Liability Issues - Limited Liability Company - Essay Example

Liability Issues - Limited Liability Company Introduction This paper is based on a case analysis that is based on three friends who have graduated from the Computer Science Department of the Manchester Metropolitan University who desire to run a business that will buy and sell computers, computer software and accessories. The paper provides advice on how to incorporate their business and carry out their transactions in order to attain the best and optimal results. Types of Business Options There are three main types of businesses in the UK and these are: 1. Sole traders 2. Limited companies and 3. Business partnerships (Gov.uk, 2014) Under each of these three types of businesses there are sub-categories and specific types of business entities that can be formed and utilised to maintain the original legal expectations and focus of the founders of the entities. In this case though, it appears that the “sole trader” concept is not appropriate to these three individuals. This is because the sole trader is an individual who sets up an entity. Thus, whatever entity they set up will not be a sole trader. Thus, it could either be a limited liability company or a business partnership. A limited liability company is one in which the three individuals can form by pooling their resources in the form of acquiring shares in the company to be formed. The acquisition of shares creates a separate entity that will have a limited liability. On the other hand, if the three individuals in question decide to form a partnership, they will be a collection of individual sole traders who will contribute their resources according to a ratio. Based on the ratio of contributions, they will bear responsibility for issues that come up and also get to split profits on the basis of the ratio. However, partnerships often do not have a limited liability. Liability Issues The concept of “limited liability” is steeped in the idea that a firm is separated from its owners. This is steeped in the case of Salomon V Salomon (1897) in which a man created an entity with 20,007 shares. He took 20,001 shares and sold one share each to six of his family members. The business went into liquidation and the creditor sued for the recovery of money from the owner with 20,001 shares. The court held that once it was incorporated as a company, the liability was limited and the liability for issues and matters was only limited to the assets and shares owned by the business itself. Based on this, it is deduced that a business that has a limited liability is separate and different from its owners (James and Tilley, 2009). In doing this business, there are risks and there is a possibility that the computers of the firm could encounter some forms of risks. In that case, there is the need to protect the entity from having its liability spread from the organisation they will form to the owners of the business. Most partnerships (except limited liability partnerships) do not have a limited liability. In other words when there is a loss, the assets of the entity will be sold and if possible, the assets of the owners will be sold to defray the costs. On the other hand, companies (limited liability companies) have a limited liability and this implies that the owners have a separate economic existence from the company. Kind of Company/Partnership Possible A company is an entity that is registered as a corporate entity usually with a limited liability. It has a separate existence from the owners and it is owned through shares that are a stock of capital which is divided into equal units. Thus, the three friends could define a share capital of say £9,000 and divide it up at £1 each. Thus, each member could buy and control as much as he could. There are three types of companies. The first type, which is the most common is the company limited by guarantee and the company's directors and shareholders only back the organisation up to the amount of capital invested (Buckle and Thompson, 2012). Thus, in this case, in any issue where the company incurs a major loss, creditors and external loan owners can seize up to the £9,000 that has been put out as shares. On the other hand, there is a second type of company which is not recommended. This is the private unlimited company in which the directors or shareholders are liable for all debts when things go wrong (Davies, 2010). This can only be considered by the three friends if they are pursuing a business idea that they are very confident about. In such a situation that they will need to convince external investors, they can set up such an entity. However, aside that, it is not recommended. The third type of company is a public limited company which is a type of company that has it stocks floated on the London Stock Exchange. Such an entity requires very rigid rules like 9 or more directors and it should have a certain level of capital and comply with Security and Exchange Commission regulations which are very rigid. Clearly, these three friends' cannot set up such an entity because they do not have the level of reputation or stocks to be considered for membership on the London Stock Exchange. If they opt for partnerships, there are two main options and approaches they can use. The first option is the traditional partnership, the 1895 partnership which comes with the Deed of Partnership that shows the amount each party is investing and how proceeds will be shared. However, this form of partnership has no limited liability. On the other hand, there could be a Limited Liability Partnership in which the partners can limit their liability as required or expected. This will involve setting limits to what they will put in and how they will do it. For any form of partnership, the partners in the entity will be considered individuals and they will be taxed with personal income tax based on how much they make. This will include various taxes and processes that will be based on their personal earning and their personal income from the partnership on a yearly basis. Involvement in the Management of the Business If they choose to form a limited liability company, they will need a director and the other two can be shareholders. These three can take part in decision making and the review of decisions. They will take decisions and have a grip of affairs. Voting rights will be apportioned on the basis of shares that are available. This is in a clear and straightforward manner. On the other hand, partnerships are a bit blurred. Decisions are taken by the active partners and they run the entity. Sometimes, this leads to disputes as there are often grey areas that comes with so much disagreements. However, the deed of partnership lays down rules on how to bring on a new partner and how to deal with profits amongst others. Taxation Matters A company will attract a corporate tax which typically moves between 15% and 30%. This is a flat rate that is applied to the profit of the company before dividends can be shared. However, dividends can be taxed when they are paid to individual shareholders. In terms of a partnership though, there is a direct tax applied to the earnings of each partner. The share of profits that every partner makes is taxed as an individual income and the money is paid directly by the partner. Control over Membership of the Business Partners can define how new partners can be brought into the company. This is stated in the deed of partnership. However, private companies also have a similar control and they can agree only by resolution on when to take on a new partner. Thus, it is somewhat flexible for companies. Partnerships can change their membership by changing the deed of partnership to accept a new partner. This is somewhat rigid. Continuity: Death and Incapacity of Members On the death of a partner in a traditional 1895 partnership, there is a dissolution of the partnership and it must be reconstituted (Lustig, 2013). However, in the case of a limited liability partnership (LLP), the death of a partner does not dissolve the partnership, the executor of his will can take over the shares. Companies continue to exist if a member dies. This is because the shares are transferable and could be purchased by the other members or taken over by the shareholder's next in kin. Advice Since there are risks in the buying and selling of computer products, there is the need for the three friends to limit their liability. Thus, they must either form a private limited liability company or a limited liability partnership. For control and flexibility, it is recommended that they form a limited liability company to safeguard their assets, reduce taxes and also improve their credibility and recognition. References Buckle, M. and Thompson, J. (2012) The UK Financial System Manchester: Manchester University Press. Davies, P. L. (2010) Introduction to Company Law Oxford: Oxford University Press. Gov.Uk (2014) Choose a Legal Structure for a New Business [Online] Available at: https://www.gov.uk/business-legal-structures/overview Retrieved: February 15, 2014. James, O. and Tilley, F. (2009) Competitive Advantage in SMEs London: Wiley. Lustig, M. (2013) Business Continuation Insurance London: Relstone Publishing. Read More