Company Law: Sole Proprietorship and Limited Liability Companies - Coursework Example

? Company law Task: Introduction Company law represents an enormous legislation that seeks to govern diverse aspects of corporations. The legislation provides a legal structure for corporations. The legislation is an all-encompassing since it governs formation, extent of operations, management and dissolution of companies1. The statutes under this law are predominantly a culmination of acts of the legislature and judicial precedents. Notably, the law has undergone phenomenal alteration to suit the changing business environment. Company law does not only govern companies but also other corporate entities. This legislation is a critical constituent of the constitution since it provides guidance to corporate entities2. Initially, company act begins by establishing diverse business forms. The key forms include partnership, sole proprietorship and companies. Sole proprietorship Sole proprietorship is the oldest business structure normally founded by a single party. Consequently, the founder of the organization serves as the overall manager of the entity3. Sole proprietorship lacks a legal personality since the owner is accountable for the organization liabilities. Similarly, the revenues of this entity act as the income of the founder for tax purposes. Sole proprietorship is the most rampant form owing to easy in formation. Moreover, the entity’s governance follows few regulations thus its operations are easy to manage. Despite the inclusion of the business form in company law, the entity lacks legal personality4. Therefore, strict legal analysis deters inclusion of Sole proprietorship in this legislation. Because of the absence of a distinct legal personality, the founder bears all legal consequences that relate to the entity5. Partnership Represents an organization founded by more than one individual. An assorted forms of this partnership exists. Notably, the differences to the partnership exist due to liability of the founding members6. Unlimited liability characterizes a general partnership. Consequently, founders bear legal liability both individually and jointly for business’ transactions. This means that the entity has no legal individuality. Similarly, the founders coin a ratio that dictates sharing of profits. This ratio principally corresponds to the capital ratio. This section of the company provides the basis for dissolution of partnerships. Additionally, the legislation provides for limited partnership. Limited partnership deviates from the convectional partnerships by admitting partners with limited liability. Subsequently, the unlimited partner bears the blunt of the entity’s losses. Partnerships suffer multiple management hitches due to differing ideologies of the partners. However, the Company act provide for a treaty that guides the partnership. The treaty outlines how the partner will operate the entity. Moreover, it establishes the responsibility of the partners. Limited liability companies The Company act predominantly addresses this entity in detail. Fundamentally, a company represents an alliance of individuals with a unified objective. The legislation begins by establishing an entity with a distinct legal individuality7. The distinct legal individuality arose through judicial precedents. The distinct legal personality allows the entity to transact in its own identity. Additionally, a company can undertake legal action against a party. Similarly, the entity can be a defendant in litigation. “Salmon vs. Salmon” established the legal identity of the companies. Salmon, a shoe designer, incorporated his business with himself as a debenture holder8. Additionally, the entity borrowed more money creating creditors. Owing to industrial upheaval, the entity collapsed and the creditor applied for liquidation of the entity. In adherence to the company act, the liquidators paid Salmon prior to the creditors. Nonetheless, the creditor argued that the entity was a deception hence creditor should receive refunds before Salmon. The lords stated that the entity’s incorporation was adequate hence; Salmon is distinct from the entity he founded. Subsequently, the liquidator repaid Salmon debentures in preference of the creditors. The ruling asserted the company’s separate legal identity from that of it owners. Notably, there are other rulings, which further entrenched the personality of the company9. Company registration The Company act further elaborates the procedure of registering companies. The registration requires certain documents10. The documents include “statement of directors”, memorandum and article of association. These three documents are vital since they create the foundation of the organization. The Article of Association holds critical information relating to the corporation awaiting incorporation. First, the entity establishes the stock in the entity. Additionally, it details the diverse category of stock in the company and their rights. The stock represents the basic ownership units in a company11. Holders of stock are shareholders. Subsequently, the article elaborates appointment of directors. Directors are appointees of the shareholders. No entity ought to operate without directors. The directors oversee the daily undertakings of an entity on the shareholders’ behalf. Therefore, the directors owe the shareholders a responsibility of care as their appointees. Article of association The directors determine the policies of the entities. Moreover, they declare dividends. The directors ought to attend meetings in the entity. The article of association also addresses another essential aspect of the entity’s ownership. The article addresses transfer of shares. Meetings represent a means of decision making in the entity. The article will establish modalities of meetings12. Many company acts adhere to the English laws, which stipulate that a company faces automatic dissolution owing to failure to convene a gathering