Operating an Incorporated Private Company - Book Report/Review Example

? Business Law Question Before starting a business, every entrepreneur considers the type and form of enterprise to establish. An entrepreneur should consider the advantages and disadvantages of the numerous forms of ventures then evaluate and compare them to identify which venture suits him or her (Pride et al, 2012). Arguably, the forms of business that entrepreneurs choose dictate their success or failure. In this regard, Abi, Emily and Ella should consider the advantages and disadvantages of establishing an incorporated private company and those of operating as a partnership. Operating an incorporated private company has numerous advantages and disadvantages. The main advantage of operating a private company by Abi, Emily and Ella will be limited liability. According to Miller and Jentz (2008), this implies that their personal assets will be safeguarded against lawsuits or claims by creditors. This is unlike a sole proprietorship or a general partnership where the partners or owner are jointly or personally liable to all the claims such as loans, legal judgments or accounts payable by creditors and lawsuits. This implies that in a private company, Abi, Emily and Ella’s liability will be restricted to the amount they have advanced in the company (Scheeman, 2013). Their assets will be safe and since they cannot be held responsible for the debts incurred by the company except when they give a personal guarantee. Conversely, an incorporated private company has an independent corporate existence (Miller & Jentz, 2008). When Abi, Emily and Ella register their business as a private company, it will be independent and different from them. It will have become a separate legal entity that can own assets, acquire liabilities and sue or be sued. If Abi, Emily and Ella were to form a private company, they would benefit from a tax deferral potential. In reference to Gillies (2004), numerous authorities give newly incorporated companies the opportunity to defer taxes until a later date. Through this, they can realize some tax savings. In addition, operating a private company has another advantage which is income splitting. In essence, companies give dividends to their shareholders from the company profits. These shareholders are given the dividends regardless of them being active or inactive (Emerson, 2009). Anyone can be a shareholder in Abi, Emily and Ella’s company. Therefore, they can give their family members the opportunity to be shareholders, which gives them the chance to reallocate income from family members in high tax group to family members in a low tax group who are taxed at a low rate (Gillies, 2004). If Abi, Emily and Ella were to form a private company, they would be in a position to receive income and authentic taxes benefit (Emerson, 2009). Rather than receiving earnings when they are earned by the business entity, being in an incorporated private company will allow them to receive their earnings at a period when they will pay less in tax. Incorporated companies have an unlimited life span. Unlike partnerships and sole proprietorships, incorporated private companies keep on existing even when the owners or shareholders leave business or die or when the business ownership changes (Pride et al, 2012). Though there are numerous advantages that Abi, Emily and Ella would enjoy forming a private company, there are numerous disadvantages that would accrue to them. Though an incorporated private company is regarded as a separate entity that is different from its owners, authorities require to look at the character of the people behind it. For instance, in Daimler Co Ltd. v Continental Tyre and Rubber Co, it was determined that a company can be assumed to be an enemy of the state if the owner or the shareholder in control is an inhabitant from an enemy state (Miller & Jentz, 2008). In addition, an incorporated company can be stripped off its separate entity if the main purpose of its formation is to evade taxes. This is evident in Commisioner of Income Tax v. Meenakshi Mills Ltd (Miller & Jentz, 2008). Starting an incorporated private company involves numerous formalities. These procedures at the formation and administration are often expensive, which make the formation of an incorporated private company an expensive venture for Abi, Emily and Ella (Madura, 2006). A private company has a more multifaceted legal composition than a partnership and a sole proprietorship. This makes it a little bit expensive and complex. If Abi, Emily and Ella were to form a private company, they would have to pay double taxes. Gillies (2004) notes that the taxes will be double because each individual owner will pay taxes for personal income and the company will also pay taxes. This, for sure, implies that there will be increased costs of accounting. This is different form a partnership or a sole proprietorship where the owner or partners are not subjected to double taxes. In forming a private company, Abi, Emily and Ella will be subjected to a lot of paper work. Sustaining an incorporated private company entails a lot of paper work than a partnership or a sole proprietorship (Pride et al, 2012). Paper work does not stop with filing two tax returns, in turn a private company will need to keep comprehensive books of accounts, meeting notes, and reports of bank account records and audit files. When Abi, Emily and Ella establish a private company, they will need to create different bank accounts and credit accounts for the business. This means that the identity of the business will be different from that of Abi, Emily and Ella and they cannot mix their personal funds with that of the business once it is incorporated. Furthermore, the institution of a private company can engross selling of shares which can make the shareholders the new owners of the company. This implies that Abi, Emily and Ella will not have full control of the company (Madura, 2006). On the other hand, Abi, Emily and Ella can decide to form a partnership. However, they would need to consider its advantages and disadvantages. One of its primary advantages that would accrue to the three would be its easy formation (Emerson, 2009). The formation of a partnership involves few formalities when compared to a private company. In essence, a partner’s agreement can serve as the only paperwork involved in establishing the partnership. Needless to say, the formation of a partnership is less costly. On the other hand, unlike a private company, a partnership is easier to run and manage. The partners control the partnership and manage the business as according to their agreement (Gillies, 2004). The formation of a partnership by Abi, Emily and Ella would expose the partnership to large resources since each member will contribute capital towards the partnership. This implies that a partnership will have an added financial strength which can be utilized in increasing the scale of the activities of