Partnership in the Corporate Law - Term Paper Example

 Corporate Law (a) In the case of a partnership, the business is controlled by the partners and they are often its investors. Moreover, they are also responsible for the losses that the Company bears. All profits are shared between the partners and they are taxed even when they do not draw on the profits. A private Limited Company is also owned by its shareholders, however the advantages of converting to a Private Limited Company are that Lorraine and Brenda will not have to offset any losses the Company incurs from their own personal funds. Moreover, they may also sell shares, although they cannot sell them directly to the public in the open market. Lorraine and Brenda will also be considered as employees of the Company and will be taxed accordingly rather than having to pay taxes out of their profits. In order to minimize their risk, Lorraine and Brenda could consider transferring some of their assets into trusts rather than retaining all assets with the Company. In this way, should the Company fail, some of their assets will be safe in trusts (Gerber, n.d). A trust is like a gift of the assets to another person or entity, so that it will not be accountable under the assets of the Company. These trusts can also be set up abroad, as off shore trusts, so that payment of taxes can be avoided. Another option for the partners to consider is to take up insurance for some of their assets, so that even if the company fails, they will be reimbursed for the value of the assets. Exemption planning would also be very helpful to protect assets and Lorraine and Brenda should incorporate their new Private Limited Company so that they will not have to reimburse losses of the Company from their own personal assets. They could also consider joining a trade association, where they pay membership fees and the association will pay the customers in case the Company fails. The value of the authorized share capital can also be kept low, so that in the event of a loss, the losses to the principals will be less severe. (b) In order to ensure that Lorraine and Brenda retain control over the business, they can be set up as the principal officers of the Corporation that is the new Private company and its founding directors. The Articles of Incorporation would specify the London office as the major center of operations but Lorraine and Brenda would be designated as the CEOs. The Articles of Association could include a provision whereby their ownership or stake in the Company could be preserved by the option to transfer their shares down to their heirs. A provision may also be included whereby these two officers may not be removed through any procedure except in the event the Company becomes bankrupt. They can also be designated as the principal shareholders of the Company, with a majority of shares, so that they will be able to retain the operating control. While some shares can be sold to relations and private parties to finance the new venture, these shares can be limited, in order to limit the degree of control of the new shareholders. Venture capital investment could provide a valuable source of finance without the need to relinquish control of operations of the Company. (Collins, n.d.) This would provide a means for raising capital on the basis of existing shares already possessed by Lorraine and Brenda in the partnership. Since the private limited Company is being set up for expansion of the business, UK corporate law that was the sole determinant when the partnership was established in Essex will now have to take into account, international law as well. The issue of conflict of obligations of each system of law will have to be taken into account in the operation of the Company. According to Dixon (1996) the doctrine of incorporation explains the use of international law in domestic courts. International law confers applicability of EU law on a community wide basis irrespective of national laws and do not need to be transposed into national law for them to become effective. In this case, the issue that rises is: Will British courts have jurisdiction over any losses the new company might sustain while doing business overseas and dispatching its antiques to international customers? One of the issues that must be considered by the new Company is that in view of the precedence that is being established through various cases on the implementation of EU Directives1, the articles of incorporation must include provisions whereby individual future employees or clients will not be able to supersede British law under which the partnership has hitherto functioned. Therefore, the articles of incorporation must specifically set out the limitations under which the Company operates and the manner in which it operates. Employees, suppliers and customer contracts and vouchers will all have to be designed in such a way that they limit the liability of the Company in compensation of damages. (c ) If there are losses initially, they can be offset by extending credit periods so that they do not have to be reported immediately and can be passed into the next statement, which will help to distribute losses in various statements so that the presentation of the financial picture of the Company is not so negative. As a limited Company, Brenda and Lorraine will be expected to publish their annual account to Companies House and this information would be available to anyone who is interested in the Company. However, such financial information is not generally easily available to members of the public, it is easier for financiers and investors to get hold of such information. But certain financial transactions which Lorraine and Brenda wish to keep secret can be managed by transfer of funds to an off shore trust account, in which case they will not be obliged to report these amounts in the annual financial statements. One of the best means for the Company to preserve the secrecy of its operations is to maintain an offshore unit which could be set up in any international location. An offshore trust could also serve as a good business option to transfer gains from the business after dividends on shares have been paid. It is also recommended that these offshore trusts be set up in the United States or Australia rather than the European Union, since British law is increasingly coming under the control of EU law. For example in the case of Commission v UK2, the ECJ stated that EU regulations were binding upon the member States “in their entirety” and they also stated that “a member state cannot choose to implement them piecemeal.” (d) Lorraine and Brenda will be expected to maintain a copy of the Articles of Incorporation, a record of the minutes of meetings of the Board of Directors and shareholders, and the certificate of ownership of shares. Records of annual financial statements must be maintained, prepared by an accountant, which will include (a) Income statement (b) Profit and Loss Statement (c) Balance sheet (d) Statements of ownership of equity. Information on the directors of the Company and the list of shareholders, employees of the Company together with wages and bonuses paid to them and audited annual statements of the Company must also be maintained. Annual tax statements and records of amounts paid will have to be preserved, because they can be inspected any time. All these documents must be maintained at the Company’s head office in Chancery Lane. But at the Essex premises, financial books that may be maintained are the cash book, sales ledger, purchase ledger, petty cash book, inventory list. Additionally, the Essex office will also need to maintain employee records. All correspondence pertaining to the business of the Company will need to be preserved in the event of any future