Partnership and Private Limited Companies - Essay Example

PARTNERSHIP AND PRIVATE LIMITED COMPANIES PARTNERSHIP AND PRIVATE LIMITED COMPANIES Introduction There are several forms of business units that a person can start. The form of business unit chosen depends on the purpose and nature of the enterprise. In this case, the most appropriate form is the one that is ideal for the scale of operation and the types of goods and services dealt with. Some of the forms of business units include sole proprietorship, partnership, parastatals, limited companies, corporations and cooperatives among others. These forms of business units have unique features that distinguish them from the rest. This essay discusses the main distinguishing features between partnership and private limited companies. In analyzing the differences, the article will high regard features such as the formation, registration, membership, liabilities, legal status, management and continuity. In addition, the essay will highlight some of the landmark rulings that have strengthened the distinction features of partnership and private limited companies. Formation One of the most noteworthy distinctions between a partnership and private limited businesses is their formation. A partnership is created by at least two individuals called partners. It can be formed without legal formalities or hefty paperwork that requires to be filed with the state department. It can minimally be an informal concurrence between two individuals noted by just shaking hands. In other words, a partnership organization can also be registered with the registrar of businesses as a business unit owned by two or more parties. In this case, very few formalities are observed and hence the procedure involves less documentation procedure. The minimum number of partners is two while the maximum number is ten partners in banking and insurance concerns. Other businesses have a maximum of twenty partners. In contrast, a private limited business is a formal agreement that is deposited with the registrar of limited companies. In this case, incorporation papers are required to be filed with the relevant department in the United Kingdom. When formulating a limited company, the parties involved are required to make several agreements in the presence of their legal representatives. In this case, compliant forms are filed that stipulate the ratio of ownership of the company. It is paramount to note that the formation procedure and documentation for private limited companies in lengthy compared to the partnership. in terms of membership, a limited company can be started by a minimum of two shareholders while the maximum can be up to fifty shareholders. Tulk v Moxhay case of 1848 Concerning the formation of the partnership and private companies, Blythe (2006) cites the Tulk v Moxhay case of 1848 where Tulk hat sought legal redress against Moxhay in the United Kingdom. In the case, Tulk was challenging the legality of their company that had started as a partnership business. In the ruling the judge held that the Tulk and Moxhay partnership seized to exist once the Tulk, Moxhay and Sons was legally formed on January 1844. Legal Status A private limited company is a legal entity that is separate from the personal being of its shareholders, members, staff or the managements. In this case, members and shareholders only serve as representatives of the entity but not as a part of it. Gupta (2010) declares that a limited company is a separate legal entity that can, sue, be sued, own property and get legal representation in case of court litigation. As such, the company has all characteristics of an artificial person. This, therefore, implies that debtors and creditors of the limited company cannot pursue against members in their personal capacity. On the other hand, partnership does not have a separate legal entity from its members. As such, the partnership business is considered as a personal property that not a business one. In this case, Gupta (2010) declares that all partnership are vested personally on the owners. Therefore, creditors can pursue the owner at personal level for their money. Additionally, a partnership business cannot be sued since it is not recognized as a legal artificial person. As such, the owners are sued on behalf of the business. Unlike private limited company, properties cannot be registered in the name of partnership business. The case of Salomon vs. Salomon The principle of separate legal entity originated from this case The legal facts in this case disclosed that Mr. Salomon incorporated the company in which he and members of his family were the only shareholders. The issue arises when the company fails but the assets are no sufficient to pay both Mr. Salomon and the creditors. Accordingly, the creditors raised a litigation whereby they argued that Mr. Salomon should not be paid payment from the company’s assets because he exercised the control in the company. In the ruling, the judge declared that there exists a clear boundary between Mr. Salomon and the company he manages. As such, the company assets should be distributed so that Mr. Salomon receives payment for his debentures and the creditor should be paid off appropriately. The ruling strengthened the aspect of separate legal entity in Private Corporation in that the entity is legally separate for its owners and managements, (Gupta 2010, pg. 761) Liabilities According to Hollensen (2011), business liability is the total amount of money owed to third parties. As such, they include salaries, creditors, tax due, bills and interests among others. Businesses often incur debts so as to raise money for its operations. Both limited companies and partnership land in debts. In partnership, the owner have unlimited liability. This implies that if the business liabilities exceed the amount of capital raised in the partnership, the partners are required by the law to take up the debt themselves. In this case, if the partnership assets are not sufficient to offset a debt, the