the business venture (Miller & Jentz, 2008). However, they still admit more partners into the partnership, which would increase their capital base. When people come together to form a partnership, they bring together the different skills, dexterities and capabilities together. This implies that Abi, Emily and Ella will have the advantage of bringing their different expertise in managing their business venture effectively (Pride et al, 2012). In this regard, Abi, Emily and Ella can share roles of managing the business venture. This will permit them to utilize and optimize on their capabilities. Rather than dividing the management tasks equally, the partners can divide the responsibilities according their skills (Madura, 2006). If one of them is outstanding in accounts, they may deal with book keeping while one of them may deal with marketing and sales. In most cases, partnerships have unlimited liability which acts as a safeguard against mismanagement and embezzlement of funds. In a partnership, the unlimited liability among the partners controls the activities of the business venture and checks any careless acts of management that may plunder the business into great debts (Emerson, 2009). Partners in a partnership meet frequently (Madura, 2006), which makes decision making process fast and prompt. In addition, all the partners in a partnership business venture are vigorously involved in management of the business, which improves on supervision and eradicates wastage leading to increased efficiency. Unlike a private company, partnerships are not required by authorities to publish the records of accounting. This implies secrets of a partnership business venture can be maintained to some extent (emerson, 2009). Though operating a partnership business venture seems to have advantages over a private company, there are some shortcomings that Abi, Emily and Ella should analyze before choosing this form of venture. According to Gillies (2004), unlimited liability is the primary drawback of partnership business ventures. When the business venture is unable to repay its debts, the partner’s personal assets will be confiscated to repay the debts. Unlike a private company, a partnership can be dissolved because of the death of a partner or insolvency of the business venture (Emerson, 2009). Additionally, disagreement among the partners may bring an end to the partnership. In most cases, partners act as agents to the business venture and the acts of one of the partners bind the business and all the other partners. Miller and Jentz (2008) note that the acts of an incompetent or dishonest partner may land the organization and the partners in deep trouble and all the partners will pay for the acts of the incompetent or dishonest partner. In addition, partnerships do not allow the transfer of interest to third parties without the approval of all the partners (Pride et al, 2012). This implies that none of Abi, Emily and Ella will enjoy the freedom of changing her interest in the organization into cash. Question 2 Whenever an individual becomes the director of any company, there are numerous fiduciary duties of care that they legally owe to the business venture (Schneeman, 2013). In this regard, Abi owed fiduciary duties of care to their company. According to Smith (1999), directors of any company should exercise their authority for the right purpose. In some cases, as seen with Abi, directors may seek to feather their nests by diverting investment opportunities, which engrosses a violation of the director’s role of acting in good in faith (Hicks & Goo, 2008). This puts the director in a situation where his or her individual interest clash with their roles owed to the organization (Bourne, 1998). In this case, Abbi’s personal interests seem to clash with the responsibilities that she owes to the firm (Davis & Andrew, 2001). When Abbi decided to enter into a transaction with the head teacher, a shareholder in the company, there is conflict of interest and the duties she owes to the company. A conflict of interest situation arises when an individual exploits their position or capacity for their personal gains (Davis & Andrew, 2001). Since conflict of interests is unavoidable in many organizations (Kerr, 1962), it only becomes a legal matter when influences the outcomes of a decision for their personal gain (Hannigan, 2012). In this case, Abbi’s resignation from the company influenced the head teacher’s decision to enter into a contract with her. Among the duties of a director, he or she should not, without the approval of the company, put him or herself in a situation where there is a conflict of interest, either directly or indirectly (Smith, 1999). Though Abbi entered into the contract after she had resigned, she was liable for conflict of interest. This is because the duty to shun conflict of interests continues to apply even after an individual ceases to be a director regarding the exploitation of an opportunity so long as he or she learnt and got information about the opportunity while a director (Hicks & Goo, 2008). Abbi learnt of the opportunity to work with the head teacher while still a director, which binds her to liability. Therefore, according to the ruling made in Aberdeen Ry v Blaikie (1854), Emily and Ella have the chance to force Abbi to disgorge all the personal gains made from the contract with the head teacher. In Aberdeen Ry v Blaikie (1854), it was held “a corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal; and it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which possibly may conflict, with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into” (Hicks & Goo, 2008). In addition, Emily and Ella can apply for damages or rescission of the contract between Abbi and the head teacher (Bourne, 1998). References Bourne, N. (1998). Principles of company law. London: Cavendish. Davis, M., & Andrew, S. (2001). Conflict of interest in the professions. Oxford: Oxford University Press. Emerson, R. W. (2009). Business law. Hauppauge, N.Y: Barron's Educational Series. Gillies, P. (2004). Business law. Sydney: Federation Press. Hannigan, B. (2012). Company law. Oxford, U. K: Oxford University Press. Hicks, A., & Goo, S. H. (2008). Cases and materials on company law. Oxford: Oxford University Press. Kerr, R. (1962, September 3). Senator Kerr Talks about Conflict of interest. US News and World Report [New York], p. 86. Madura, J. (2006). Introduction to business. Princeton, N.J: Recording for the Blind & Dyslexic. Miller, R. L., & Jentz, G. A. (2008). Business law today: The essentials : text & summarized cases : e-commerce, legal, ethical, and international environment. Mason, OH: Thomson/West. Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2012). Business. Mason, OH: South-Western Cengage Learning. Schneeman, A. (2013). The law of corporations and other business organizations. Clifton Park, NY: Delmar Cengage Learning. Smith, D. (1999). Company law. Oxford: Butterworth/Heinemann. Read More