lawsuits, where they can serve as useful sources of evidence. (e) The fact that Lorraine and Brenda are planning to set up the Company as a private limited Company is likely to work in their favor. In a partnership where the partners/owners are solely responsible for all the losses the partnership incurs, and are expected to compensate the losses from their own private funds and assets. However this is not the case in a Private Limited Company which enjoys limited liability. Since Brenda and Lorraine are the primary shareholders in the Company, their liability in the event of a loss or risk to the Company will be limited to the value of the shares that they possess. Since the value of the shares will also be initially determined by assessing the current value of the partnership and then dividing it by the number of shares proposed to be issued, the more the number of shares, the less will be the value of each individual share. Hence, in the event of a risk, personal liability of Brenda and Lorraine will be considerably reduced. Another factor that goes in their favor is that in a private limited Company, the shareholders are not expected to draw form their personal assets to compensate for losses, so Lorraine and Brenda will not incur personal risks(Delacy 2002). A Private Limited Company will also enjoy an advantage over a Public Limited Company, where the financial requirements are much more stringent. A Company that is functioning as a public limited Company is expected to provide much more detailed financial statements where nothing can be concealed from the public. They are also subject to more frequent financial scrutiny from income tax officials and there is a higher degree of sensitivity to corporate mismanagement in the case of public limited corporations. Therefore, Lorraine and Brenda have greater flexibility in financial operations and their personal wealth will not be at stake in forming a private limited Company. Moreover, if the new Company is also a member in some trade association, losses are generally borne by the association which will reduce the personal liability of these two principal stockholders. Therefore in the event the Company fails, Brenda and Lorraine will effectively incur near zero liability for the losses, since their personal assets are protected. They will be liable only for the value of the shares that they possess. (f) Lorraine’s contract to purchase office accommodation from Alfre will be valid. A contract is said to exist between two parties when there is some consideration exchanged for the performance of a particular service (Poole 2005). In this case, Larraine has entered into a contract with Alfre to purchase office accommodation in exchange for monetary consideration. In fact , the consideration doe snot even have to be a monetary one for the contract to be valid, as laid out in some cases.3 Therefore the contract was entered into in good faith by both parties and cannot be later rescinded, especially if it is a written contract, without the agreement of both the parties concerned. For example in the case of Thomas v Thomas (1842)4, when a dying man expressed an oral wish that was different from his written will, the written document had precedence and the change was not taken into consideration by the Court. Thus once Alfre has entered into a written contract, he is not at liberty to rescind the contract without Lorraine’s express agreement. Similarly in the case of Gilbert Steel vs University Construction Ltd5, wherein it was stated: “Consideration for the oral agreement is not to be found in a mutual agreement to abandon the earlier written contract and assume the obligations under the new oral one." Therefore, in this case, the written contract that exists between the two parties will stand as the final agreement between them and Alfre’s oral opposition to the contract will not serve to release him from its obligations. This contract also involves the issue of good faith. Lorraine has entered into a written contract with Alfre in good faith that the terms and conditions that have been previously agreed to and spelt out in the contract provisions will be upheld. There is of course, the minor issue of technicality to be considered herein. The fact is that Lorraine entered into the contract with Alfre before the company was established as a private Limited company through its incorporation. Therefore the issue that arises here is whether the contract that Lorriane entered into in her personal capacity will be equally valid in her official capacity as the CEO of the Company? The answer to this is that some adjustment has to be made, but this in no way undermines the validity of the contract that Alfre has with Lorraine. Despite the fact that this was a contract Lorraine entered into in her personal capacity, she is at liberty to continue to uphold the contract in her personal capacity and then transfer her contract to her Company. The contract with Alfre pertains to a sale of property. The price at which the purchase is to be made, or the consideration due thereof, has already been settled. Since this is not a contract for continuing payments, it is immaterial whether Lorraine is enforcing the contract in her personal capacity or in her capacity as CEO of the organization. The major issue is that Alfre has agreed to certain terms and he has indicated his agreement to these terms by affixing his signature to a written document. This make shim fully liable for any failure to go through with the contract. Any failure on his part will in fact be construed to be a breach of contract and Lorraine will be eligible for damages that she can claim in court for breach of contract. The only solution for Alfre is to offer to re-negotiate the terms of the contract. In the event that Lorraine is prepared to discuss terms with him again and both parties are able to agree upon the revised terms to be incorporated therein, it is only then that the terms of the contract may be changed. If Lorraine is not prepared to re negotiate the contract Alfre has no option but to go through with it. But the major issue here is that Alfre has absolutely no way in which he can now wriggle out of the contract and sell his property to a higher bidder. If he had not entered into a written contract, he would be free to offer his property elsewhere and seek the highest possible offer. But once he has agreed to certain terms, he is obliged to fulfil his part of the contract, failing which Lorraine can sue him in a court of law on the counts of breach of contract and breach of good faith. Breach of good faith in particular, is a potent cause for damages. Since all contracts are founded upon the premise of good faith – or the promise to fulfil the obligations one has already agreed to, a breach of good faith is in effect akin to going back on one’s word. A contract which has been agreed to and signed by both parties is iron clad and cannot be altered without the express consent of both parties. Therefore Lorraine has attractive options available from a legal point of view, in enforcing the contract she has with Alfre. References: * Collins, Scott. C. (No date) “Raising Capital while retaining control.” [Online] Available at: http://www.summitpartners.com/summit_assets/public/resou rce/EuropeanCEO%20~%20Raising%20Capital%20While%20Retain ing%20Control.pdf; accessed 11/25/2005. * Delacy, John (2002). “The reform of United Kingdom Company Law”. Cavendish Publishing Ltd. * Dixon, M. (1996) "Textbook on International Law", 3rd Edition. London. Chapter 4 * Gerber, Selwyn. (No Date). “Asset Protection – Everything you need to know.” [Online] Available at: http://primeglobal.com/assetprotection_i.htm; accessed 11/25/2005 Poole, Jill. (2005). “Casebook on Contract Law” Oxford: Oxford University Press. Read More