A Business in the UK and the Type of Business Structure - Research Paper Example

1 Introduction Setting up a business in UK entails a lot of planning and research on the regulations and processes that are necessarily attached to it. There is, for example, the need to determine the type of business structure to be adopted, a consideration needed to be deliberated at the onset before the business starts its operation. This is important because the kind of business structure that will be chosen to govern the business will spell the obligations, duties and rights of the owners of the business. The simple task of choosing a name for the business itself is a complicated process because it is regulated both by the Companies House and the Intellectual Property Office. If the owners finally decide to incorporate the business into a limited company, then there are steps to follow and documents to draft and submit to the appropriate agencies. Finally, the business owners must understand that doing legitimate business entails consideration of a myriad of principles of laws and regulations that govern almost every aspect of transactions. The basic and most common of these transactions are contracting with other parties. Inevitably, this calls for the application of the principles of contract law. 2 Setting up a Clothing Retail Business: Choosing Appropriate Business Type There are different types of private business organisations to choose from under which a business, like a clothing retail business, can be incorporated: sole trader, partnership, private limited company, and, public limited company. Sole trader, as its name implies, is owned by a single person. A public limited company, on the other hand, represented by the letters ‘plc’, is usually attached to large businesses whose shares are floated and offered in the Stock Exchange, hence, public. Just starting businesses rarely opt for this form because not only does it require bigger capital but also for the business to be already well-established with many potential buyers interested in trading its shares (Blankson 2005 44; Carysforth & Neild 2000 126, 131-132). Since the business being contemplated at hand is a small business with initially less than 20 employees, then the public limited company with stock option is not suitable for it. A partnership is a business structure with ownership held by two or more people and a maximum of 20 persons. This business type is governed by the provisions of the Partnership Act 1890 and all partners are presumed to have equal liabilities for partnership debts unless they have previously signed a Deed of Partnership which assigned different liabilities to be borne by each partner. Some advantages in this type of business structure is that the personal and business purchases of members are closely associated allowing easy offsetting of the personal with the business, the contribution to the national insurance is only 7%, and raising capital is easy because the partners can make their contributions anytime, in money or in kind. The obvious disadvantage is its member is answerable, not only with his business but also his personal assets, for all the liabilities of the partnership. Like the sole trader, there is no separation between business and personal assets in this type (Blankson 2005 45-46). A private limited company, on the other hand, is usually applicable to small scale business operations as opposed to public limited companies. It is represented by the letters ‘Ltd.’ Like public limited companies, it also issue shares but only to its members, which shares correspond to the extent of a shareholder’s interest in the company. A limited company goes through the process of incorporation, in accordance with the processes set forth by law: by grant of royal charters, the grant of which is limited to professional, educational and charitable constitution; by a special act of Parliament usually extended to public utilities like railways; by registration under the Companies Act 2006, a method availed of by trading companies (David et al pp 309-310). Evidently, the option best suited to the business being contemplated at hand is incorporation through the Companies Act 2006. The process of incorporation creates, by fiction of law, a juridical entity with a personality that is separate and distinct from that of its members and shareholders. This implies having a personality that can transact, negotiate and be proceeded against like a natural person. Thus, it can be sued in court, own property, real or personal, in its name, enter into a contract through its representatives and possesses other rights and responsibilities. The doctrine of separate personality is what makes private limited companies attractive to small entrepreneurs because, obviously, it separates their property and assets from that of the company. Thus, when a company of which a person has a share in becomes insolvent and creditors sue and claim for its liabilities, the shareholder’s personal assets not attached to the company is not available to answer for such liabilities (Forji 2007). In addition, incorporation in this type of business structure