Emmas Salon in Hatford - Coursework Example

LLB Company Law work Question 2009 Emma's Salon in Hatford Introduction When setting up a business, individuals have several options on how they want to form their organization. In other words, there are a number of forms of organization, namely, sole proprietorship, partnership, private limited company and public limited company. As individuals move on the list, the forms get more complex. Meaning, sole proprietorship is the least complex while public limited company the most. Complexity varies with the amount of paperwork, articles, responsibilities, and other things. This paper will examine the case study based on Emma's hair salon. In answering the questions of the case, the paper will first present a thorough view of the form of private limited companies in order to advise Emma. She will be told about the advantages and disadvantages of them, and why it should be opted over partnership. The second part of this paper will advise Chris and David on whether they can go against the articles written down in their Articles of Association. If they can, then how they can go about it and if not, then what other options and alternatives they have will be considered. Discussion Private limited companies are often compared with either partnership which is one step behind or public limited companies which are a step forward. This means that if there are two or more people starting a company, they can either opt for partnership or a private limited company. They can also form a public limited company directly but it is ideal and normal to move to a plc from a private limited. Companies are usually started as private limited and then are gone public or 'floated' (Bendrey et al, 2004). Therefore, throughout the first section, Emma will be advised keeping in mind the advantages of private limited companies over partnerships public limited companies . Private Limited Company A private limited company or Ltd. is a form of organization which is a legal entity. It is not only a legal entity but a separate legal entity. This means that company is separate from the shareholders. In other words, the company exists in its own rights and not through the shareholder (Carysforth, 2004). This is further explained as the concept of Limited Liability which will be discussed in detail later. Furthermore, the owners of the company are also the shareholders of the company (Carysforth, 2004). This means that in order to become owners, shares of the company need to be owned. The amount of shares held in the company can change with time and so can the number of shareholders, with no limit to them (Carysforth, 2009). Shares are sold to raise capital in a Ltd. The name suggests that shares are only sold privately and are not listed on the stock exchange. In order for a company to become a private limited company, many different legal requirements have to be met. Each of the points mentioned above will be discussed in more detail in the following sections. Legal Requirements In setting up a private limited company, Emma, Chris and David must understand that there are more legal requirements than partnership and lesser requirements and paperwork than public limited companies. In becoming a private limited company, the following legal requirements have to be met (Carysforth, 2004): A Memorandum of Association which has details about the company - its name, address, owners, liability, activities, objectives, etc - and an Articles of Associations that establishes how the company will be run by the directors must be produced before a company can become a limited one. There must be at least two people starting the company. In the case of this salon, this requirement is met because there are three partners. However, what is important to understand is that each owner must own shares. They can also add more people as owners by selling shares to them. The specifications which also include the Articles and Memorandum of Associations must be registered with the Registrar of Companies. The Registrar ensures the complete formation of a private limited company so that it can begin trading. Emma, Chris and David must realize that registration involves a fee. After the Registrar acknowledges and accepts the details provided to him, a Certificate of Incorporation will be given to Emma and company so that they can start operating their salon. Finally, each year private limited companies are expected to send the copy of annual their accounts to a Companies House where the general public can view them after submitting an application and a fee. Separate Legal Identity Private limited companies are legal entities that exist on their own, and not on the shareholders. This means that the shareholders and management are separate from the company and vice versa. In other words, in the eyes of law, the company is treated like a separate person with its own rights and liabilities (Wiss, 2008). Therefore, if somehow it owes to people so much that it becomes insolvent, it is responsible for this insolvency it self and will go down alone because the shareholders have nothing to do with it. This gives rise to the concept of limited liability discussed hereunder. Limited Liability One of the biggest advantages over partnership that Emma, Chris and David could experience is the leverage, in terms of protection, that incorporations provide. The shareholders are only liable for the amount that is not paid on their shares or the amount that they originally invested in the business. Many private limited companies issue shares as 'fully paid' (Tutor2u, 2009). In such a situation, if a company goes bankrupt or if something else goes unplanned, a shareholder's only loss will be the value of the shares and any cash loaned to the company. They will not personally be liable or their personal cash or assets will not be risked in such a situation. Their liability is only limited to the capital that they have invested in the company (Bendrey et al, 2004). However, Emma, Chris and David must understand that limited liability is not relevant to fraud. All of these partners have a legal responsibility to not bring upon themselves any liabilities in the salon that they think can not be paid by the