Form of Business Organisation for an Estate Agency Business - Essay Example

Task Partner [make up a law firm [make up an address] 16th April Ahmed Mustapha 56 Frenchie Road, London SE29 4ER Dear Sir, Form of Business Organisation for an Estate Agency Business and the effect on the Concept of Limited Liability We write to you in response to your query on the above matter. In deciding which type of business organisation to choose for your intended Estate Agency business (the “Business”), there are a number of factors to be considered. The two main options available to you are that of a Partnership and a Private Company limited by shares. Each of these options will be discussed hereinafter. A Partnership is where two or more persons come together to do a business. Each partner will put in assets to be used by the Business. Such assets will still be owned directly by the partners. Profits and losses will be shared in accordance with the Partnership Agreement. It must be emphasized that the Partnership is nothing but a collection of individuals and not a separate entity in itself. As such, there is no concept of limited liability. All the partners are jointly and severally liable for the debts of the business. This means that the creditors of the business can not only seize the assets which were put into the Business by the partners, but also to the personal assets of the partners. So for example if your Business defaults on the loan that you intend to take out from Credit Crunch Bank, then not only will the £10,000 put in by each partner be liable for forfeiture, but the personal assets of the partners will also be up for grabs. To emphasize the point, under a partnership there is no dividing line between the Business and the Partners themselves. A private company limited by shares is different. Here a company will be incorporated having separate legal personality and the Business will be carried out by this company. In the eyes of the law, the company is a separate person just like all you and your fellow colleagues are different people. Any debts of the company will remain its own and will not flow over to the shareholders. Similarly, any assets contributed to the company will belong to the company and will no longer be a part of the shareholder’s estate. The main duty of the shareholder is to contribute to the value of the share. Once this is done, there is no further liability on the shareholder. Even if the company later faces debts, the personal assets of the shareholder are safe. The concepts of separate legal personality and limited liability come together to ensure that the liability of the shareholder is limited to any amounts unpaid on the price of the shares and nothing else. So if, as before, the company defaulted on the Credit Crunch Bank loan, then only the assets of the business such as the £10000 each contributed as capital by you and your colleagues would be liable for forfeiture, and not your personal assets. Furthermore, you yourself will be a creditor of the company and will have the right to be paid back that £10000 from the company just the same as other creditors of the company have a right of repayment. Hence in terms of liability, the private company limited by shares is the obvious choice at first glance. However the following needs to be considered. A partnership is a relatively informal arrangement. Unlike a company, there is no need for incorporation and for complying with the Companies Act. In addition to the somewhat tedious process of incorporation of a company, there are also annual registration requirements that must be adhered to and even day to day running of the company must be in accordance with the Companies Act and the Articles of Association of the company. The new Companies Act has admittedly reduced the formalistic procedures necessary in relation to smaller private firms; however this is still more than that required for a partnership. In addition to these formality requirements which may be costly in both time and money, companies also have the added disadvantage of corporation tax. Companies are taxed on their corporate profits and the distributions to the shareholders and the salaries they will take in their position as directors will be taxed again under individual income tax. However in Partnerships, as the Partnership is not considered as a separate legal personality, it is not taxed separately. Also it must be kept in mind that even if you opt for a private company because of the benefits of limited liability, in practice this limited liability is rarely seen because most creditors such as banks will require you to give personal guarantees on the debts of the company so that they will be able to seize your personal assets under that guarantee, though not under company law. We hope the above information answers your query. Please do contact us if you need further assistance. Yours truly, [your name] Cc: Julie Jones Timmy McCarthy Task 2A [your name] Partner [make up a law firm name] [make up an address] 16th April 2010 Ahmed Mustapha 56 Frenchie Road, London SE29 4ER Dear Sir, Procedure for Registering a Company We write to you in response to a query on the above matter. The essence of the process of registration is to deliver specific documents to the Companies House, also called the Registrar of Companies. However, practically speaking, the first step is to decide a name for your business. The Companies Act provides for certain rules that apply in this context. Seeing as you have chosen to incorporate your business as a private company limited by shares, the main requirement is that the name of the company must end with the words “limited” or “ltd”. In addition the “Company and Business Names (Miscellaneous Provisions) Regulations 2009” prescribes restrictions on what can be used in the main part of the name. So for example, if the proposed name is the “same as” a name of a company already registered or the proposed name suggests a connection with Her Majesty’s Government or a devolved administration, a local authority or certain specified public authorities or even where the proposed name is offensive the Companies House will refuse to register the business under that name. Once you have chosen a name that is within the restrictions (and we will be happy to assist you in ascertaining the acceptability of the proposed names), the next stage is to apply for the registration of the company by delivering the specified documents to the Companies House. The documents to be handed in are as follows: 1. Application to register a company (Form IN01) This form asks for a number of details of the new company, including the name of the company, the proposed officers of the company such as the corporate secretary and the directors, the statement of initial share capital and the proportion of shareholding between the initial shareholders, the registered office and finally a statement of compliance by the applicant to certify that all the requirements of the Companies Act 2006 has been complied with. 2. Memorandum of Association After the new Companies Act came into being, this is a very brief document. It will just contain the names and signatures of the subscribers who desire to incorporate the company (basically you and your other two colleagues) as well as the number of shares that each of the subscribers will take (each must make a commitment to take at least one share each). 