does not require much starting capital and its shares are not sold to the public, which implies that the owners and original shareholders retain, more or less, their control over the business. Another advantage to this type is that it is easier to obtain loans from banks for additional capitalisation because banks trust this type of business organisation more than they do sole traders or partnerships (Carysforth & Neild 2000 130). The doctrine of separate personality has long been acknowledge since the 1671 case of Salmon v The Hamborough Co [1671] 1 Ch Cas 204. It is, however, the case of Salomon v Salomon [1897] AC 22, which is considered the precedence of the doctrine and therefore, the more widely cited in its support. The case involves a successful boot-maker who, wanting to share the success of his business with the rest of the family, converted the business into a private limited company, making it appear that he sold the business to the company and took as payment debentures and majority of the shares. The business suffered, however, when the economic environment turned sour, necessitating incurring loans to keep it afloat. That did not do the trick, however, and the company went insolvent. The creditors moved for a foreclosure of all the assets of the company including the debentures held by the original owner. The Court did not agree on the inclusion of the debentures to the foreclosure on the ground that there was legal incorporation of the company making it a distinct and separate personality from its shareholders. Thus, the debentures held by the father was his own personal asset, not the company, and therefore, not available to answer for the company’s debts. Although the proposed business of clothing retail is being recommended to incorporate in accordance with the Companies Act 2006 because of the many advantages that such a business structure offer, it must also be remembered by the potential incorporators that the doctrine of separate personality is not absolute. The courts have recently been more open to lifting the veil, so to speak, of incorporation in the interest of justice and to thwart those who think that they may resort to the doctrine to circumvent the law. This is especially true if the courts suspect that the doctrine is being used to create a “sham” or “façade” company to conceal or as cover in the perpetuation of certain illegalities. Unlike the Salomon case where the Court limited itself to the technicalities of the law, it was more painstaking in the more recent case of Gilford Motor Co. Ltd. v Home [1993] Ch 935, where it exercised its prerogative to lift the veil of incorporation to serve justice’s end. In this case, the defendant severed his employment with his employer and went on to set up a private limited company, engaged in a similar business to that of his former employer, in the name of his wife. Before resignation from his previous job, he signed a contract with his former employer agreeing not to solicit ever from the clients of the company in the event he leaves or resigns from it. The defendant, however, breached this agreement when, after setting up his own company, he did exactly what was prohibited from him to do: approach the clients of his former employer for solicitation. His former employer sued him for breach of contract and the court gave it relief on the ground that the company set up by the ex-employee was a sham and a façade concocted to circumvent the agreement between him and his employer and that therefore, the doctrine of separate personality cannot be upheld in the case because to do so would allow the law to be used for illicit purposes. In addition, there are also drawbacks to the doctrine of separation even if the members act in good faith and do not use it to conceal illegal activities or as a sham or façade company. In the case of Macaura v Northern Assurance Co Ltd [1925] AC 619, the House of Lords rejected the suggestion of lifting the corporate veil even if it means serving the ends of justice. The plaintiff was the owner of a land on which stood timber, which he had dutifully insured from fire. He eventually sold the land to a company of which he formed and of which he is the sole shareholder. Fire gutted the timber standing over the land and the plaintiff moved to recover on his insurance policy but he was refused by the insurance company on the ground that he had no personality to make the claim since he does not anymore owned the land and the timber over it. He went to court but the court sided with the insurance company. The Court held that the plaintiff’s claim must fail because he had no insurable interest over the timber since he had already sold it to the company. This is because a company has a personality distinct and separate from its shareholders, and by implication the shareholder has no insurable interest over the property that is not personally owned by him but by the company. Between partnership and private limited company, the most practical choice to take under the present case is the latter. The proposed clothing retail business will be more stable if there are two or more persons who could contribute in its capitalisation and additional financing will be more achievable through bank loans if the business is to incorporate as a limited company because of the trust that such a form normally engenders in the banking sector. In addition, this type of business form secures the members from liabilities that the company may incur in the event the business climate turns bad. 3 Steps in Setting Up the Business 3.1 Choosing a Business Name In choosing a business name, one must make sure that the name, whatever it is, must end up with letters that are supposed to represent the private limited company nature of the business like the letters ‘Ltd.’ or ‘Limited.’ Some additional requirements in choosing a name are: it should not be offensive, or sensitive as enumerated in the Companies House, or misleading or similar or almost similar to company names already registered with Companies House or trademarks already registered with the Intellectual Property Office. The best way to ensure the latter is to check it with the Companies House and the IPO either through their online website, by telephone or by personal visits (Fairweather & Border 2004 27-28). In the case of Glaxo plc v Glaxo Wellcome Limited [1996] FSR 388, two agents involved in company registration got wind of the information that two established pharmaceutical companies, viz. Glaxo and Wellcome, are about to form a merger. In anticipation of that merger, they registered the name Glaxowellcome Ltd and attempted to sell it to Glaxo. The latter was furious and went to court, which granted them relief. The Court held that the act of the two agents was an abusive registration and perpetuated as an “instrument of fraud.” The Court noted that Glaxo and Wellcome had carefully cultivated through the years the goodwill of their names and the act of the agents in smearing that goodwill by registering the name for themselves and blackmailing Glaxo into buying the registered name was abusive and will not be countenanced by the Court. The company name should be prominently displayed in the business’ vicinity and on stationeries and other company business documents. Thus, it is important to go through the process of waiting for the approval of incorporation before finally printing official stationeries and business documents (Practical Advice for Business). In addition to identifying and choosing a name for the company, the applicants must prepare three sets of documents to be submitted to the Companies House and these are the Memorandum of Association, the Articles of Incorporation and Form INO1. The MOA sets out the names of the subscribers to the company accompanied by their authentication whilst the AI is a description of the goals of the company, the rights of the shareholders, and the functions and powers to be exercised by the company’s directors. The last document, form INO1, is the official application of incorporation itself. 4 Entering into Contracts: Principles of Contracting A contract is an agreement between two parties or more, which is legally binding upon them unless declared by the courts to be unlawful. Contracts may be oral or in writing, express or implied but in business transactions, it is recommended that they be in writing and express so that it will be easier to prove them in court in the event one or both of the parties fail to meet its or their obligations. A simple contract must have basic elements to be valid: an agreement in which there is a meeting of minds between the contracting parties as a result of the consolidation of the offer-acceptance process; a consideration, or a promise to give something of value in exchange for goods or service; the parties must intend to clothe the agreement with legal effect; consent by both parties to the contract must have been freely given because of the absence of circumstances that would have vitiated their consent; the parties must have capacity to give their consent; the contract itself must not be a form of any illegality otherwise it will be void (Mead & Sagar 2005 38; Kelly et al 2005 109). The rules on agreement, particularly offering and accepting, are one of the trickiest parts of contract-making. Many parties have mistakenly thought that a contract exists when in fact the offer and acceptance were inadequate to have formed a valid contract. One of the principles in English contract law with respect to offers is that the offeror can withdraw his offer at any time before his offer is accepted by the other party notwithstanding that he had set a period of expiration of that offer in the offer and that period has not yet lapsed. In the case of Dickinson and Dodds [1876] 2 Ch Div 463, for example, the defendant made an offer, through a letter, to another to sell his property at a stated amount and which offer is to terminate two days after the offer at 9 in the morning thereof. The party being offered had decided to take on the offer the day after the offer was made but did not communicate this to the offeror thinking that he had still a day to do so. Meanwhile, the offeror was negotiating with another for the same property, a negotiation which the first person offered