Challenging Legal Issues - Case Study Example

Case Study The given situation of the enterprise Freedom Diving, Leisure & Co reveals challenging legal issues, considering that the legal entity wascreated only by the consent of the two friends: Andy and Robert, without having explored the legal issues that might arise in time as a result of their partnership. Given the situation that they are now asked to pay back the three unsecured loans and that the partners are not able to do that at the moment, it is necessary to reveal the alternatives that the two friends should have appealed to in order to avoid a potential bankruptcy and to successfully develop the business. Andy and Robert made some mistakes by not signing a written agreement on their partnership, by not choosing to set up an appropriate legal entity and by letting their personal relationship interfere in business. The legal issues that arise from the situation of Freedom Diving, Leisure & Co refer to: the legal status of the enterprise, which unavoidably leads to the extent of the personal liability of the founders; the real type of partnership between Andy and Robert, considering that the enterprise is called Freedom Diving, Leisure & Co, & Co – referring to a specific level of employees’ involvement in the management of the company; alternative form/s of business structure that the partners could have chosen for their business in order to manage it better, the possibility of a better management of their business, considering the general partnership between Andy and Robert. The legislation that applies to this case and to the alternatives that the two partners had is: 1. Partnership Act 1890 2. Limited Partnership Act 1907 3. Limited Liability Partnership Act 2000 4. Limited Liability Partnerships Regulations 2001 5. Limited Liability Partnerships (Fees) (No.2) Regulations 2001 6. Companies Act 2006 7. Insolvency Act 1986 8. Business Names Act 1985 First of all, the legal status of Freedom Diving, Leisure & Co should be analyzed in order to seek out the legal implications of the two partners. Including ‘&Co’ in the name of the company implies that the employees participate in the management of the enterprise. Considering that at the beginning of their partnership Andy and Robert did not have employees, it is possible to assume that they were not aware of the legal stipulations in this matter and they just went along with the name they liked. On the other hand, the partners had legal alternatives to their partnership, but I would have advised them to choose a form of Limited Liability Partnership or Limited Company, both options having their advantages. The advantages of the Limited Liability Partnership are the following: The informality of the relationship between the partners The limited liability of the partners The flexibility of the partnership The protection of the personal property of the partners The tax-transparency1 – The limited partnership offers privacy to the investor, as the accounts of the partnership are not generally disclosed.2 The freedom to agree3 On the other hand, a limited partner cannot participate in the management of the company4, otherwise he will become just as liable as a general partner5. In the case of Andy and Robert, the non-participation in the management of their own company is far from being possible, as it is they who are qualified in diving and it is a hobby that has become a source of income. The second alternative – a limited company - has its own advantages and disadvantages. The advantages are: Again, the limited liability of the partners The protection of the name of the company The possibility for the company to continue its activity aside from its members/shareholders. So if they die, become bankrupt or are reassigned, the company continues to exist. The easy assimilation of new shareholders and/or investors Opportunities for the employees to acquire shares of the company. On the other hand, a limited company has some disadvantages, too. Some of them are: the high cost of running a company, the obligations of presenting proper accounting records yearly, if a company has passed the auditing threshold, the necessity to pay for the audit. As it has already been mentioned, both legal structures have numerous advantages, but there are some disadvantages that are difficult to avoid. The partners – Andy and Robert - should choose the one that fits their type of business best. On the other hand, there is a big minus in the LLP option – the fact that limited partners cannot participate in the management of the company, otherwise they become as liable as a general partner. In order to protect their personal property, I would advise them to consider the possibility of a LTD. Although it is more difficult to manage a company than a sole trader or partnership, it does have a lot of good sides and it would bring a high profit in time. Limited companies may cost more, but they do protect their personal assets and they have more flexible borrowing options. This way, their lenders – the three friends that lent them 8000 £ each - would offer secured loans and the possibility of paying them back and still avoid insolvability and personal bankruptcy. This form of business entity – a limited company – is one of the most popular forms that small businesses set up to. Apart from choosing the correct form of legal structure for their business, the partners should provide Company articles of association6. Andy and Robert should expressly stipulate their rights and obligations, the power of decision, and any other provision regarding various matters that would help the business to run efficiently and avoid legal and inter-personal problems in the future. I would advice Andy and Robert to look at these articles as a contract between them and in this way, refer in this contract to every single aspect of their business relationship. This will certainly help them overcome eventual problems in the future. However, considering the fact that Andy and Robert chose to create a general partnership, they should be aware of all the legal implications of this kind of business structure and make the best of it in order to manage the business better than they actually have done did. We I believe than an imperative action on behalf of both partners is to come to a written agreement regarding: 1. their rights and obligations in relation to the management of the business 2. the manner of sharing the profits and losses of the enterprise 3. the right to represent the business – by law each partner is considered to be the agent of the partnership7. Another event that the two partners allowed to happen and that had a serious impact on their business is letting the personal issues interfere in business. In case they encountered the situation in which they were not able to agree on the strategic direction of the business and the operational day to day management, a solution to this problem could have contacted a Consultant firm for help. These kinds of companies analyze and study the market and they would have suggested the two partners an economic solution to their disagreement. Moreover, I would suggest that Andy and Robert should make an express provision in the articles on this, mentioning that in case of disagreement between them, a particular consultant company would help them. Regarding the loans from the three friends, I would certainly advise the partners to secure them with some assets of the company’s property or with personal ones, at their own discretion. It would be possible, in this way, to avoid the risk of becoming bankrupt. Considering the situation that has been created, both Andy and Robert are liable for the financial difficulties of their business. The Partnership Act 1890 specifically says that: “Every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied, but subject in England or Ireland to the prior payment of his separate debts”8 meaning that the liability of Andy and Robert is jointly shared by both of them, disregarding the amount of each partner’s initial investment in the company. Therefore, each partner is liable for his actions, the actions of the other partner and the actions of the employees. Each partner has the right to participate in the management of the company. In conclusion, Andy and Robert should have started by choosing a different form of business structure, which would have made it possible to avoid the problems in the future. They should have also reached an agreement regarding everybody’s rights and obligations in the management of the business and they should have also agreed from the beginning on the strategy of the business. 1500 words Works cited I. Table of authorities: 1. The Partnership Act 1890 2. The Limited Partnership Act 1907 3. The Limited Liability Partnership Act 2000 4. The Limited Liability Partnerships Regulations 2001 5. The Limited Liability Partnerships (Fees) (No.2) Regulations 2001 6. The Companies Act 2006 7. The Insolvency Act 1986 8. The Business Names Act 1985 II. References 1. DeMott, Deborah A. “Transatlantic Perspectives on Partnership Law: Risk and Instability”, (2001) 26 Journal of Corporation Law. 2. Naomi R. Lamoreaux and Jean-Laurent Rosenthal, Entity Shielding and the Development of Business Forms: A Comparative Perspective 3. Unsecured loans vs. secured loans. www.fool.co.uk. 19.11.2009. http://www.fool.co.uk/loans/unsecured-loans-vs-secured-loans.aspx Read More