1 Identify the three main types of business organisations recognised in Scots law. A. Sole trader
The most popular style of small business enterprise, it’s simple to set up and does not require any formalities. Sole trader often is a one person who manages and owns the company. They take all the profits, but must also include all losses. Indeed, if the only operator becomes insolvent personal assets may be used to satisfy creditors, such as a house, car, etc. They are personally responsible for all indebtedness of the company and have unlimited liability.
C. Incorporated Bodies
Private Limited Company (LTD)
Public limited company (PLC)
2 Clarify for Gurpreet and Samuel, by distinguishing the difference between these organisations by identifying and explaining the advantages and disadvantages of the legal requirements for setting each of these up.
| Advantages| Disadvantages|
Sole trader| * Small – cheap to run in comparison with other forms of business enterprise * Can use their own name as the name of the business – Business Names Act 1985 * Fairly straightforward to establish * All profits go to trader * Privacy| * Because all income goes to the owner, money tends to be squandered * Little cash used to regenerate business * Owner personally liable for all debts!| Partnership| * No formulation * Written contracts are advisable to ensure all partners know exactly what their responsibilities are
* Scotland – separate limited personality – making it an artificial person (a body that the law recognises as a person in its own right; it can take legal actions and defend them) * Shared responsibilities * Privacy * Incentive to do well * Shared profits| * Joint and several liability * Partnerships require agreement between partners, on everything. This can lead to deadlock, eventually killing the partnership if they cannot be resolved| Private Limited Companies LTD | * More capital raising possibilities
* Greater continuity * Limited liability | * Shares cannot be offered to public * Accounts not private * Possible limitations in raising capital | Public Limited Companies PLC| * Shares transfer easy * Easy of raising capital * Maximum continuity * Limited liability * Little difficulty in borrowing money | * Formation involves considerable documentation * Share transfer can lead to take over * Lack of privacy |
3 If Gurpreet and Samuel decide to set up in business as a partnership, what authority and liability would each of them have?
Business partnership of two or more people but no more than 20 partners (possible exceptions). Each partner will contribute something to the business, whether it is a skill or investment capital. Partners are agents of partnership, so a person may be associated with partnership to a contract. It says that the partnership is a legal person distinct from the partners. This means that the partnership may be sued or may sue. Partners are jointly and severally liable for all the creditors. As the only entrepreneurs, the partners in a partnership have unlimited liability. It is recommended that these terms and conditions are written in the partnership agreement, although this is not required by law.
If the company does not prepare a partnership agreement or does not contain some term, the partners will be bound by the rules dictated in Section 24 of the Partnership Act 1890. For example, unless otherwise indicated, all gains are shared equally. Profits were agreed by both to share on that basis how much capital they put in the opening the business, they need to make this word expresses the Partnership Agreement. However, for Gurpreet and Samuel a good solution could be to assume limited liability partnership.
Limited liability partnership (LLP) shares many features of a normal partnership, but also offers reduced personal responsibility for the debts of the company. They liability is limited to the amount of money they put into the business. There is a disadvantage in raising LLP as this form is more expensive to set up. First of all the company must be register in Companies House and there is a fee need to be paid. Also there is some extra cost related running that kind of business like: financial information must be publicly available and copy of that statement must be send to Companies House. Partnership agreement should be drawn up setting out how it will run and LLP how profits will be shared.
4 In relation to each type of business organisation explain the following: * The legal provisions relating to management
* The implications of contractual arrangements
There are many reasons why a trader may decide to set up company. Considerations include the credibility and prestige of the company, which is public companies associated with the available resources to obtain financing, and the possibility of limiting liability. It is important to note that not all companies offer their shareholders of limited liability in respect of claims by creditors.
Private Limited Company
This is the most common type of company and is what most people have in mind when considering whether or not to set up a company. Each shareholder’s liability is limited to the amount unpaid on the shareholding owned by them. However, the shareholder must also be aware that they run the risk of losing monies paid to the company whether in full or part payment of the shares owned by them.
There must be a minimum two members, where members are usually part of the same family. Limited liability small businesses must include the word “limited” in its name. The Company raises capital through the sale of shares, but cannot offer shares for sale to the general public, through the stock exchange. That’s why the shares are usually sold to family and friends, but they cannot be resold without the permission of directors. Shareholders have the control of the company; they have the right to appoint directors who employ managers to run the company. However, the small company directors tend to be shareholders.
The formation of private and public limited companies regulates The Companies Act 1980. There are two important documents in forming a company, which must be submit to the Registrar of Companies.
Memorandum of Association under Companies Act 1985 contain:
* The company’s name
* In case of a PLC, a sub-clause stating that it is a public limited company
* The situate of company office
* A statement of the objects of the company
* Confirmation that the shareholders’ liability is limited
* Capital clause: the amount of capital to be raised to start the company and the division of the share capital into shares of a stated amount
Articles of Association:
* Rules for running shareholders’ meetings
* Voting powers of the shareholders
* Rights and powers of the directors
* Powers of the company to raise additional capital
Limited by shares: It is the most common type of business and is what most people have in mind when considering whether or not to create a company. Each shareholder is limited to the amount of unpaid interest to them. However, the shareholder must also be aware that the risk of loss of money paid to the company, whether in full or part payment of shares held by them.
Limited by guarantee: It is typically used by charities and other non-profit organisations. The liability of members is limited to the amount they have agreed to contribute to the company’s assets if it is wound-up, often set to £1 for one member.
Unlimited: There is no limit to the liability of the members. This type of company is not widely used.
Public limited company
These are large companies. There must be at least two members and must be minimum share capital allotted £50 000 and the public must have the words “public limited company” at the end of its name, usually use the short PLC. The company’s shares may be offered for sale to the general public and the shareholders liability is limited to the amount unpaid on shares held by them.
As with private limited companies, the shareholder runs the risk of losing any monies paid to the company whether in full or part payment of the shares purchased by them. There are strict rules applicable to PLCs, including the fact that a PLC must maintain a minimum allotted share capital. For this reason, PLCs are normally reserved for larger national or multi-national businesses. A PLC does not have to be listed on a recognised stock exchange.
Salomon v A Salomon & Co Ltd (1897)
Mr Salomon transferred his business to a limited company and he and other family members subscribed the company’s memorandum: the purchase price of £38 782. Salomon took 20 001 shares and the other six members took one share each. Debentures (loan stock) of £10 000 and £8782 cash were paid to Salomon as the balance of the business price. However, the business was not successful and ended up with liabilities of £7733. The company’s liquidator claimed that the company’s business was still Salomon’s – i.e. that Salomon had set up the company to use it as an agent to run his business – but that Salomon should still be liable for debts. Court’s decision
The original judge agreed with the liquidator.
The Court of Appeal agreed with the liquidator stating the principle of limited liability was a privilege conferred by the Companies Act only on genuinely independent shareholders and not on ‘one substantial person and six mere dummies’. However, the House of Lords unanimously reversed the Court of Appeal and stated that a company is a legal person independent and distinct from shareholders and managers.
The company is, at law, a different person altogether from the subscribers to the memorandum and, though it may be that after incorporation, the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act [per Lord McNaughton in Salomon v Salomon (1897)]. Salomon has long been accepted as the leading authority on separate personality in Scotland.