Law and the Corporation, Advice Given to Lugi - Case Study Example

Running Head: LAW AND THE CORPORATION Law and the Corporation s Law and the Corporation Case to Be Considered Lugi wishes to start a language tuition business but is worried about becoming personally liable for debts incase his business fails. His friend has told him to that he can avoid this if e trades trough a limited company or a limited liability partnership. Advice Given to Lugi Limited Company: Before giving any advice Lugi must first understand what a limited company is so that he can have clear understanding on how to act on the given advice. A limited company is an incorporated company in the private sector, in which an investor has limited liability and the company has a separate legal identity. There are two types, one, as mentioned above is a Public Limited Company, and the other is a Private Limited Company, which as the name suggests cannot sell its shares to the general public. In the UK, the Companies Act permits several people to form a company for any business that is lawful. Private companies are the easiest kind of company to begin as well as run in their initial stages. Company's name should always end with "Limited" or "Ltd" (Ewan 2004 p 20). Lugi must keep in mind that this type of company is often a family business; directors of these firms tend to be shareholders and are involved in the running of the organization. Normally the shares of Private Companies can only be transferred to another person if the consent of all the other shareholders is obtained. Private Limited Companies as does a PLC have to apply to the Registrar of Companies, submitting a number of documents, which have to be delivered to the Registrar of Companies at Companies House. The two most important are the Memorandum of Association and Articles of Association, in addition to these; there is a Statutory Declaration, which states that the requirements of the Companies Act have been followed. When the registrar is satisfied, then a certificate of incorporation will be given, the company can then begin trading at once (World Bank 2007 p5). I would advice Lugi to start his business as a limited company as just 2 share capital is required to set up a private limited company. Limited Companies are made with a share capital that is authorized (authorized shared capital) as well as with a share capital which is issued (issued shared capital). The authorized share capital can be called the total number of shares that exist in a company which is multiplied by the nominal value of each share. But he must keep in mind that not all such shares might have been issued. The issued share capital is exactly same calculation in respect of each and every one of the issued shares. A company that is incorporated in England as well as Wales can be made with whichever number of shares of any value, in any currency. For instance, there might be 10,000 shares with a nominal value of 1p, or 100 shares each of 1. In both cases the share capital would came out to be 10 (Henry 2006 p 19). Advantages for Limited Company: The core reasons why Lugi should open a limited company is as follows: Control of the company cannot be lost to outsiders, more people are prepared to risk money because shareholders have limited liability, more capital can be raised because there is no limit to the number of shareholders and, the company is a separate legal entity and therefore, as such has a continuous legal existence, separate from the individuals who are its shareholders. Its existence is unaffected by changes in the directors and other shareholders, and the work of the business can thus carry on with a minimum of interruption (contrast this with the death of a sole proprietor) (Stephen 2000 p 10). Disadvantages Like every business even limited business has risks, Lugi must be fully prepared to manage those risks and disadvantages. They are as follows: shared profits among a larger amount of people, the legal procedure to set up the business, as a consequence of this there is a cost in time and money, firms are not allowed to sell shares to the public restricting the amount of capital that can be raised, if one shareholder decides to sell shares - it may take time to find a buyer and, financial information filed with the registrar can be inspected by any member of public, any competitor could use this to their advantage (John etal 2000 p 25) . Limited Liability Partnership To make thing more clearly to Lugi so that he can easily compare which is a better choice at this point for him a limited company or Limited liability partnership, it is very necessary that he understands what Limited liability partnership is. A limited liability partnership (LLP) can be called a legal entity as well as a body corporate. This means that the company has a legal personality part from that of its members. Similar to a limited company, a limited liability partnership can do each and every thing an individual or company is capable of doing. It can make legal contracts with other companies, sue other companies or people or be sued by the public or other companies, it can also hold property or become bankrupt. This too could be a good option for Lugi as by and large, partnership law is not compulsory for limited liability partnership; however the arrangements among the partners may strongly follow a traditional partnership agreement. The limited liability partnership's continuation as a corporate entity may mean that the consequence of the general law is very much dissimilar in comparison with a partnership. in spite of the similarity among a limited companies , the partners in a such a complex limited liability partnership are not in any way employees of the particular partnership in question , while the all the directors of a limited company are by al legal means employees of the company that they hold directorship of (Jeffrey 2006 p 34). However Lugi will have to careful of salaried partners as well as other hybrid animals. He will have to always keep in mind that when employee is in a partnership, then that employee is automatically regarded as being in the limited liability partnership. The Limited Liability Partnership Act 2000 usually permits several people running a lawful business with a plan to gain a good profit in order to form a limited liability partnership by means of legally signing up to its incorporation text - in the Form LLP 2. (In law, 'person' includes each and every individual as well as companies.) Nonetheless, limited liability partnerships are not obtainable for every activity for instance the nonprofit making activities. A UK LLP is complex and strong legal tax transparent or pass-through for the purposes of tax it can be said in simpler words that it pays no tax at all its on the other hand the Members have to pay tax according to the amount of to the income that they get via the LLP (Colin 2004 p 12). Advantages for Limited Liability Partnership: This could be a better choice for Lugi if he wants to avoid debt because of the following reasons: -less public scrutiny because the partnership agreement remains confidential; -easier manipulation of shares between partners; -easier changes of membership; -no administration relating