partner’s personal assets will be auctioned to pay the loan. On the other hand, members and shareholders of limited private companies have limited liability. In this case, Keegan & Green (2005) asserts that the business asset and the capital raised by the shareholders are sufficient to settle the company debts. This means shareholders only have liability up to the amount of capital they put into the business. In the case of Salomon vs. Salomon, the appellate court held that Mr. Salomon is the company creditor and he is entitled to full payment for the value of his debenture. Though he was not only the main shareholder, but also the managing director, the court held that the liabilities of the company are only limited to the amount of capital available. In this Mr. Salomon’s payment for debenture should not be held for payment of other creditors, (Hollensen 2011). Statutory obligations Partnership businesses are registered and governed under the Partnership Act of 1932 and the its subsequent amendments. In this case, all activities that can be carried out by the partnership are stipulated. In addition, duties and responsibility that each partner is supposed to discharge are mentioned. The Partnership Act of 1932 establishes a vital document, partnership deed that stipulates the relationship between the partners and the internal organization and management of the association. However, Kurtz and Boone (2011) confirm that the partnership deed comes to play in the absence of formal partnership agreement deposited with the relevant department. According to the Act, any of the partners can act on behalf of the partnership. In this case, all action and decisions made by one of the partners is taken to be the partnership decision and as such, the implications of such decisions shall be upon the partnership entity. According to Kotler, 2013, a partner is an agent of the business and hence their actions cannot be distinguished as either for personal purposes or for the sake of the firm. On the other hand, private limited companies are registered and governed under the Company Act of 1956 and its subsequent amendments. According to the act, a private limited company is obligated to keeping correct books of accounts such the balanced sheet and trading, profit and loss accounts. In additional, limited companies must undertake periodical audit from registered audit firms. In the case of members and shareholders, none of them is allowed to act on behalf of the company. According to Kotler (2013), shareholders are not agents for the company and hence their actions cannot be taken to be on behalf of the company. It is important to note that unlike the partnership where partnership deed can be substituted with a formal agreement, private limited companied has two indispensible documents; article of association and memorandum of association. These vital documents are prepared and duly filled before they are deposited with the registrar of companies. Martin liberty vs. Daniel Liberty This is a significant ruling that set a widely applicable judicial precedent in the United Kingdom. The two brothers formed themselves in to a limited company in the year 1877. In the article of association, it was aforementioned that Martin Liberty owned 99% of the shares while his brother the rest. During dissolution, Daniel claimed that the 99:1 ratio of ownership was arbitrary as they had contributed equal amount of money to buy the company assets. Though Daniel was able to produce documentation evidence that they each contributed 50% of the asset, the appellate judge held that the article of association was the only legal document that tells the percentage ownership of each shareholder, Kotler (2013). Winding Up In case of partnership, there are no legal formalities needed to end the partnership. Ganesan (2012) states that a partnership can easily be dissolved though a mare agreement between the partners. He adds that this form of business can seize existing when partners withdraw leaving less than one of them. However, the court can order the closure of a partnership business if there is sufficient evidence that the business is carrying out illegal activities. In this case, the partnership will seize to exist as a result of court injunction. Conversely, a limited company can only stop existing through a court order. In this case, any of the shareholders can institute a case in the legal system seeking court order to dissolve the company. If the court opines that there is a rational ground for dissolving the company, a liquidator will be selected to manage the liquidation process. The liquidation firm will pay off the company creditors and then distribute excess amount among the shareholders. It is essential to note that the limited company continues to exist even if a shareholder dies or is incapacitated. Conclusion The article has clearly shown that there exists a clear boundary between partnership firms and private limited companies. In addition, the essay has cited various legal judgments that added a lot of emphasis on the aforementioned distinctions. It is important to note that the two forms of business units have their own advantages and drawbacks. Partnership is preferred by persons who are unable to go through the rigorous documentation procedure while limited companies are good for those requiring separate legal businesses with limited liabilities. . Reference List Blythe, J 2006, Principles & practice of management, Thomson, London. Ganesan, S 2012, Handbook of corporation organization, Edward Elgar, Cheltenham, U.K. Gupta, K 2010. for business partners, Himalaya Pub, House, Mumbai, India. Hollensen, S 2011, a decision-oriented approach for companies, 5th edn, Pearson Education, Harlow, England. Keegan, WJ, & Green, MC 2005, Global marketing, 4th edn, NJ, Pearson/Prentice Hall, Upper Saddle River. Kotler, P 2013, Principles of marketing, 9th Canadian edn, Pearson Canada, Toronto. Kurtz, DL & Boone, LE 2011, Contemporary business, 14th edn, NJ, Wiley, Hoboken. Read More