got wind of. The first offeree immediately went to the house of the offeror on the same day to formally make his acceptance but the offeror was not home. He instead communicated such acceptance to the mother of the offeror, leaving a written note of acceptance to the offeror, which the latter never received. The following day, before the hour of expiration of the offer, an agent of the first offeree handed a written note of acceptance directly to the offeror and several minutes later, another formal letter of acceptance was handed by the first offeree himself to the offeror. This acceptance however, turned out to be too late as the offeror had already successfully sold the property the day before. When the case reached the Court, it held that there was no valid contract between the parties because there was no valid offer-acceptance exchange, since the offer was deemed withdrawn when the offeror sold it to another before the first offeree tendered his acceptance. The Court said that there is no law that precluded the offeror from selling his property to another considering that no acceptance was yet made. In effect, the offeror validly withdrew his offer before there was a meeting of the minds between him and the first offeree (Dickinson and Dodds [1876] 2 Ch Div 463). Another principle in contracting concerns the element of consent. For consent to be valid, it must have been freely given at the time the contract was entered into. The implication of a freely given consent is that it was free from vitiation, that is, there was no extraneous force that forced a party to give his consent such as undue influence, duress, mistake of fact and misrepresentation. If misrepresentation, for example, was present at the time the parties entered into the contract, it renders the contract voidable, and this is true even if the misrepresentation is not deliberate. This was the dictum held in the case of Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574. In this case, a party needed to dump excavated clay in the depths of the sea and needed barges to do achieve that. It approached a barge-leasing party and asked for the specifics of their barges including the amount of weight they can carry. One employee offered the company’s German made barges and declared that one can carry deadweight of 1600 tonnes on the basis of Lloyd’s Register, a marine classification system, although he knew that the documents that accompanied the barges stated a lower tonnage capacity. When it turned out that the leased barges cannot meet the weight capacity promised, the lessee refused to pay. The leasing company went to court and one of the defences of the lessee was misrepresentation. The Court accepted the defence of misrepresentation, and awarded damages, on the ground that although the statement in issue is not deliberately false and fraudulent, it failed the reasonableness test. 5 Conclusion Setting up a new business is not an easy task especially if the owners decide to start the business from scratch rather than buy a readymade company shell off the market. In the former case, the best approach is the setting up of a limited company because of the advantages it entails, foremost of which is the limited liability attached to the members. This implies that a shareholder cannot be sued for his personal assets in the event the company goes for a downturn and creditors are pursuing the company for its liabilities. This is because the law acknowledges the doctrine of separate personality of companies, a personality that is spawned by mere legal fiction in incorporation. The downside to this type of business structure is that it demands more paperwork in the initial stages and subsequent maintenance throughout the life of the company. Care must also be given by companies in the most basic transaction of contracting because of the many tricky aspects of the process. Although the law respects the rights of the parties to enter into contracts and determine for themselves the provisions or terms that should bind them, basic elements should be present in contracts to preclude them from being rendered void or voidable. References: Blankson, S. 2005 Tax Avoidance a Practical Guide for UK Residents Lulu Press Incorporated. Carysforth, C. & Neild, M. 2000 Intermediate Business Heinemann. Dickinson and Dodds [1876] 2 Ch Div 463. Gilford Motor Co. Ltd. v Home [1993] Ch 935. Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574. Kelly, D. & Holmes, A. & Hayward, R. 2005 Business Law Routledge Cavendish. Fairweather, M. & Border, R. 2004 Setting up a Limited Company Routledge Cavendish. Forji, A. G. 28 September 2007 The Veil Doctrine in Company Law, LLRX http://www.llrx.com/features/veildoctrine.htm. Glaxo plc v Glaxowellcome Limited [1996] FSR 388. Macaura v Northern Assurance Co Ltd [1925] AC 619. Mead, L. & Sagar, D. 2005 Business Law Paper C5 Elsevier. Practical Advice for Business, Business Link http://www.businesslink.gov.uk/bdotg/action/home?r.s=b&r.l1=1073858805&r.lc=en&r.l3=1073859929&r.l2=1073859131&r.i=1073788946&r.t=RESOURCES Salmon v The Hamborough Co [1671] 1 Ch Cas 204. Salomon v Salomon [1897] AC 22. Read More