to the issue and allotment of shares; -easier expression of administration, roles and management in a partnership agreement. Disadvantages: Like in limited companies here also Lugi will have to face some difficulties, they are as follows: -lack of certainty as to how the Registrar and the courts will treat limited liability partnerships; - Lack of a body of law to protect minorities; -possibly more "fuss" to administer until staff and advisers are fully conversant with new procedures; (http://www.netlawman.co.uk/info/limited-liability-partnership.php) This is defiantly a good choice for Lugi as if your limited company is bankrupt; the only thing that you will may lose is the value of its assets. You might find a limited liability partnership bankruptcy to be a lot more costly given that the amount you may lose is expected to be a lot. On the other hand, this cannot in any way be a rigid rule; this rule can be changed depending on the fact of each case. the viewpoint that the amount of limited liability partnerships will raise exponentially for a small number of years, whereas we all come to conditions with a new legal animal, but then level off when the thrill come to an end . To give a brief summer it can be said that the limited liability partnerships will have a vital purpose, however one which does not have an effect on the lives of a lot of people (Denis 2007 P 10). Formalities necessary of incorporate a limited company under the Company act 2006 Lugi should know that the new Companies Act comprises just about 1,300 sections as well as it introduces a new legislation which seems to reflect the changing business environment. The Act comprises of new as well as updated legislation. The Act provides for a single company law regime which will apply to the entire UK, so that companies will be known as UK companies and not GB companies or Northern Ireland companies as at present I would advice Lugi collect all the important information and documents because for UK companies incorporated under the Act, the following information and documents are required: 1. The Memorandum and Article of the Association must be delivered to the registrar together. With the application for the registration of the company, the documents required by this section and a state of compliance. 2. The application for registration must state the company's proposed name, whether the company's registered office is to be situated in England or Wales. Whether the liability of the member of the company is to be limited and if so whether it is to be limited by shares or by guarantee, and whether is to be a private or a public company. 3. The application must contain: In the case of a company that is to have a share capital, a statement of the capital and initial share holdings. In the case of the company that is to be limited by guarantee, a statement of guarantee must comply with this section and it must contain such information as may be prescribed for the purpose of identifying the subscribers to the memorandum of Association. 4. The application must be delivered to the registrar of the companies for England and Wales, if the registered of the company is to be situated in England and Wales. Other legal requirements include filing annual accounts and an annual return with Companies House and a tax return to HMRC. You must also register for VAT if company turnover is over 61,000. (http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_3) Effect of Certificate of Incorporation: Certificate of Incorporation Is another advantage which Lugi will have if chooses to start a limited business, it will advantage for him because: A company is a separate legal entity governed by the Companies Act, which conducts activities on its own behalf and is distinct from the persons who own and control it. The shareholders are the owners and control the company, but their liability in relation to the company's creditors is limited. Incorporation is the process by which the company is entered on the register at the Companies Registry, and thereby comes into existence as a separate legal person. A Certificate of Incorporation will be sent to the company by the Companies Registry on first incorporation and on any change of name. ( http://www.clickdocs.co.uk/glossary/certificate-of-incorporation.htm) Lugi must realize the fact that if he chooses to start such a business then When certificate of incorporation is issued that is when the corporate existence begins, as well as the certificate of incorporation is beyond questionable evidence that all conditions precedent necessary to be performed by means of the incorporators have been complied with as well as that the cooperative has been included under chapter, except as beside the state in a proceeding to cancel or withdraw the certificate of incorporation or for involuntary dissolution of the helpful. I would advice him to keep in mind the following points while issuing this certificate - The certificate of incorporation has the following effect as from the date of incorporation. - The subscribers to the memorandum, together with such other persons as might from time to time turn out to be member of the company, as well as are body corporate by the name affirmed in the certificate of incorporation. - The body corporate is proficient of exercising each and every function of a company that is incorporated. - The status as well as registered office of the company is as listed, or in association, with the application intended for registration. - If a company has to the share capital, the subscribers to the memorandum turn into holders of the share that are specified in the statement of capital along with initial shareholdings. - The person that is named in the statement of proposed officers as the directors of the company, or as secretary or as joint secretary of the company are definitely going to have to have appointment to that office (Patricia 2007 p 3). Conclusion After analyzing all the advantages, disadvantages and important points the best ad vice for Lugi if he wants to avoid debt is to start a business that is limited and make it in to a limited liability partnership business. References Colin Barrow 2004; Starting a Business for Dummies; UK edition p 12 Denis Keenan, Sarah Riches 2007; Business Law 8th Edition; Publisher: Pearson Higher Education Edition p 10 Ewan MacIntyre 2004; Business Law 2 edition; Longman publications. p 20 Henry Cheeseman 2006; Business Law 6th Edition; Publisher: Pearson Higher Education Edition p 19 http://www.clickdocs.co.uk/glossary/certificate-of-incorporation.htm retrieved on October 6 2007 http://www.netlawman.co.uk/info/limited-liability-partnership.php retrieved on October 6 2007 http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_3 retrieved on October 6 2007 Jeffrey Young 2006; case studies in business law, 2nd edition elm publications p 34 John Braithwaite; Peter Drahos 2000; Global Business Regulation Cambridge University Press p 25 Patricia Clayton 2007; Law for the Small Business Kogan Page Ltd; 12Rev Ed edition p 3 Stephen Maple 2000; Complete Idiot's Guide to Law for Small Business Owners Alpha; 1 edition p 10 World Bank 2007; Doing Business 2007: How to Reform Editions Saint-Martin p 5 Read More