An Overview of the UK Corporate Sector - Essay Example

? Contents Contents Introduction 2 Discussion 2 An Overview of the UK Corporate Sector 3 Proprietorship 3 Partnerships and Private/Public Limited Companies 10 Solomon’s case 13 Limited liability in relation to a company’s shareholders and directors 13 Conclusions 15 References 17 Introduction Business structures prevalent in any economy reflect the maturity of its capitalistic and legal system of enterprises respectively. In the formation and running of any business enterprise, there is an inherent assumption that ‘law matters’ because irrespective of nature of business organization, whether it is proprietorship, partnership or corporation, there always exists two classes of stakeholders, the shareholder as well as creditors. Thus the shareholder in a proprietorship company is an individual, the partnership depending upon the number of persons who constitute the partnership and private company (corporation) the number of shareholders who promote and subscribe to the shareholding of that organization. By its nature, conducts of a business obligates its owners to discharge their liabilities to the creditors in the process of running and earning income out of business operations. The degree of responsibilities and viability vary due to the risks involved in accessing capital. Stated otherwise, in certain types of businesses informal rule applies whereas in others informal ones apply but the ultimate objective of all them is to ‘effectively constrain agents (the form of companies here) actions and their growth (North, 1990). The interdependence between the legal and financial rules have further be amplified, for instance, by Cheffins, (2001) and Coffee, (2001) according to whom while the good quality legal rules could enhance the investments potential for businesses, financial structures can influence the creations of legal norms. In this light, the objectives of this paper is to discuss specific structures under which businesses operate, viz, Sole proprietorship, limited liability, the pros and cons of both the structures and the later in relation to ‘Solomon Case’. This paper would also be finally enlarged with a discussion of limited liability as to how it impacts a company’s directors and shareholders. Discussion An Overview of the UK Corporate Sector The corporate structure of the UK business enterprises is influenced by a number of factors, such as access to bank borrowing, cash, non-debt tax shields, growth opportunities, profitability etc. Business structures are platforms through which capital, goods and persons carry out commercial transactions in a given space wherein the accessibility to capital and size have a distinct impact on the nature of the corporate forms in which such transactions are facilitated. While one can state that there are three broad choices, via, (i) sole proprietorships, (ii) partnerships (limited liability), (iii) corporations (private or public) for organizing and running of business enterprises. There are various other types of companies such as royal charter, industrial and provident society, company limited by guarantee, community interest company, etc. But proprietorship, partnerships and corporations are the three main types prevalent. Proprietorship Proprietorship businesses are characterized by single owners, at times a one person shows with limited or even the owner performing the role of an employee also. In such a case it acquires the form of self-employment whom for such a reason cannot be classified as real entrepreneurs. Proprietorship entities have certain advantages which makes it a most popular form of business enterprise. Some of such advantages are: a) It facilitates an easy formation because neither is there a need for complying with legal formalities nor any registration of the firm is needed; b) the owner comes up with the requisite capital which ordinarily gets generated either out of their savings and or through the reinvestment of profits generated; c) The owner has total control of the business operations which enables the proprietor to safeguard the business interests and also allows the maintaining secrecy of the business transactions d) Since the decision in general rests solely on the shoulders of the proprietor, quick decision and flexibility in operations are ensured. However, proprietorship forms of businesses are also fraught with certain amount of disadvantages some of which are serious enough to even cripple the business. For instance, the liability of the proprietor is unlimited which implies the personal properties of the owner is liable to be confiscated for recovering business debts and for payment unpaid statutory dues. This type of a business structure also suffers from a form of uncertainty as unless or otherwise the proprietor has a business plan to convert it into partnership or corporation, there is every possibility of the business ceasing to exist with the death of the proprietor. Any illness of the proprietor or aging may affect the efficiency of the business operation. A proprietorship company has limitations in terms of the capital it can bring into the business, managerial abilities it can induct. From the above, it can be concluded that subject to other things being equal, this form of business structure can be considered to be suitable for businesses involving moderate risks and less capital intensive. It can also then be said that such firms ordinarily (but not always) is characterized by limited growth prospects. According to Crusto (2009), however inadvertent it may be scholars in business law have ignored to study in detail sole proprietorship laws. There have also been no efforts towards codification of proprietorship form of businesses. The author argues for introducing reforms into this type of business structure for the reason that it represents a vital form of business operations across the world. Such reforms would go a long way in enabling them to make significant contribution to business life (Clark, 1986). It can also be seen there is no clarity that is emerging in the scholarly literature about the status sole proprietorship. For instance newer ways of defining proprietorship entities are being attempted as it can be seen from the work of O’Kelley, (2011) who wants to use a new terminology, via, ‘the corporationship’ to replace existing term ‘proprietorship’ as this would ensure the proprietor being legally recognized as the common party to all contractual relationship taking place within the firm run by the owner. Limited liability companies A limited liability form is the type of business entity, in which; some of the partners or all the partners have limited degree of the liability. It has certain elements of the partnerships. In a limited liability company, one of the partners is not fully responsible for the negligence of another partner. In a limited liability, some of the partners have a sort of liability like the shareholders of any company. But, there is a primary difference. Unlike the shareholders, the partners can manage the business in a direct manner. The limited liability type of the companies also has a different type of tax compulsions when compared to the general type of the businesses. There is a definite kind of confusion between the limited type of the companies in the UK and the USA. In the UK, the companies are named as the LLP (Limited Liability Partnerships). Inspire of the name, they function as corporate bodies, and not essentially as partnerships. In the UK, the limited liability companies are governed by the Limited Liability Partnerships Act 2000. The limited liability company may have an existence, that is independent of the members, as opposed to the case of the partnerships; that is dependent on the continuity of the members in the entity. In UK, the members of the LLP have a joint responsibility, where the agreement is in terms of the joint agreement, but the responsibility of one individual does not extend to the others. This is analogous to the limited company or a general corporation; where the constituents of the company cannot lose more than their investment. In terms of the structure of the tax, the UK limited liability companies are similar to the partnerships. It is generally tax resurgent or passes through, so that no taxes are paid in relation to the UK; but the members pay the taxes for the gains that they receive through the functioning of the LLP. Advantages and Dis-advantages of LLC There are a number of advantages and disadvantages of a LLC. They play a part in a large number of areas. This is a new type of the business structure that is hybrid in nature. It has the limited liability type of the features of corporation and the tax efficiency of a partnership. The advantages and the disadvantages of the system can be analyzed for a number of perspectives. They are as follows- They come under the default tax classification; the profits are taxed at the level of the members, not all the level of the LLC. Thereby, there is no double taxation. The members of the firm are protected from the liability and the debts of the LLC. The limited liability company can be opted pot be taxed as proprietorship, the S corp. the corporation or any other entity that can be used as a correct option for the business. This can be set up by the involvement of only one natural person. There is no requirement for the annual shareholder meeting. This holds true for almost all the provisions of the law. There is a generally no loss of power to the board of the Directors. The limited liability companies are perpetual kind of the business entities, tat extend beyond the natural lives of the owners. This deals with the problems associated with the general termination of the business after the death of the owners. The amount of the record keeping is very less. The interests of the membership of the limited liability company can be assigned. The level of the economic benefits of the company can be shared among the members. This gives the economic benefits of the distribution to the assignee. This ca is done without the transference of the title to the interest of the membership. Disadvantages of the LLC The disadvantages of a limited liability company are as follows- The earnings of the members of the limited liability company are liable to the self employment taxes. This is in large contrast to the earnings of the general corporation were it can be passed through the distribution of the profits. This is very different from the other types of the self employment taxes. The consideration of a limited liability company as a partnership firm has a lot of implications on the income taxes. There is a cap on the amount of the capital other the profits that can be exchanges or sold within a twelve month period. If more than half of this is done, it shall lead to the termination of the limited liability company due to the federal tax purposes. The cash method of the accounting can be lost in some cases. The degrees of the minority discounts are generally lower for a limited liability company. This means that the assets of the limited liability company are very easy to dissolve. If there is the conversion of any of the existent kinds of the businesses to the limited liability company status, it may lead to recognition of the taxes on the appreciated assets. There are a lot of new companies in UK that have been becoming limited liability forms. The examples can be drawn from a number of areas, most notably IT (Information Technology) companies. The examples of this kind of the companies can be like that of the Dragon IT services, Fahrenheit IT services, Gadget help and many other companies. Comparison between sole traders and limited liability companies There are a number of points of comparison between the sole traders and the limited liability companies. They are as follows- Limited amount of liability- There is a protection of limited liability company’s agents the claims that are made against their personal assets as a part of the actions being taken by the company. The businesses in the UK are incorporate businesses in nature (Philips, 2005). The sole trader care seen to be part of the group. Thereby, they do not enjoy any kind of the immunity from the actions taken against the personal type of the actions. The prestige The limited types of the companies are deemed to be more prestigious types of the companies when compared to the sole trader firms. The higher degree of the compliance requirements of the firm means that the amount of the operational complexity is very high. There are a lot of features like that of the company seal, the degree of the paperwork, the certificate and complexity are some of the factors