Various Business Structures Are Available - Case Study Example

Title: Company Law Name: Course Code: Institution of Learning: Date of Submission: Dear Kylie and Imad Following your request on the advice regarding the type of company you should form, I have provided the following advice in order to assist you make a decision to implement it in formation of your new business. 1. Various business structures available There are a number of business structures that can be adopted by two people when they need to conduct a business. An example of a business structure available is general partnership. This is a business structure where two or more people are involved in proprietorship in a business. The partners agree on the amount of money to be contributed, labor and skill requirement of the business (Matthew, Granziera and Smith 2011). The profits, losses and management responsibilities are shared by the partners in the ration agreed among the partners. The partners also agree on the ration in which they share the liabilities of the company. If the parties involved in the business idea decide to become general partners, they will be entitled to equal rights of partners based on this structure of a business. There are various terms of partnerships as contained in the partnership agreement. Another business structure available for individuals who want to take part in a business is a Limited Partnership. This is a form of partnership where there are one or more general partners while there are one or more partners who are limited (Brunt 2003). Genera partners are those who manage the activities in a business and share the profits and losses incurred by the business. Limited partners are those who share the profits and losses of the business but this is based on the amount of investment they make in the company. Limited partners do not take part in the daily activities of running the business. In this case, the people involved in formulation of the business idea can decide whether they want to become limited partners if they want to use the Limited Partnership structure of a business. A third form of a business structure available for individuals interested in formation of a business is Limited Liability Partnership (LLP). This is similar to general partnership but the distinction is that a partner does not have personal liability as a result of negligence of another partner (Gibson and Fraser 2012). For instance, if a partner makes a mistake that results into the need for recovery of the loss, the partner that makes the mistake is liable for the recovery of the loss and no other partners are involved. Limited Liability Limited Partnership (LLLP) is another business structure that can be used by people who are interested in starting a business. It is a form of business that results when a Limited partnership chooses to become LLLP as a result of introduction of a statement that has an impact on the certificate of partnership (Groves 2005). It is business structure that has the potential to shield general partners from liability resulting when a LLLP is formed. In addition, those who want to form a business have the option of forming a corporation. This is a form of business where shareholders have particular rights, privileges and liabilities that extend beyond individual levels (Latimer 2011). In the process of conducting a business in a corporation, taxes may be incurred while other financial benefits might also be obtained. These benefits and liabilities have the potential to offset other considerations that include fees during licensing processes and ability of a shareholder to control assets of a company. The partners involved in a business idea have the option of forming a limited liability company (LLC). This is a company that can be formed by one or more individuals by writing an agreement. The agreement explains the manner in which the limited liability company is organized, such as strategy of management, assigning of interests and the share of profits and losses (Lindgren and Vermeesch 2011). Such a company is allowed to engage in a business undertaking for the purpose of profit generation or any other activity permitted within the law. A LLC provides a limited liability to the owners of the company for the liabilities of the business such as debts, judgments and the business has a separate entity and the income taxes are deducted from the personal contributions of shareholders. 2. Assumption of a company structure for the gelato business 2.1. Type of Company to be formulated The most suitable company to be formed in this case is a Limited Partnership. It is a business that can be organized by one or more persons who can invite others to join them in running the affairs of the business. The partners who start the business are called general partners and they are liable for debts, judgments and other liabilities associated with a limited partnership, with an exception of a case where a general partner is a corporation (Skene 2008). In order for the company to acquire a limited partnership status, one or more of the general partners must become a limited partner while the other partner becomes a general partner. The general partners in a limited partnership will be involved in sharing the profits of a business and indicate the amount of profit obtained in their income tax statements. The limited partners are not held liable for the liabilities of the business and do not take part in most operations of the business. This implies that partners are not individually responsible for the actions performed in the partnership or the actions of other partner, and are only accountable for their individual negligence or practice as determined by the partnership agreement (Schmulow et al 2013). Limited Partnership members’ interests are protected through charging order method. This results into creation of limits on debtor-partner or debtor-member share distribution and does not confer on the management rights. During the formation of a Limited Partnership, parties involved must file documents of registration to the relevant state office. They must indicate their LP status when involved in a business activity with other businesses, to create awareness that the company they are dealing with carries a limited liability (Vrachnas 2006). It is also required that any documentation issued to the public must carry an elaborate statement identifying the nature of the company and indicating that partners are limited or general. Thus, the company does not have an inherent agent authority to bind the company and they are considered as agents of the firm in the duties they perform for the company. 