Legal Forms of Doing Business - Assignment Example

Introduction Law has provided many options for anyone to start a legitimate business while remaining within the parameters of the law. In order to form a business, it is therefore necessary that it must have certain legal form so that rights and obligations of various stakeholders of the business are clearly identified and enforced according to law. There are different forms of a business and depending upon the relative nature and size of the business it can take either of the form. Main forms of business include Sole Proprietorship Partnership, Private limited Company and Public Limited Company. The above legal forms of doing business offer different benefits, rights as well as obligations to the owners of such businesses and as such as one moves from one form of business to another, the extent and nature of the rights and obligations also change. For example, a sole proprietor is personally liable for all the liability of the business running by him and as such the personal property of the sole proprietor is therefore also subject to liquidation if business fails and files for bankruptcy. Similar, in partnership, the partners are subject to personal liability also however as one move up towards formation of a company either a private or a public, the nature and extent of liability start to change. The shareholders of the private and public limited companies are only liable to the extent of their individual shareholding within the business. It is also important to note that in public limited companies, the function of management and ownership are two separate functions i.e. owners and the managers of the business are separate from each other. This paper will prepare a written analysis of a problem which identifies relevant legal principles; identify remedies and obligations appropriate to the circumstances of a legal situation presented in the given question. From the facts provided in the question, it is clear that the apparent form of the business is a sole proprietorship with Ivor being the legal owner of the business and Andrew as the employee of the new business. Sole proprietorship is considered as the oldest and common form of business formation where an individual can form a business without going into too much detail about the legal consequences of the business formation. Typically a Sole Proprietorship is owned and managed by single person and unlike limited company; there is no separation between the ownership as well as the management of the business. This is also the most distinguished character of the business too because owner and the business are not inseparable from each other and the owner is personally liable for all the liabilities of the business. (Spadaccini, 2007). One of the disadvantages of the sole proprietorship is the fact that it cannot raise its equity from external sources and have to rely only on the capital introduced by the owner. However, on the other hand if any other person is willing to introduce his or her own funds than the sole proprietorship will cease to exist and as such a partnership may be formed between more than one individuals having stake in the business. It is also important to note that Sole Proprietorship is not a legal entity in its strict sense and only refers to the natural person owning and running the business. However, a Sole Proprietorship has to register itself with different authorities for either taxation purposes or securing external funding from financial institutions. If we analyze the facts provided in the case study, we will come to notice that Andrew has not contributed towards the capital of the business and as such may be considered as the employee of the business rather than the owner. As an employee, Andrew may be entitled to get the compensation for the work rendered by him however; he will not be entitled to share the profits of the business. The implications of the actions for both the parties can be different depending upon the nature of the agreement between both the parties. If there is no implicit contract between the two parties against any consideration and both are working without any written or either an implicit agreement therefore Ivor may be considered as the owner of the business and Andrew as the employee of the business. It is also critical to note that any dealing done by the Andrew will be on behalf of the Ivor as being an employee of the business, Andrew also serve as the agent of the Ivor i.e. there is an implied agency relationship between the two also. It is because of this reason that the Ivor shall also be personally liable for any dealings concluded by Andrew on behalf of Ivor. It is also however important to note that both Andrew and Ivor can form a partnership however, for that purpose, Andrew has to bring in his own capital into the business and as such both the partners must decide on a certain profit and loss sharing formula in order to effectively forming a partnership. However, in order to achieve this objective, it is also important that the partnership has either to be registered or unregistered. In most of the cases, the partnerships are registered in order to avail different benefits offered to the registered partnerships under the law. If a partnership is formed between the two than both the partners will also be jointly and severally liable for the liabilities of the business and as such their personal property will also be subject to liquidation in case business goes into liquidation. It is also possible under English Law that a limited liability partnership may be created and in this case the liability of the partners will be only limited upto their share in the business and as such all the partners in partnership will not be severally liable and their personal property will also not be subject to liquidation if business goes into liquidation. The limited liability partnerships are formed under the Limited Liability Partnership Act 2000. Q#2 The above question discussed roughly as to what type of businesses Andrew and Ivor can formulate to start their business. This question will discuss in detail different types of businesses which can be formed by the two: Sole Proprietorship As discussed above that Sole Proprietorship is not a legal entity as such however if one forms a sole proprietorship then there is a no difference between the ownership as well as management of the business because owner and the business are considered as one. One of the most important benefits of this form of the business is the