salon. If any creditor who has given loan to the salon loses money because of a fraudulent act by the directors, then Emma, Chris or David will not be protected by limited liability. Shares and Share Capital In a limited company, shares are issued to others so that capital can be raised. Issuing shares is a form of getting investment from people. As a result, more capital can be raised if compared to a partnership form of organization. There is no limit to the number of shares that can be issued. However, the shares must be sold only to private contacts such as friends, family, friends of friends, etc through private channels. So, the salon will not be able to get a listing on the London Stock Exchange while it is a private limited company. Also, shares cannot be sold to members unless all three; Emma, Chris and David, agree on it unanimously. Moreover, shares can be issued differently; they can be issued of profits or otherwise (Carysforth, 2004). Owners and Shareholders There must be at least two owners. However, others believe that a private limited company can be formed with just one shareholder also, under the 1992 Twelfth Company Law Directive of the European Union (Moynihan & Titley, 2001). To this end, Emma and company have nothing to worry about because they already are three. Furthermore, the number of shareholders can be increased without there being an upper limit to them. There is no maximum number of shareholders that a Ltd. can have, as long as all the three directors agree. These shareholders can be included in the company at any time (Carysforth, 2004). Continuity Since, shares can be sold to a multitude of individuals in incorporations, continuity is ensured. This means that if one of the partners retire or pass away, the business will still continue to operate or trade. For example, Emma can be ensured that after 60 when she retires, her salon will still continue to provide its services. The same cannot be said if this business was a partnership. If a partner leaves the business, his share will have to be bough or if he dies, the business will have to be terminated (Carysforth, 2004). Therefore, once a limited company has been formed, it has an eternal life. If any of the directors, manager or employees leaves, retire or die, the company continues to exist. Incorporations can only be terminated wound up, liquidated or under the decisions and orders of the court or the Registrar (Tutur2u, 2009). Control of the Company The control of the company remains even if shares are sold to new members. This is because shares are usually sold to a limited number of shareholders unlike public limited companies where anyone can buy shares on the stock exchange. There is no divorce between ownership and control, like in PLCs. This is one reason Emma should choose a private limited form of organization because at a salon, it will be important to be in control and know how things are being run. Also, the control of the company is never lost to outsiders because of the fact that new members are sold shares with a unanimous vote from all the directors (Carysforth, 2004). Taxation According to a number of sources, incorporations have tax advantages that sole proprietorship or partnerships do not have (Carysforth, 2004). Sole traders and partnership forms of organizations have to pay income tax. On the other hand, limited companies pay a corporation tax on their profit before tax. There is a more extensive range of leverages and tax reducing costs that can be used to make up for a company's profits (Tutur2u, 2009). In addition, the present percentage of corporation tax is lower than that of income tax. Simply put, Emma, Chris and David would have to pay lesser taxes than if they formed a partnership instead. Cost It is relatively costly to set up a limited company than a partnership form of business. This is because there is more paperwork involved, more legal requirements and a registration fee has to be paid. Therefore, the initial set up of the salon will be costlier as compared to the cost of setting it up in partnership. However, the good thing to notice is that, when compared to setting up a public limited company, this seems like a cheaper option. It has a modest balance, which is why Emma and friends should decide on a private limited company. Complexity As mentioned earlier, a number of legal requirements and paperwork is required in setting up this form of a business. It is also difficult for newer people to understand the requirements in the beginning. The concept of shares and raising capital through selling share but selling shares only to private contacts with a unanimous vote and holding annual general meetings and dealing with the Registrar and the Companies House can be difficult and too much to understand for new players. Limits One of the limits to this form of business is that even though capital is raised from shares, this capital is limited as shares cannot be sold to the general public. They cannot be advertised on the stock exchange, or sold for that matter (Moynihan & Titley, 2001). Also if a shareholder retires from the business voluntarily or forcefully, his shares have to be purchased by other members. In addition to this, another limit of private limited companies is that if the company wants to sell shares, it can take considerable time to find members that all director and shareholders agree on (Carysforth, 2004). Disclosure of Information As incorporations, private limited companies are expected to hold annual general meetings every year. This is not the bigger problem as accounts do not have to be published at these meetings, rather directors are appointed and the like. The problem is when companies have to send complete copies of their final accounts each year to the Companies House, where these accounts can be sold for a fee to anyone at all. Therefore, such private information like the annual financials of the company will be readily accessible to the public which may include competitors also. Emma, Chris and David would need to consider this and carry out a competitive analysis to see how this information can be used by people who will have interests in the company. Breach of the Articles The problem under consideration is