that are absent in the sole trader firms. The requirements of the personnel The sole trader firm requires only one person to become operational. This is in contrast to the limited liability types of the firms that require more than one individual. It requires the services of a director and a secretary. These are some of the elements of the business that are very different in these types of the firms. The limited liability must have two participants. The cost of starting up the firm The costs of the setting up of the sole trader firms are very less when compared to the costs of the setting up of the limited liability forms (Eisenhardt, 1989). Although, the costs have come down in the recent years, it still continues to be very high. A share can be defined as the single unit of the ownership in a corporation. The companies divide the available capital into the shares, which can be offered for the sale to raise the adequate kind of the capital, called as the issuing kind of the shares. The share can be defined as the indivisible part of the capital, which expresses the proprietary type of the relationship between the firm and the holder of the shares. The value of the denomination of the share is also called as the face value. The common features of the shares are the equity participation. The authorized capital of a company can be defined as the maximum amount of the share capital that any company is authorized by the legal decree to allocate the shareholders. Some portion of the capital can remain unissued at any of the points of the time. The number can be changes by the approval of the shareholders. The corporate concept of the authorized share capital was abolished in UK by the Companies Act 2006. The unpaid capital is the example of the capital, which has been subscribed. But, the issue of the capital call has not yet been made in this. Partnerships and Private/Public Limited Companies Business enterprises with more than one owner/shareholders can form partnerships, companies etc. Typically partnerships are entered with two or more individuals to broaden the resource capability and functional areas of businesses for such a structure could help in acquiring larger capital and diversified skills besides distribution of risks. Consequently, the advantages such a structure could bestow on the owners of a business relate to sharing of skills and responsibilities in performing the business operations to ensure better business outcomes. On the other hand, partnership firms have the limitations in the form of unlimited personal liability for the business and more importantly each partner is held individually as well as severally responsible in that besides their own action, they can be sued for the misconduct of any of the partners. Partnerships also do not have a separate legal entity even though a distinction under the laws is made between registered and unregistered partnerships. Unregistered partnerships are also called as Association of Persons (AOP). From the very way the acronym is made, it can be deduced that it is an entity which is formed to apportion the undertaking of responsibilities to carry out specific functions of a business and sharing of the profit. The tax treatment in an AOP is same as that of proprietorship and the associations of persons are also not held legally or severally responsible for the liabilities. On the other hand, registered partnerships for which the status confers on them the benefit of sharing profits or losses. Corporations in most of the business enterprises is characterised by a phenomenon of being closely held among a group of individuals. A private limited company can be formed with just two individuals who have joined hands to promote and become shareholders of the company they intend promoting. Private limited companies are governed by the provisions laid down Laws of England and Wales. It has a legal existence separate from the owners and management. Besides two shareholders, it has to have two directors and the shareholders can become the directors of their company. The procedure involves applying to the Registrar of companies to check the availability of the name in which the promoters seek to commence their businesses. In order to have a fair chance of getting the name approved, the intending promoters are provided the chance to mention multiple names and any one of them subject to being available would be approved by the Registrar and intimated to the promoter(s) and the communication would be sent to the proposed registered address of the company. On obtaining the communication of the name availability, the promoters would have to prepare a Memorandum and Articles of Association in line with the nature of the business that would be performed in such organizations and the terms and conditions in terms of authorised capital, paid up capital, the denomination of shares, rights regarding share transfer inducting additional shareholders etc. The compliances requirements for a private limited company are codified which makes it mandatory to keep the accounting and auditing books, ensure meeting of board of directors at least once in every quarter in a year. The financial statements would have to be approved by convening an annual meeting to approve the financial statement for the previous financial year. In addition to filing of tax returns, a separate financial return has to be submitted to Registrar of companies. The advantages which private limited companies bestow on the promoters/directors of the company could be seen in their enjoying a better creditability and reputation. Such credibility is of paramount importance to afford reputation to the shareholders and relatively an easier method of sourcing funds. It is difficult to pinpoint the disadvantages. However, it can be stated that private limited companies impose certain responsibilities on the shareholders and board of directors besides having a bearing on the cost. For instance, start up costs for incorporation of the company is needed which varies depending upon the authorized capital, the returns would have to be filed to both the Registrar of Companies and Income Tax department, Auditors under the law ( at least in theory) cannot be changed without obtaining a no objection certificate (NOC) from them and filing the same with the Registrar of Companies, liquidating the company is cumbersome