UK Business Law - Case Study Example

UK business law Name Course Lecture Date Introduction The conversion of a partnership to a company limited by shares is a wise move. Former partners can enjoy various legal advantages that come with operating a business as a limited company. The main advantage of doing business as a limited company is the limited liability status of a company. In this case, the liability of the two partners (now shareholders) will be limited to the capital contribution in the salon business. The limited liability of a company arises from the fact that the law views it as a separate legal entity from its owners (Companies Act 2006, section 2; Salomon v A Salomon & Co Ltd [1897] AC 22). In contrast, if the two continue operating their salon business as a partnership they risk their personal property being sold off to repay any debts the Salons may accumulate in the future. The most obvious choice for Belinda and Jack is to convert their business into a proprietary or private limited company (Companies Act 2006, section 2). This is a variation of a company limited by shares where the liability of shareholders remains limited to their capital contribution (Harris 2000). A private limited company is distinct from a public company as trading of shares is restricted. The restrictions on trading of shares can be both an advantage and disadvantage to Jack and Belinda. As an advantage, the restriction allows the two shareholders to retain control of the business they have built to its present success. However, the private company they will form cannot raise capital by advertising shares publicly (Companies Act 2006, section 755). This is a major problem as the Jack’s and Belinda’s motivation for converting their partnership to a company is expansion. Set up formalities Jack and Belinda must comply with a number of legal formalities before commencing trading as a company. They must furnish the registrar of companies with a unique business name that they will use to refer to their company (Companies Act 2006, section 66). Tax implication Unlike a partnership, the companies are required to pay incorporation tax on the profits it makes in any given year (Income and Corporation Taxes Act 1988). Company income suffers the double taxation effect as profits and dividends paid out to shareholders are taxed separately. However, the fact that profits reinvested in the company are not accessed for tax compensates for the double taxation affecting company income. Continuity and transfer of ownership Creditors prefer to deal with a business entity where their can recover their debts regardless of whether the owners are alive or dead. If Jack and Belinda decide to operate their business as a limited company their credit risk will be considered lower by creditors and financiers. Consequently, it will be easier for them to access credit and loan and the associated cost of borrowing will go down (Dignam and Hicks 2011). In contrast, the partnership’s life will be limited to the life of Belinda and Jack; if any of the partners dies then the business dies with them. Unlike a partnership it is easy for shareholders in companies to transfer their ownership to other parties. For public limited company’s shares are freely traded while shareholders in private companies are required to obtain the consent of other shareholders before transferring ownership. Management and Control The management and control of a limited company is through directors who are elected by the shareholders (Companies Act 2006, section 155). In private limited companies it is common for shareholders to be also directors and they can appoint other directors. The running of a company through directors has a number disadvantage and disadvantages to business owners. Although, directors are ideally supposed to run the company according to shareholder wishes this is not always the case. This status of affair may see Belinda and Jack lose effective control over the Salon business. For example, directors will decide the amount of dividends Jack and Belinda should be paid from the company’s profits (Companies Act 2006, section 102). In contrast, Jack and Belinda would have the benefit of paying themselves as much as they wished if they continued to run the business as a partnership. Considering the fact that the business and the owners are separate legal entity, directors are first and foremost responsible for ensuring continuity and prosperity of the company over the wishes of shareholders to share as much profits as possible from the company each year (Companies Act 2006, section 171). As seen earlier the legal principle considering a business a separate legal entity from its shareholders gives rise to limited liability (Vermeulen 2003). Liability for the company’s debt is limited to the share capital contributed and any uncalled share capital. However in some cases courts choose to ignore the limited liability of companies and find directors and members personally liable for the company’s debts. In legal terms this is referred as the act of “ piercing or lifting the corporate veil” Piercing the Corporate Veil According to Ramsay and Noakes courts are ready to overlook the