fifteen months from incorporation. Meetings allow them members to evaluate performance of the entity. Additionally, the company act stipulates circumstance that would lead to the court overruling a meeting’s resolution. Most importantly, if only a single member attends. However, numerous company acts provide an exception to this ruling. Memorandum of association The memorandum of Association is another document required during registration. However, the magnitude of this document has declined considerably due to changes in the legal and business sectors. The document is consent of the founders. Fundamentally, the memorandum highlights the willingness of founders to associate by subscribing for entity’s shares13. However, in numerous countries this document will contain registered offices of the company, the capital structure and name of the entity. Currently, the content of the document has decreased as many nations seek to simplify registration. Evidently, companies have adopted a lesser strict expression of the entity objectives consequently allowing to deal in numerous trades. The objects clause normally highlights another doctrine, which contributes to the company acts. The ultra vires The ultra vires doctrine represents a vital aspect of the company law. Similarly, this doctrine was a culmination of a judicial precedent. The Ashbury Railway Carriage established the ultra vires doctrine. The defendant was Ashbury Railway Carriage, a firm that sold, hired, rent and constructed carriages as detailed in its objective clause. Therefore, the entity enlisted for a contract to erect a railway line in Belgium. To undertake this contract Ashbury Railway Carriage borrowed funds. Unfortunately, the contractor renounced the contract. Consequently, Riche pursued Ashbury Railway Carriage for amounts owing. The court held that the action to construct the railway was beyond the entities objectives thus, ultra vires. Approval of ultra vires undertakings demands a specific resolution that was absent in this litigation. The legal personality The legal personality granted in this legislation is subject to certain exceptions. The exception allows the law to pursue certain individuals for malpractices within the company’s structure. Pursuance of such individuals results in “lifting the veil of incorporation”14. This deviates from the doctrine that grants an entity a distinct identity since the court pursue individuals for their deeds in diverse capacities in the company. The court has jurisdiction to pierce the veil of incorporation. However, there must be credible reasons. Certain situations may warrant lifting of incorporation’s veil that encompasses injustice and fraud. If the court perceives that a company is operating fraudulently, it has authority to charge individuals serving in the entity. Essentially, unveiling of incorporation means that individual involved in the entity have unlimited liability. Additionally, where doubts arise regarding the objectives of an entity the court can subsequently lift the veil of incorporation. If an entity’s creation aims at hiding the actual reasons of incorporation hence, allowing the entity to avoid certain obligations then the court can lift the veil. The company act addresses another critical aspect of companies’ formation. Pre-incorporation contracts are agreements created on the company’s behalf prior to its incorporation. This section addresses who bears responsibility for such agreement if the prospective founders fail to incorporate the entity. Essentially, the contracts are void since the entity is nonexistence. Additionally, the agreements are unenforceable on the entity on its inception. “Kelner v Baxter” established the above principle owing to the ruling that the court made. The promoter signed a pre-incorporation contract for supply of commodities. However, the newly incorporate entity faced multiple hitches necessitating its dissolution. This left the suppliers unpaid. The resulting case ruled that the pre-incorporations are void. Consequently, the promoters are answerable for such agreements. The liability of promoter arises since all parties to the agreement were conscious of the nonexistence of the intended company. Despite nullity of pre-incorporation treaties, the law provides means to adjust the agreements. Ratification and novation are means to modify pre-incorporation contracts making the new entity liable. Ratification involves the parties signing the contract afresh. Conversely, novation requires a complete overhaul of the contract15. Consequently, the new entity enters into a fresh contract. The ruling on pre-incorporation contract further asserts companies as distinct legal individual from the promoters. Therefore, promoters have no power whatsoever to make an agreement on behalf of the entity. Accordingly, they bear liability for any pre-incorporation agreements. Holding meetings Meeting are critical in any company. An entity that fails to hold a meeting within fifteen months from incorporation ought to wind up. Meeting are consequently critical since they enable shareholders to undertake certain responsibility. First, directors present the entity’s results for evaluation by shareholders. Secondly, shareholders hire directors. Many company acts globally permit representation of shareholders by proxies who have the capability to vote as directed by the shareholders. Directors call meetings in the entity. However, the notices for the meeting differ with the agenda of the gathering. Annual general meetings and those deciding on a specific resolution require a twenty-one days notice. If director fail to sanction a meeting then members can authorize a gathering. Nonetheless, for the call to bear legal implications certain percentage of membership should approve the call. The proportion varies among public and private entities. Additionally, the court has jurisdiction to sanction meeting. Hiring and dismissal of directors The company act provides for hiring and removal