2.2. Types of obligations for each director When a limited Partnership is formed, the affairs of the business will be under the responsibility of directors appointed by the partners. There are certain roles that directors will be required to perform as well as responsibilities they must be aware of. These are illustrated below: 2.2.1. Powers of Directors When partners appoint directors, the appointed directors have certain powers which enable them perform their duties in management of the affairs of the company. Directors will participate in the management of activities in the company as well as exercising powers of the company (Zeller 1999). The extent to which they can exercise their powers is regulated by Companies Act of 2006 and the article of association for performance of activities of a limited company. For instance, in the articles of association, there are provisions and restrictions on the amount of funds that can be borrowed by a company. It is also required that the action of directors must be collective as a board and include the needs of the company. On the other hand, it is possible to delegate duties to individual directors when considered appropriate. However, most activities of a company will be carried out by individual directors. 2.2.2. Statutory Duties It is required that directors must be aware of their responsibilities to statutory duties in their positions as company directors. Furthermore, the company as a legal entity has to be held accountable for its statutory controls and the directors have the responsibility to ensure compliance with statutory controls (Brunt 2003). There are a number of duties set out for directors according to Companies Act 2006. Some of these duties include the following: Exercise their duties according to the constitution of the company as well as implement those powers for the intention for which they were meant. In the case that involved Howard Smith v Ampol Petroleum Limited; PC 1974, the court ruled that the decision made by the directors to award shares to their preferred bidder was made on the basis of self-interest, hence the court considered their action to be against the law. Ensure the success of the company is promoted for the benefit of members of the company Make independent judgment in the process of discharging their duties as directors Ensure they exercise care, show skills and diligence in the process of discharging their duties as directors Cooperate with the company in achieving the objectives of the company and should not demonstrate a conflict of interest while working for the company Avoiding accepting benefits from third parties in the process of discharging their duties as directors of the company. The above statutory duties are not seen in isolation and there are various forms of regulations to which directors are subject such as Insolvency Act 1986, Health and Safety Act 1986 among other acts. The secretary of the company as a chief administrative officer will perform the related to administration according to the Companies Act 1986. Since this company will be a private company, it is not required to appoint a secretary and the duties of the sectary will be performed by directors. Directors of a company are responsible for penalties if the company does not engage in its statutory duties (Gibson and Fraser 2012). On the other hand, they have the right to defend themselves on a reasonable ground to show that they had complied with statutory provisions in the process of discharging their duties. An example of a statutory responsibility for directors is that they have to prepare the accounts and provide a corresponding report of other directors. Directors also have the responsibility of ensuring full maintenance of accounting records of the company. For instance, they are required to take part in creation of a balance sheet, profit and loss account of the business for a particular financial period and present these statements to shareholders and keep records of accounts and director’s report with the Registrar of Companies. 2.2.3. Liabilities Directors of a company are subject to a number of personal liabilities, both civil and criminal for the actions they perform in the process of discharging their duties for the company. For instance, there are cases where they may be disqualified to work as directors of the company under the Disqualification Act 1986 and Insolvency Act 1986 which applies when directors are held personally liable for the debts incurred by a company. For instance, according to Companies Disqualification Act 1986, directors can be disqualified from participating in the activities of a business when a director has been considered guilty of three or more faults relating to compliance with companies legislation and lack of compliance with filing documents procedures with the Registrar of Companies, having a history of being a director in a company that had become insolvent in the past that makes him or her less suitable for management of the company or being found guilty of involvement in a fraudulent activity according to Insolvency Act 1986 (Groves 2005). In the case Good Year Tire Company v Rubber Company (2015) ICR, Good Year Tire Company was sued by the Rubber Company when its subsidiaries paid bribes so that they could land the deal of sales of tires in Kenya and Angola. The company was found to be in violation of Foreign Corrupt Practices Act (FCPA).In effect to this practice, Good Year was fined $16 million. 