The Benefits of Operating a Private Limited Company - Essay Example

The Law of Persons By + The benefits of operating a Private Limited Company The current partners should expand their business by changing it into a Private Limited Company. They desire to retain control of the company especially when it comes to the distribution of shares. They would like to have final approval on who owns shares. These specifications suggest that a Private Limited Company is the best option. This is because as compared a Public Limited Company, it adequately enables the current partners’ desire for control. In a Private Limited there is control on who can own shares in the company. These shares are not open to the public and current shareholders maintain the right to allow for this to happen. This is different from Public companies where the shares are offered on a public stock exchange (Beatty & Samuelson, 2007). Another advantage would be that to form a Private Limited Company the minimum requirement is to have members with an upper limit of 50. In contrast, public Companies require a minimum of seven members with an unlimited upper limit. They are currently three partners and this is enough to form a Private Limited Company. Changing the business to a Private Limited Company enables the business to be able to source for funds from a wider scope than before. They can still obtain funds from family and friends, but now come into consideration from financial institutions. Companies are able to obtain better loans as they tend to have better credit scores when compared with other forms of business like partnerships. This is similar to Public Companies. The main difference is that Public Companies can raise more funds since their books of account are open to the public. This increases the chances of getting debt financing. In forming a company they will enjoy the benefits of having limited liability, Salomon vs. A. Salomon & Co Ltd (1897). A limited company is limited to the extent of the shares held by each individual shareholder. In the case the company winds up, the only claim creditors can have is to the extent of unpaid up share capital. This is because in law, a company is a legal entity in its own right and is separate from the shareholders (Shtein & Lindgren, 1984). This also enables a continued existence even with the incapacitation of a shareholder (Adams, 2008). In the previous partnership, any event leading to the incapacitation of a single shareholder would have led to winding up of the business. In case they would like to expand further, the upper limit of 50 members enables the company to source for more funds by allowing interested members to subscribe. They cannot offer these shares to the public on a stock exchange. This is only done through a private agreement between buyer and seller. They can maintain privacy within the company, as they do not have to publish their accounts like Public Limited Companies. This enables the shareholders to keep their discretion. They will also benefit from a recognised formal structure. A company has a prescribed set-up that will instil confidence in the people it deals with. A bank will be more likely to give out a loan as there will be the assurance of structure. Partnerships and Sole Proprietorships rely to a great extent on the partners and proprietor, respectively (Jones, 2011). A company on the hand has a set-up that takes away this over-reliance. This boosts confidence in the way other businesses will interact with the company. Choice of Business Name As a partnership, ‘IN ANY EVENT’ did not have name protection. In setting up a private company there is protection of business name since this name is registered with the Companies House (Mahaffy, 2011). There are restrictions to choice of business name. This choice of name should not imply a connection with the Crown or any part of Government whether local or national as well any public authority that has been specified (Keenan, 2007). A good example would be the name, ‘Her Majesty’s Car Wash’. This implies that the car wash services the cars of the royal family or has their patronage. This would be misleading to the public and be a slanted indicator of quality when in reality it may be different from this. The choice of name should also not imply words that constitute a crime, for example, ‘Terrorist Tailors’. This contains the word terrorist and it relates to the crime of ‘terror’. This would be highly inappropriate for name choice of a company. Another inappropriate example is ‘Murder Bakeries’. This contains the word ‘murder’ which is also an offence and it renders the choice invalid. The name should not include words that are considered to be sensitive in nature or expressions that are found in regulations. These are words that suggest a certain status, a particular function or pre-eminence in business. The use of these words is regulated and cannot be used without permission as they may be misleading to the public. For example use of the word ‘international’ in a scenario such as ‘INANY EVENT INTERNATIONAL LIMITED COMPANY’. For this name to be accepted there should be justification for use of the word ‘international’. There must be evidence that a major part of the business’ activities is situated abroad. The basis for evaluating this is if the company trades in two countries overseas or more. The choice of name should also not be offensive. It should not contain racial slurs, demeaning language and any word that would be considered abhorrent in current society. Lastly, the choice of name should not be too similar to a company that already has its name registered in the index of names at the Companies House (MacIntyre, 2007). The name choice should be unique and original. Punctuation marks will not count in determining the originality of the name. If at the Companies House there already exists the name ‘IN ANY EVENT LTD’ then ‘IN ANY EVENT! – LTD’ would be considered as the same name (Jensen & Bulpitt, 2006). This provision is to prevent confusion among the public on the identity of a company. It also enables a company to preserve the goodwill garnered during its activities. The exception to this provision occurs in two scenarios. This is when the proposed company is to be a part of the group that the existing company is in. secondly is when the existing company gives consent for the proposed company to use the proposed name. Methods of raising Business Capital In raising capital for a company the two main forms are debt and equity