of directors. However, the above process differs with the nature of the institution. Public companies remove individuals from this post through ordinary resolutions16. Moreover, expiry of the director term at the position legally implies that the position is vacant. However, if the directors represent a distinct group of shareholder then a director only vacates office on appointment of a predecessor. This ensures that such groups have a representative in all gathering that require the director’s presence. The company act addresses other aspects of director and their responsibilities toward the entity and the shareholders. First, the company begins by elaborating the legal aspect of lending funds to individual that may hold the above position. Many company acts are categorical that the company should not issue any loan or security for loans to directors. Directors are appointees of shareholders subsequently the legal statutes require certain conduct from them. The conduct expected from the director emanates from the fiduciary duties. First, the director should be honest. Secondly, the director should be devoid of conflicting interests. This will ensure that the director only acts in the plight of the shareholders. This duty is vital since it guarantees that directors run the company appropriately. This duty owes its origin to a judicial precedent. In Cook vs. Deeks, the directors of an entity that constructed rail obtained a contract in their names17. However, they presented the contract for ratification. Shareholder instituted an action based on contravention of trust. The shareholders argued that the directors were beneficiaries in the treaty, which belonged to the company. The ruling consequently stipulated that indeed the director had contravened trust bestowed upon them. Responsibility of a director The company act further stipulates that the director should act objectively. Consequently, actions that culminate in squandering of the entity’s asset will are actionable. Director should not institute actions that will culminate in wastage of the entity’s asserts. The company law additionally provides remedy when director contravene the above duties. There exist three key remedies. First, the company may claim the secrets gains made. Secondly, the entity may action for damages. Finally, the entity may invalidate the director’s actions18. The company law discusses in detail the possible capital structures. The entity can raise capital through share. Shares represent the basic unit of ownership in companies. There are certain characteristic of shares. First, shares receive dividends on the profits earned by the entity. Secondly, shareholders bear voting rights. Distribution of funds culminating from liquidation of an entity follows a certain sequence. The sequence depends of the diverse classes of stock. There exist three classes of capital namely authorized, issued and reserve capital. Authorized capital refers to the total value of shares that an entity can issue. Issued capital denotes the nominal value of shares. Finally, reserve capital represents the unpaid proportion of the capital structure. Types of shares There exist three distinct types of shares namely ordinary, preference, as well as the redeemable19. The key difference in the share relates to the right that each category has. Notably, ordinary shares represent the real capital in the entity. Moreover, holders of these shares have voting rights. Preference share represents another category of stock. The above shares rank above ordinary shares in preference during insolvency. Preference shares earn a specific interest rate regardless of the company’s profitability status. The final class of share is redeemable which provides a provision for the company to re–purchase the shares from the shareholders. Debenture is an additional means for a company to pool capital. Debenture is a loan that a company takes to fund its operations. Debentures earn interest paid regardless of the profitability of an entity. This form of capital ranks above all shares in preference. Therefore, debenture holders receive refunds prior to any shareholders on insolvency. Essentially, debentures are a secure investment since the holders receives interest periodically. There are diverse forms of debentures that encompass registered, bearers, secured and redeemable debentures20. Conclusion Ultimately, the company act provides a detailed legal structure for companies. However, it also establishes corporation. Consequently, companies have multiple advantages. Notably, companies can pool funds from many sources; such sources include Initial Public offers (IPO). However, the act stipulates certain strict conditions for IPOs. The entity has to avail audited accounts. Additionally, the entity should have performed impressively previously. This would make its share attractive to investors. Conspicuously, the company provides apposite structure to guide the operations of the entity. The legislation establishes a company as distinct legal entity through judicial precedents. Subsequently, it established the principle of ultra vires, which governs the operations of entities. The company act further states the task that the director should accomplish. Additionally, it evacuates the responsibilities that the directors owe to the shareholders. The company’s act also details the basic requirement for registration of an entity under this category. Visibly, countless company acts bear inclination the English common law. The English laws form the base of most company since created the basic principles, which guide companies. However, various countries have altered the enormous their legislation to suit their nation and circumstances. Reference List Ashton Helen, The company secretary's handbook: a guide to duties and responsibilities, (London, Kogan Page Publishers 2006). Bevans Neal, Business organizations, (Clifton Park, Cengage learning 2006). 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