regardless of the many combinations and varieties of business ownership that we see in the real world, they basically all boil down to the above three forms. Mergers, acquisitions and buyouts only enhance the size of the business while having different effects on the assets, liabilities and owners equity of the business. These are usually agreed on the basis of the takeover or merger agreements that are made. The Sole Trader business is a very easy business to start and is admittedly the most common form of business enterprise in the UK. To form a Sole Trader business, all one needs to do is to decide the name and location for the business, and then file for a business licence with the local authorities. If we want to operate a home based business, we can also do so from the comfort of our home (Murray, 2012, 1). The responsibility for all facets of the business lies ultimately with the business owner, and his personal assets may also be attached for the settlement of claims relating to his business obligations. There is no separation of his business obligations from his personal assets. The existence of the business is also dependent on his physical existence, for his demise would signify the end of his business in legal terms as well. Coming to the formation of a partnership, we can see that like a Sole Trader business, it is also quite easy to create. We have to decide the nature of the business, the number of partners joining, the rights, duties and responsibilities of each partner, what will they invest and how will they share the profits or losses. The business name will have to be registered with the local authorities. It is better also to have all the essential details written out in a Partnership Agreement/ Deed which is legally admissible in a Court of Law. Obtaining a business license, registering for tax purposes and opening a bank account in the name of the business with proper mandate for signing cheques and business letters are all that remains to get the business up and running in legal terms. A partnership may be formed for a specific purpose, and is terminated by will, or any of the partners retiring or dying. So we see here that both sole traders and partnerships suffer from the deficiencies of unlimited personal liability of the owners as well as a life and legal existence limited to the death, bankruptcy or retirement of any of the owners (Citizen Law Media Project, 2011, 1). Contrasting this with the corporate form of ownership, where we see that the disadvantages of limited financing, people and other resources have been overcome by publicly held corporations. Anybody who buys their shares in the open market becomes part owner of the firm. The shareholders elect the Board of Directors to oversee the daily operations of the business. Shareholders are rewarded for their investment in the shape of dividends declared and paid to them in proportion to their investment in the shares of the firm. A corporation can attract funds from the general public by issuing a prospectus and informing them of an Initial Public Offering. It is then up to the public to decide whether they would like to invest in the company or not. This depends on the viability of the business venture and the strength and capability of the management. The authorised and paid up capital are both mentioned in the Prospectus and Annual Reports which must be audited by a firm of Chartered Accountants to establish and verify the authenticity of records. A Private Company has to submit certain details to Companies House, UK which then provides copies of it to the general public for a small fee. This ensures the transparency of records and that they are available to those who are considering a stake in the company (Simple Formations Website, 2012, 1). Methods of Financing A sole trader has to rely mainly on his own resources, what he can arrange from friends and relatives or from his local bank through a loan, which must be repaid with interest. It is much the same story for a partnership, where the assets and funds of a number of business owners or partners can be combined together to run the business. But for a corporate form of ownership, the amount that it can attract through the stock market and bond market is limited only by its financial strength, the reputation of management and the financial performance of the enterprise. It will usually go for equity financing, since it involves no risks and payment of dividend only at the discretion of the directors. Bond or debt financing necessitates the payment of interest as well as repayment of the amount borrowed on the completion of the borrowing period. However the interest is tax deductible. So we see that in many respects, the corporate form of business is generally the most advantageous. Besides this, it can also ask for bank loans depending on the strength of its balance sheet. Going to a venture capitalist is also an option for a new business venture. Personal and Business Liability- Are They Related? The Law Commission Report 159 on Partnership found that inherent weaknesses in Partnership Law had resulted in many needless windups, while research showed that in Canada and the USA a partnership was allowed to carry on irrespective of a partner’s death or pullout of capital etc. In Sweden the simple process of registering a partnership gave it a legal status like a corporation (Law Commission Report, 22). We have already seen that as per the law, there is no distinction between the personal assets and business obligations of the sole trader and his personal assets may be attached for the settlement of business obligations. In a general partnership, where there is no agreement to the contrary, business profits or liabilities are generally shared equally among all partners. In a limited liability company which is a hybrid between a partnership and a corporation, personal liability can be limited to the amount of capital invested or remaining in the business, while profit and loss sharing is determined separately as agreed among all partners. A limited liability partnership which has been allowed under the Limited Liability Partnership Act 2000 may have some of the partners contributing both capital and skills, while others contribute only capital and are not liable beyond the extent of their investment. However a general partnership can also choose to have the liability of partners limited to the extent of their investment by filing such a stipulation with the relevant authorities. Another type of business entity, a joint venture is a partnership between two or more individuals working together for a common purpose till that purpose is achieved or for a particular length of time. On the completion of the term, the business will operate as a general partnership with equal rights and obligations. In a corporate form of business, there is separation of ownership and legal liability. Owners called shareholders are liable to the creditors only up to the extent of their capital contributions. The death of a shareholder does not end the legal existence of the corporation. Having a separate legal existence, a corporation can also sue and be sued in its’ own name. Only in the case of bankruptcy or dissolution or a merger or acquisition by another entity does a corporation cease to exist. Thus we can see that the advantages of the corporate form of business are far more than its disadvantages. The setup, management, taxation, administrative and other responsibilities are as per the laws of the states or countries in which they are established (Simple Formations Website, 2012, 1). Avoiding Unlimited Personal Liability in Business Contracts As can be seen from the above, it is always advisable to avoid unlimited personal liability in business contracts with others e.g. suppliers or other creditors. This kind of business contract can be made at the start of formalizing any business relationship- with a supplier, dealer, buyer, creditor etc. The Courts would have to take this into account, especially after it has been signed by the counterparty agreeing to a limitation of liability on your part and promising not to attach your personal assets for settlement of claims (Wolfe, 2012, 1). While forming a business as an LLC or limited liability company, it is advisable not to attach your personal name with the business, for on the event of a claim by creditors, their lawyer is likely to attach your personal assets in settlement, stating that there is no distinction between your LLC and the Sole Trader business form because of the firm’s name. Doctors, insurance agents and banking companies cannot register themselves as LLCs and therefore cannot claim the advantages of limited liability companies. References Author Unknown (2011). Citizen Media Law Project. Forming a Partnership. Accessed on 20 March 2012 at http://www.citmedialaw.org/legal-guide/forming-partnership Murray, Jean (2012). Starting a Sole Proprietorship. From the About.com Guide at http://biztaxlaw.about.com/od/businessorganizationforms/a/solepropt.htm Simple Formations (2012). The Different Types of Business Status in the UK Accessed on 20 March 2012 at http://www.simpleformations.com/types-business.htm The Law Commission Report on Partnership. Consultation Paper 159. Accessed on 20 March 2012 at http://lawcommission.justice.gov.uk/docs/cp159_Partnership_Law_Consultation.pdf Website of the Federation of Small Businesses, UK. Accessed on 20 March 2012 at http://www.fsb.org.uk/data/default.asp? Wolfe, Michael (2012). Advantages & Disadvantages of Contracts in Companies to Minimize Liabilities. Accessed on 20 March 2012 at http://smallbusiness.chron.com/advantages-disadvantages-contracts-companies-minimize-liabilities-13714.html Read More