2.2.4. Responsibilities according to Insolvency Act 1986 During the process of conducting their activities, directors are required to exercise care and effort aimed at ensuring the success of a business and their actions should not contribute to insolvency of a business. Insolvency Act 1986 states the responsibilities of directors in the event that a company is found to be insolvent. For instance, if the director had the knowledge that a company would become insolvent in the near future and there was the need to avoid liquidation, the court may declare that the director contributes personally to the assets of the company (Latimer 2011). On the other hand, the director cannot be made personally liable if reasonable steps were taken to minimize the possible loss prior to liquidation. In the case of Morphites v Bernasconi [2003], it was ruled that there was no fraud when a company director resigned and transferred assets and not liabilities to the new company. Another responsibility of directors according to Insolvency Act 1986 is that the directors may be required to contribute to the assets of the company if, during the process of winding up a business, a director knew or involved in a fraudulent activity that resulted into insolvency of the company. 2.2.5. Responsibilities according to Health and Safety at Work 1974 It is the duties and responsibilities of directors and employers to ensure health and safety is enhanced in a company (Lindgren and Vermeesch 2011). If there is a breach of health a safety requirement while a director has the knowledge about the neglect of the responsibility to ensure safety, the director can be subject to prosecution under section 37 of the Health and Safety at Works Act 1974. The directors are subject to fines and in some cases imprisonment. Furthermore, the Company Directors Disqualification Act 1986, section 2 subsection 1 states that the court is empowered to disqualify a person convicted of an offence related to the management of a company’s affairs. These management offences include lack of compliance to health and safety requirements in the process of performing their duties as directors (Skene 2008). The court has the discretion to exercise its powers without additional investigation or evidence. Directors can also be held liable for other associated offences that include negligence or manslaughter. On the basis of the common law, gross negligence manslaughter is evident when officers in a particular company are involved in neglect of tasks that result into manslaughter or death of an employee. 2.3. Whether Kylie and Imad can become an employee of the company It is possible for one of the partners in a business to become an employee of the business but not all the partners. This is because if all the partners become employees of the business, it can lose its identity as a limited partnership. Thus, one partner can become a general partner while another partner becomes a limited partner. The general partner can take part in running of activities of the business and has the right to get benefits such as management benefits and other benefits associated with the area of operation (Schmulow et al. 2013). The limited partner cannot take part in the running of the business thus the benefits of such a partner are only contributed by the shares of the partner in the company. However, the partner that becomes an employee of the company must relinquish some employment rights so that the rights as a shareholder can be granted. As a result, partners in this case can agree on who should become a general partner and who should become a limited partner so that the general partner can also work as an employee of the company. Conclusion This paper is a summary of ownership advice designed to assist Kylie and Imad make a decision whether to use a Limited partnership type of a business in the process of operating their gelato bar. It is assumed that the proposed type of business will ensure they are able to manage the affairs of the business and success will be achieved in terms of profitability and sustainability of the business. 3. References Alderton, Matthew, Michael Granziera and Martin Smith, Judicial Review and Jurisdictional Errors: The Recent Migration Jurisprudence of the High Court of Australia (2011) 18(3) Australian Journal of Administraive Law 138 Brunt, Maureen. Economic Essays on Australian and New Zealand Competition Law. (The Hague [u.a.: Kluwer Law Internat, 2003). 46. Gibson, Andy, and Douglas Fraser. Business Law. (Frenchs Forest, N.S.W: Pearson Australia, 2012) 67. Groves, Matthew. Law and Government in Australia.(Sydney: Federation Press, 2005) 79. Print. Latimer, Paul S. Australian Business Law 2012. (North Ryde, N.S.W: CCH Australia, 2011) 15. Print. Lindgren, K E, and R B. Vermeesch. Vermeesch and Lindgren's Business Law of Australia. (Chatswood, N.S.W: LexisNexis Butterworths, 2011) 65. Print. Skene, Loane. Law and Medical Practice: Rights, Duties, Claims and Defences. (Chatswood, N.S.W: LexisNexis Butterworths, 2008) 90. Print. Schmulow, Andy, Andy Gibson, and Douglas Fraser. Blo1105 Business Law. , (2013) 42. Print. Vrachnas, John. Migration and Refugee Law in Australia: Commentary and Materials. Cambridge: (Cambridge University Press, 2006) 37. Print. Zeller, Bruno. International Commercial Law for Business. (Leichhardt, N.S.W: Federation Press, 1999) 364. Print. Cases Good Year Tire Company v Rubber Company (2015) ICR. http://www.sec.gov/news/pressrelease/2015-38.html#.VSUfGtyUdaY Howard Smith v Ampol Petroleum Limited; PC 1974. http://swarb.co.uk/howard-smith-limited-v-ampol-petroleum-limited-pc-1974/ Morphites v Bernasconi [2003] EWCA Civ 289. http://www.londoninternational.ac.uk/sites/default/files/corporate_finance_management_issues.pdf Read More