3. Articles of Association The Articles of the company are basically the rules and regulations by which the company is run. It will provide, for example as to how shareholders will meet and enforce their rights, how Board meetings will be conducted, what rights and duties a director has etc. The Companies (Model Articles) Regulations 2008 provides for model articles that can be used. We would be happy to send you a copy of the model articles relevant to a private company limited by shares, at your request. If you are not satisfied with them, we can amend those sections that you think not suitable or draft a wholly new set of Articles. If it is decided that the model articles provided for in the Companies Act will apply in its entirety to your company, it is not necessary to submit them as part of the registration documents. If you decide to simply amend the model articles as opposed to drafting a wholly new set of Article, only those the provisions of the model articles that are amended need to be sent. It is only in the case of bespoke Articles that the entire set of Articles needs to be sent in the registration application. This application for registration with the accompanying documents can be submitted electronically or you can send a paper application. The Companies House’s standard fees are £15 for electronic submission and £20 for paper filing. If the application satisfies all the examination checks, your company will be incorporated. The Companies House will register the new company’s details on their database and its name will form part of their company names index. A unique company number will be assigned to the company and certificate of incorporation showing the company name and number will also be issued to you. Please not that all the documents submitted in the application process, as well as future company filings, will be available for the public to search. We would be pleased to assist you in the incorporation of your company and all ancillary work. Please do not hesitate to contact on this or any other matter relating to your business. Yours truly, [your name] Cc: Julie Jones Timmy McCarthy Task 2C [your name] Partner [make up a law firm name] [make up an address] 16th April 2010 Timmy McCarthy No. 3, Stockley Road, London SE29 2FF Dear Sir, The Concept of Corporate Personality and the Nature of a Company’s Constitution The concept of Corporate Personality is essentially a legal fiction. It basically means that a company, once incorporated, becomes a separate legal person. As such when you and your colleagues incorporate your estate agent business, that incorporated company will be seen in the eyes of law as a totally different person, separate to and independent of you and your colleagues. It is as a consequence of corporate personality that the concept of limited liability is possible. As the company is its own legal person, it will be responsible for its own debts and liabilities. As such, other persons such as the shareholders will not and cannot be responsible for the debts of the company. This important concept was down in the case of Saloman v Saloman & Co., and the facts of the case are useful in illustrating the concept. Mr. Saloman sold his leather business to a company he incorporated (i.e. converting a sole-proprietorship into a limited liability company). In return for selling his business to this company, he took shares and debentures in favour of himself. Unfortunately, the company ended up in liquidation. In all respects he had run this new company just like he ran his sole-proprietorship. However the legal consequences on liquidation were very different. Had the business gone bust while it was a sole-proprietorship, Mr. Saloman would have been personally responsible for all the debts of the business-the business was not a separate person. Once the business had been incorporated however, it had its own corporate personality and therefore its own debts. On liquidation Mr. Saloman was no longer liable for the debts of the company. In fact, the company was in debt to Mr. Saloman. The debentures he had taken out were held by the Courts to be secured debts owed by the company to Mr. Saloman so that the company had to pay it back to him in preference of the other creditors of the company! Pragmatically, it’s almost like saying the Mr. Saloman owes himself-but due to the concept of separate legal personality, the law sees it as the separate and independent company owing Mr. Saloman. The Company’s Constitution, as laid down in the Articles of Association, is basically the rule book of the company. The nature of this constitution (as provided in Section 33 of the Companies Act 2006) is that it acts as a contract between the company and the shareholders inter se to the effect that all will be bound by such Articles and follow them in the running of the company. This contract is quite unusual it even binds person who were not originally privy to it-such as future shareholders of the company. Furthermore, it is a contract that can be varied by the shareholders by amending the Articles in accordance with the provisions of the Companies Act. Under the old Companies Act, the constitution also included the Memorandum of Articles in which the objects (or purposes) of the company were included. In terms of the law, the company would have capacity only to carry out the objects included in such memorandum and anything outside it would be considered ultra vires and void. This was the way the old law ensured that companies were restricted to the objects they were incorporated to carry out. Under the new act, the objects clauses are now in the Articles of Association rather than in the memorandum. The new Act however does away with the concept of ultra vires in that now even if a company acts outside the stated objects, the acts will still be binding. However, there are provisions internally which allow shareholders to stop the company from acting contrary to its objects and also provisions for imposing liability on directors who contravene the Articles. Hence by including an objects clause in the Articles restricting the business of the company to an estate agency business, you will have some protection in ensuring that it is only the estate agency business that is carried out by the company. Note however that the Articles (and the restriction on the company’s objects) can be changed as per Section 21(1) of the new Companies Act by way of a special resolution. (i.e. by 75% of the shareholders voting in favour of it). Given that there are to be only 3 shareholders in your company, you have 33% of the voting rights so it will not be possible to amend the Articles without your consent. However, the shareholding may change in the future and the best way to ensure that the objects of the company remain the same is to entrench them under Section 22 of the new Act. As such, on making an application for registration, you can specify that the provisions regarding the objects in the Articles are to be restricted and subject to the requirement of unanimity in order for it to be amended. There is provision for this to be done in section A8 of the IN01 form that will be submitted in the application for registration of the company. It must also be brought to your attention that directors can be removed from their post by way of an ordinary resolution as per Section 168 of the Companies Act (i.e. 50% of shareholders voting in favour). This is vulnerable situation and we recommend that you solidify your position by including a provision in the Articles for weighted voting in circumstances where resolutions for removal of directors are put forward. It could provide that a 3:1 weighted voting in favour of the director to be removed be allowed, so that in a case where you are up for removal from a directorship, you have 3 votes when every other shareholder has 1 vote. This will ensure that your position is no longer dependent of the approval of your colleagues. Such weighted voting is perfectly legal and has long been recognized by our Courts as seen in Bushell v Faith. We hope the above information answers your queries. Yours truly, [your name] Reference List Bushell v Faith [1970] A.C. 1099 Salomon v A. Salomon & Co Ltd [1897] A.C. 22 Read More