basically that there is a dispute between the directors. In such a situation, the directors have a number of options. Also, such a procedure can be fairly simple or fairly complex. First of all in this situation, David and Chris are advised to talk to Emma about the problems that both the directors have with her. The best and the initial solution is to always have an open discussion about the problem, and what can be done about it. In this case, Emma made a few mistakes and has clashing future plans with the other two directors. One of the articles states that Emma will remain a director until she retires. To ask her to forcefully leave the company can be grounds for a legal war and Chris and David must realize this. David and Chris must also understand that it is unethical to ask Emma and her brother to leave, that also, within a period of one year. Emma originally started the hair salon. This was her venture and she agreed to expand by letting David and Chris in on it. Simply put, it is because of her that David and Chris became directors of a private limited company in the first place. After gaining this position owing to her, it would be ethically wrong to remove her from the company, along with her brother. This is why Chris and David are advised to talk about the problems with Emma first. Perhaps this would lead them to an ideal situation where Emma understands what is expected of her and how she needs to change her behavior in order to deal with the expectations. Also, it is the responsibility of all directors to act objectively, in the interest of the company at all times. Directors are elected by the member shareholders of the company so that they can smoothly run the company in its best interests (ACCA, 2008). David and Chris must realize that if they have personal problems with Emma, which can damage the company, then it is their responsibility to act objectively. If however, David and Chris wish to ignore the ethical aspects of the situation, they must then understand that this is a legal problem. Why' First of all, the articles explicitly state that: Ben shall be the company's solicitor for life. Emma shall be the company's director until she retires at the age of 60. On any resolution to remove Emma from office as a director, the shares held by her shall carry four votes per share. Removing Emma and Ben means going against two of the articles in the Articles of Association. If, however, David and Chris want to fight this legally, they can either get Emma in on it. They can ask her to resign, and if Emma agrees, this would be a relatively more legal and ethically correct way of going about the problem. All the directors would agree to let Emma go including Emma herself. In this scenario, an agreement will need to be signed by the solicitor; according to the Companies House requirements, and Emma's shares will need to be purchased from her by other members. Emma's removal will have to be done according to the Companies Act 1985 s303 (Hanover, 2009). According to the Companies Act 1985 s303 "a company may remove a director by ordinary resolution (a simple majority of the shareholders) before the expiration of this period of office, notwithstanding any provision to the contrary in the Articles of the company and notwithstanding any term of his contract." (Hanover, 2009). If David and Chris wish to remove Emma, they will need to give a special notice to the company 28 days before. Once this period finishes, the company must send a copy of the resolution to Emma. Emma will have the right to speak to the shareholder members and David and Chris at the General Meeting, which would have been scheduled for the discussion on the proposal to remove Emma from office. Once this process of removal is complete, a copy of the resolution along with 288b form (termination of director from office) should be sent to Companies House (Hanover, 2009). Throughout all of this, David and Chris must be advised by a solicitor to stay on the right track. If, however, they wish to remove and change the solicitor also, they will need to fill form 15A which is a notice for the change in solicitors. A form 15B will also need to be filled out as a notice of appointment of another solicitor. This will temporarily remove Ben and his services as a solicitor and he will no longer be representing the party anymore. Conclusion One of the greatest protections and advantages of a private limited company is limited liability. However, Emma must realize that there are other things she might need protection from. She, along with all other directors, must be aware of the risks associated with becoming or adding directors in a company. This is because if disputes occur later, legal procedures have to be carried out to remove directors and solicitors, like in Hatford Hair Salon Ltd.'s case. This can be time-consuming, costly, upsetting and damaging for the company. Therefore, preventive care must be taken before appointing directors and solicitors to save the company, the members and the rest of directors from the hassles of legal wars. References Carysforth, C. (2004). OCR Certificate in Administration Level 3. UK: Heinemann Bendrey, M., Hussey, R. & West, C. (2004). Essentials of Financial Accounting in Business. UK: Cengage Learning EMEA Moynihan, D & Titley, B. (2001). Oxford University Press. (2009). Advantages of a Limited Company. Tutor2u [Internet]. Available from http://tutor2u.net/business/finance/legal_company_advantages.htm [Accessed December 14, 2009]. Wiss, J. (2008). Separate Legal Personality of a Company. Ezine Articles[Internet]. Available from http://ezinearticles.com/'Separate-Legal-Personality-of-a-Company&id=1451451 [Accessed December 14, 2009]. (2009). Removing A Director From Office. Hanover [Internet]. Available from http://www.hanovercompanyservices.com/faq/removing_director.asp [Accessed December 14, 2009]. (2008). Resigning From a Board: Guidance for Directors. ACCA [Internet]. Available from http://www.accaglobal.com/pubs/economy/strategy/practical/prac_9.pdf [Accessed December 14, 2009]. (2009). RULE 15: REPRESENTATION BY SOLICITOR. [Internet]. Available from http://www.gov.pe.ca/courts/supreme/rules/annotated/a-rule15.pdf [Accessed December 14, 2009]. Read More