fact that it is easily manageable and can be started with minimum capital. Since owner also runs the business therefore sole proprietorship are easy to formulate as well terminate too because the legal position of the business cease to exist the moment owner of the business separates himself from the business in any way. On the other hand, however, it cannot raise the external funds to expand itself because of its legal nature as well as the size. Further, its ownership i.e. shareholding is not transferable and as such owner may not be able to sell his stakes to more than one person. This form of business may not be suitable for Ivor and Andrew to form because either one has to work for the business as an employee and not as the owner of the business. Partnership As discussed above that there are different options available to both of them to formulate the business and give it a proper legal form. Sole Proprietorship is one of the options however; it can only be formed by one person as both the business as well as ownership remains into the hands of one person. Another option available to them is the formation of a partnership and as such both can enter into it by contributing mutually agreed capital into the business. To convert a sole proprietorship into partnership is relatively easy and any one can form it by introducing new owner into the business and as such the business becomes a general partnership. It is however, important to note that in order to validate the partnership, it is really important that the partners must prepare and form a partnership deed which must outline terms and conditions of the partnership i.e. the profit and loss shares of each partner, duties and obligations etc. (Mancuso, 2008). One of the most important benefits of the formation of partnership is the fact that it is not necessary that almost all the partners must contribute towards the running of the business as actions of each partner are equally applicable to all the partners and as such all the partners are also jointly and severely liable for the liabilities of the business. By become a sleeping partner one can therefore really contribute only the capital into the business and does not need to take active part into the day to day affairs of the business. Another important form of business is the formation of private limited company which can also be formed with the help of two members only. A private limited company is a company which is limited by the shares and as such all the shareholders’ liability is limited to the extent of their shareholding in the business. In order to form a private limited company, it is however, important to understand that a private limited company need to be registered with the Securities and Exchange Commission and it must fulfill certain legal requirements before it can be granted the status of a private limited company. However, even by forming a private limited company, Andrew and Ivor cannot raise the equity from capital markets and as such number of shareholders for a private limited is also limited. Finally, the most important and probably the best form of business is the formation of a public limited company. A public limited company is one whose shares can be easily floated on any stock exchange and as such can be bought and sold in normal course of the business. It is also important to understand that in order to form a public limited company, both Andrew and Ivor has to first complete the count for minimum number of members required to form a public limited company and then have to float the shares of the company in primary market to raise the required funds for the business. One of the most important benefits of a public limited company is the fact that it provides enormous opportunities to raise the capital for the firm on one hand and limit the liability of the shareholders on the other. In public limited company, the management as well as the ownership is therefore two different things and a public limited company acts as separate legal entity quite distinct from the owners/shareholders of the business. In order to form a public limited company and list it on a given stock exchange, company has to fulfill strict legal procedures and requirements before it can be granted the status of the public limited company. It is also important to note that the requirements for the purpose of listing on the stock exchange may be quite different from the requirements for the formation of the company itself. (Humphreys, 1998) This form of business may however, not be suitable for the type of business both are planning to start because the size of the business is really small and as such it may not require a huge amount of investment however, as the business grow, both may consider to form a public limited company. Q#3 If we assume that Andrew and Ivor are still operating the same way they started than the apparent form of their business is sole proprietorship. If we assume this as the valid legal form of the business than both the contracts will be valid and enforceable against Ivor. First contract was concluded by Ivor himself therefore being the owner of the business he is severally liable for completion of the contract. Similarly the contract concluded by Andrew is also liable on Ivor because Ivor is the owner of the business and Andrew is working as a agent of the business therefore his actions will be binding on Ivor and as such Ivor has to fulfill all the contractual agreements made by the Andrew even if Andrew have not informed him about them. Ivor can only be saved from the liability in contract with Goliath SA if he has terminated Andrew as an employee of the business and the fact has been properly communicated to the Andrew before the completion of the contract. In a situation where Andrew and Ivor form a private limited company, both the contracts will be enforceable against the company and not against either the Ivor or Andrew. Since a limited liability company is itself a separate legal entity and shareholders are only liable to the extent of their shareholding therefore all the actions of the managers are enforceable against the company and not against the shareholders or managers of the firm. It is also however, important to note that the actions of individuals can be challenged at personal level. Bibliography 1. Humphreys, T. A. (1998). Limited Liability Companies. London: Law Journal Press. 2. Mancuso, A. (2008). LLC Or Corporation? London: Nolo . 3. Spadaccini, M. (2007). Business Structures. New York: Entrepreneur Press. Read More