financing. Since the current partners want to raise capital without losing control, debt financing would be the better option. To maintain control the company cannot issue ordinary shares. These shares come with voting rights, and it is these shareholders who determine the board of directors and in extension the company policy. Preference shares on the other hand do not have voting rights and are a good choice as the current partners want to maintain control. The key is in voting rights. This is the main difference when it comes to ownership(MacIntyre, 2007). They should reserve the ordinary shares for the persons they would wish to share control with. Issuing of these shares is also another point of note. Since this is not a Public Company, the sale of shares is mainly done privately. They cannot advertise them and it is usually on a personal level. This means that persons who will subscribe for the shares are usually close to the company. They could also look to debt financing. In terms of debt financing, control is maintained with the shareholders. The debtors only have a claim with regards to their loan and cannot direct policy. This will leave the ordinary shareholders in control. Apart from issuance of debentures, the company can also undertake bank financing. This means that apart from friends and family, the scope for borrowing has now widened. The company can now gain access to larger funding and expand its operations further. All forms of debt however have their advantages and disadvantages. The debt financing has a claim on the company’s assets and must be regularly paid(Keenan, 2007). Defaulting could result in winding up of the company in extreme cases. Preference shares also have a claim but dividend can be accumulated and is not immediately. Dividend on ordinary shares can be defaulted and is not necessarily payable. Structure of the Company In the case of incorporation of ‘IN ANY EVENT’, the initial structure will be quite simple. Apart from the company’s registered office, among other things included in the Articles of Association, are the board of directors. The first three shareholders will double up as directors and in that instance they will have full control of the company. A lot of private companies operate like partnerships because the people who run it are also the owners of these companies (Jasper, 2007). This is normally done without including outsiders. Depending on the content of the Articles of Association a director does not have to hold shares. A shareholder also does not have the right to be a director. This can only be enforced unless it is stated in the Articles of Association(Keenan, 2007). A problem with having the shareholders as the directors is the confusion that follows. During incorporation the mind-set will be that of a partnership and they will consider themselves partners in this case. The issue here is that according to the Company Law, there are some decisions to be made by directors and some by shareholders. If they are one and the same then confusion may ensue. This is clearer in instances where the consent of the shareholders is needed for the directors to make a decision. The ambiguity that follows is the main problem. Control is majorly maintained even in this case. As the company grows, they may decide to appoint directors headed by a Chairperson. With the need for division of labour and specialization, the shareholders may need to do this so that they can get specialized expertise and an outside perspective to improve business. They will still maintain control as they will be the ones holding the ordinary shares. This enables them to control the operations of the company through the directors they appoint(MacIntyre, 2007). A big problem with directors is aligning their interest with those of the shareholders. To counter this, they can be offered shares within the company. This will ensure that they focus their energy on wealth maximization instead as this will also benefit them(Keenan, 2007). As per legal conditions, the minimum number of shareholders required is 2. There has to be at least one director and this has to be a real person (Kelly & Holmes, 2005). The director oversees the day-to-day running of the business and manages operations. A Company Secretary is not a requirement. This is unlike in Public Companies. Research Trail This research was mainly aided by the references provided in the essay question document. The books provided invaluable assistance and were more than adequate in the information they contained. The books Introduction to Business Law by Jones was particularly helpful in determining the advantages of a Private Limited Company. It helped determine as well the type of company that was required by the case study. To supplement what was not in this book, Law for Business Students by Adams sufficed. The language in this book helped aid the understanding of concepts and proved very useful. The books Business Law by Keenan and Riches and Essentials of Business Law by MacIntyre were important answering Sections 2 through to 4. They added a lot of information on the choices of business name, detailing the process normally undertaken. They were also beneficial in securing notes on financing available to a private company. They also contained good work on the rights of shares and which financed maintained controlling decisions. Business Law by Keenan and riches laid out structure of the company in a simple and clear manner that was easy to understand. This was helpful in adequately answering the question at hand. Bibliography Adams, A. 2008.Law for business students (5th ed.). Harlow, England: Pearson Longman. Beatty, J. F., & Samuelson, S. S. (2007). Introduction to business law (2nd ed.). Mason, OH: Thomson/West. Jasper, M. C. (2007). How to form a limited liability company. New York: Oceana. Jensen, J. A., Radford, B., & Bulpitt, S. (2006). Tips and traps when incorporating your business. New York: McGraw-Hill. Jones, L. 2011. Introduction to business law. Oxford: Oxford University Press. Keenan, D. J., & Riches, S. 2007. 6. Business law (8th ed., p. 90). Harlow: Pearson Longman. Kelly, D., & Holmes, A. E. (2005). Business law (5th ed.). London: Cavendish. Mahaffy, A. P. (2011). The private company: a legal and business guide for owners and managers.. Toronto: Carswell. MacIntyre, E. 2007.Essentials of business law. Harlow: Pearson Longman. Shtein, B. J., & Lindgren, K. E. (1984). An introduction to business law (4th ed.). Sydney: Law Book Co.. Read More