and the Registrar of Company is vested with prosecuting powers. When the company goes in for seeking a loan from banks or recognized financial institutions, they would take the personal guarantee of the directors which dilutes the limited liability characteristic of private limited companies. When the loans (term loan or working capital) against collaterals, (whether machineries or property), they need to be registered with the Registrar of companies which would be reflected in the balance sheet as secured loans and in the event of the company being liquidated, it is necessary for the company to discharge these loans or arrive at a settlement before such a procedure can be gone through. It is also possible the directors have taken unsecured loans on behalf of the company which is not reflected in the balance sheet. In general it can be said that a private limited company is an ideal form of doing business if the promoters have a vision and the directors' hands are clean because it enjoys a certain amount of credibility, reputation with those with whom it interacts and being a legal person its life is perpetual. In other words, the operations of the company do not cease to exist due to the retirement, death or resignation of the directors. What all needed is replacement and appropriate intimation to the Registrar of Companies. Solomon’s case None of the common law textbooks would be completed without a discussion on the House of Lords case of Salomon v Solomon. The salient features that emerged out of the decision of this case are, 1) since the legal personality was backed by a stature and since the stipulations laid down in the statue have formally been complied with, it was ruled Salomon’s one-man’s company was distinct from Salomon as a person 2) This situation does not get changed even if such an outcome is not contemplated by the legislature. Lords Macnaughten and Halsbury also concurred with the views that so long there is an absence of express prohibitions and there is no deviation in statutory compliance, one-man company would enjoy the benefits of limited liability (Davies, 2010; Griffin, 2005; Morse & Griffin, 2005). Limited liability in relation to a company’s shareholders and directors The fact that a company is not a human person which at the same time confers on it the status of a distinct entity (artificial person) independent of the shareholders and directors have created practical problems in interpreting the scope and implementation of the concept of limited liability. This in particular assumes importance in the determination of applicability of criminal liability on the shareholders and directors. Since the company has an independent existence from the shareholders, confusion has arisen on the part of law-makers and judiciary as to whether the shareholders can be held responsible for the misdeeds, real or perceived, committed by the company. The issue has a critical bearing because even though a company is an artificial person, the affairs of a company are handled by natural persons whose actions could attract criminal liabilities at times grave in nature resulting in the losses of lives or grievous injuries. Even though this is a tricky issue, English courts have been sentencing corporations at least from the middle of last century. The shareholders in general have been held liable under the doctrine of vicarious liability which held the master is liable for the conduct of his servant in the course of employment. However, when it comes to criminal liability, the mere existence of the master-servant relationship is not considered to be sufficient to impose the punishment on the master and for being prosecuted for such crimes, the courts would have to establish mens rea that is intention to commit the crimes on the part of the shareholders. Nonetheless, mens rea cannot be invoked under at least three types of common law violations, via, public nuisance, criminal libel and contempt of court wherein the concept of vicarious responsibility would be invoked. The application of the principle of “lifting the corporate veil” (Dalal, 2004) sets at rest the confusions that have arisen on this issue. According to this principle, wherever there has been a dishonest, improper and or fraudulent activities are deemed to have been carried out by the legal entity, the concerned individuals, (the Directors and authorized officers by the board) would not be allowed to take shelter behind the corporate personality. Any laws and cases that are relevant for this issue as amended from time to time would be invoked and instances as, but are not limited to, violating public policy, and indulging in fraudulent acts, whether it is evasion of taxes, or noncompliance labour and other laws, committing of economic offences, where the organization can be accused to have acted as conduits for illegal activities the officers would be personally held responsible and subjected to prosecution. Thus, the members and or the Directors/officers of a company would be held personally responsible if they I. have been conducting business for more than six months without the statutory minimum of seven directors in the case of a public limited company and two directs in the case of private limited company II. The application money is not refunded to those who have not been allotted with the shares within 130 days from the date of the issue of the prospectus III. Entering into a contract or signing a negotiable instrument without fully writing the name of the company IV. During the course of winding up of a company, it becomes evident that there was an intention to defraud the creditors or any other similar act The key to unlock the deliberate intentions and make the officers of a company liable is ‘lifting of the corporate veil’ Conclusions This paper has successfully discussed of running a business such as proprietorship, partnership, corporations (private and public limited). The main focus has been on limited liability in relation to a company’s directors and shareholders. Solomon’s case has been discussed and related to subject of this essay. References Cheffins, B.R. (2001), “Does law matter? The separation of ownership and control in the. United Kingdom”. Journal of Legal Studies, 30: 459-484 Clark, R.C. (1986), Corporate Law, Boston: Little, Brown Crusto, M.F. 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