limited liability of companies in the following circumstances: i. Agency as seen in Brewarrana v Commissioner of Highways (1973) 4 SASR 476, at 480 ii. Fraud; Re Edelsten iii. Sham or façade; iv. Insolvent trading Contract of Employment Terms to be covered in a Contract of employment Workers in the UK are entitled to some minimum rights and obligations, for example employers should provide a safe working environment. On the other hand employees are under obligation not to reveal the business trade secrets. This right and obligations form implied terms in contracts but in most cases it is better to have them clearly written down (Turner 2013). In addition, an employer can add additional terms in the contract that enable him to have better control over his workers. For example, an employment contract may contain a term where the employee agrees to get paid instead of working out a notice period in case of termination of employment. In contemporary businesses intellectual property rights are critical for the survival of businesses and therefore employment contracts must contain conventions where employees agree to protect the company’s intellectual property such as patents or trade secrets. The rights of employees should be given precedence when making a contract of employment. According to Turner (2013), employees in the UK have a number of unalienable statutory rights; Right to paid Time off; Employment Right Act 1996 s 55 Right to continued employment despite transfer of a trade or business; Employment Right Act 1996 s 94 (1) Right not to be unfairly dismissed; Employment Right Act 1996 s 94 (1) Right for written reasons for dismissal (upon request)  Right to a written statement of terms and conditions of employment; Employment Right Act s1-7 Under section 31 of the National Minimum Wage Act 1998 employee has a right to minimum wage Sunday shop working right; Employment Right Act 1996 S 42 Right to access to Stakeholder Pensions Right to request flexible working. Employers in the UK are required to provide workers with a statutory written statement of employment which sets most of the terms of employment between an employee and employer. Therefore, the statutory written statement of employment sets out the terms that must be included in an employment contract. According to Towers (2004) an employment contract must contain the following terms; Terms laying out the date of employment commencement Terms outlining how pay will be calculated and the intervals when wages or salaries will be paid out (i,e monthly, daily, weekly or other agreed intervals) The number of hours an employee is expected to work. These include specifications of normal working hours. Terms setting out entitlement to holidays including public holidays and remuneration during public holidays. Entitlement to pay during periods of sickness and/or injury. The length of notice an employee is entitled to in case the employer decides to terminate the employment contract. Severance pay the employee is entitled to in case the employer decides to terminate the contract of employment. A brief job description and title of the employee job. The employee place(s) of work and authorization to work in various place; addresses to these locations should be provided in the contract of employment. Whether the employer allows the employee to participate in collective bargaining Disciplinary rules that are to apply to the employee if disciplinary issues arise Disciplinary procedure to apply to various disciplinary issues Authorities and procedures for employers to lodge dissatisfaction with disciplinary decisions. Employees pension benefits and scheme arrangement made by employers Terms relating to maternity and parental leave Any terms relating to pensions and pension schemes and whether there is a contracting out certificate in force in respect of his employment for pension purposes. Conclusion Jack and Belinda must come up with a conclusive contract of employment that covers all the issues that may arise during the employee’s cause of employment. It must delineate the employee and employers rights in their interactions. Bibliography Brewarrana v Commissioner of Highways (1973) 4 SASR 476, at 480 Companies Act 2006 Dignam, AJ & Hicks, A 2011, Hicks and Goo's Cases and Materials on Company Law. Oxford University Press. Employment Right Act 1996 Harris, R 2000, Industrializing English law: entrepreneurship and business organization, 1720-1844 (Cambridge University Press, 2000). J Farrar, J 1990, ‘Fraud, Fairness and Piercing the Corporate Veil’ Canadian Business Law Journal , Vol 16, pp. 474-478. Minimum Wage Act 1998 Re Edelsten ex parte Donnelly (Unreported, Federal Court, Northrop J, 11 September 1992) Salomon v A Salomon & Co Ltd [1897] AC 22 Sealy, L & Worthington, S 2007, Cases and materials in company law, Oxford University, Oxford Towers, B 2004, The handbook of employment relations: law & practice, Kogan Page, London Turner, C 2013, Unlocking Employment Law, Routledge, London Vermeulen, EP 2003, The evolution of legal business forms in Europe and the United States: venture capital, joint venture and partnership structures, Kluwer Law International, 2003, New York. Read More