Main Features Of Different Forms Of Business Organizations

By referring to relevant legislation and case law critically discuss the main features of these forms of business organisation:
1. Sole trader
2. Unlimited partnership
3. Limited Liability Partnership

By referring to relevant legislation and case law critically discuss the fiduciary duties of directors of private limited companies in the UK. These shall include:

1. Duty to act within powers
2. Duty to promote the success of the company
3. Duty to exercise independent judgment
4. Duty to avoid conflicts of interest 

Different businesses have different features depending on their structure and also are governed by various legislations and laws. For instance a business run by an individual who owns it entirely (sole trader) does not operate on various legislations and laws of a given country like the company businesses.  However this does not mean that it operates under no regulations at all. It’s only that it does not have many regulations like company businesses.

A sole trader is someone who does business single handedly by being the sole and whole owner of the business. In some cases he has assistants in running the business.  The sole trader is in charge of the affairs relating to his business. There is no distinction between the owner and the business in the eyes of law they are both the same (Abramitzky, Frank and Aprajit, p 1888). The sole owner has unlimited liability. Therefore incase of bankruptcy the owner uses their own money to pay lenders and creditors. All the legal compensations that may arise while running the business are paid by the sole trader. He is the final decision maker in the business and does whatever he deems fit.

The sole trader is therefore responsible for all the decisions he makes (Blanchflower, and Shadforth, p 352). The buck starts and stops with the sole trader. For instance if an individual who is a sole trader decides to produce honey with the thought of high demand and the selling of the product succeeds, he takes the credit but if it fails him alone suffers the losses. Therefore all the profits as well as losses are entirely shouldered by him.

They maintain records of finances used for personal and business purposes.  The business can easily come to an end in case of bankruptcy or untimely demise of the sole trader. These sole traders do not run separate legal existences from that of theirs. They therefore have unlimited liability on running their businesses. The wage bill of such businesses is usually very low because they operate with a few or even no employees (Guinnane et al., p 720).

The unlimited liability may make the sole trader to sell their personal properties so as to offset any business debts available. In starting this business one does not need to make any registrations with the Companies House and there is no need to pay for corporate tax. To avoid being a culprit of the business risks one is advised to have a comprehensive insurance policy.

This is a type of business cooperation which has joint ownership where the owners have equal responsibility for all the liabilities and debts of the business. The liability is not fixed it can be paid using the seizure of the personal assets of the business owners thus is different from limited liability. It’s a form of general partnerships (Campbell  and Nardi, p 6). Therefore if there is any debt that has accrued in the business as a result of failing to pay or defaults all the owners in the business have equal responsibility for the debt and their wealth can be seized so as to offset the debt so instead of risking their personal assets most people resort to forming limited partnerships.

Unlimited partnerships

These partnerships are more typical in jurisdictions where some laws of the company are derived from the English law. For example in the UK unlimited business partnerships are usually formed through some registration covered under the Companies Act of 2006 (Herranz, Krasa, and Villamil, p 2). These companies are so uncommon and this is because of the severe burden on the owners in case of debts.  

For example if four individuals come together and work as unlimited partners where they all invest $ 35,000 in the business that they are owning as a joint investment. After one year the company may accrue $225,000 in form of liabilities and fails to repay or simply defaults then the four partners will be equally liable for the repayment. Therefore in addition to the $ 35,000 made by each partner they will be forced to raise close to $ 56,000 each to offset the debt. Therefore this form of business partnership increases the level of business risks.

It’s therefore a legal relic. It’s a form of business partnership that is used only in areas where limited partnerships are not allowed to operate. However unlimited partnership has some advantage of nondisclosure. For example an online crafts marketplace i.e. Etsy was able to create an Irish subsidiary in the year 2015 which is classified as an unlimited liability organization. This means that all the reports on one transaction that need to be public as well as the amount paid on taxes needs not to be disclosed anymore (Blanchflower, p 37).

This is a cooperate business which has the combination of a flexible structure of any partnership with the partners having benefits of the limited liability. The legislation that created these entities came into existence in the year 2001 and the partnership has some key features as noted below,

When it comes to decision making most of the decisions are made by the directors as provided in the Corporations Act. However there are some specific decisions that are made by the shareholders. The restrictions regarding liability are well put out. For the shareholders liability is only limited to the capital of shares owned and has not been paid. For example if a shareholder does not have any debts in association with their shares then their liability remains zero (DeNardi, Doctor and Krane, p 31).

For the directors in case the company has debts creditors have no right to recover the debts from the company’s directors unless the company has been given the go ahead to continue their trading after insolvency. Loans in such partnerships are secured by their assets of the company but under some circumstances directors are usually needed to give personal guarantees. There is also room to generate investments from outside the company by the selling of shares.  The shareholders do not have the right to claim any investments in the company as a form of deductions in relation to their income that is assessable (Morrison and William, p 341).

Taxes are paid by these companies at a cooperate rate of 30% and its very essential for the company to be in possession of financial accounts to facilitate tax returns.  All the profits are retained by the company so as to facilitate growth of the business. The shareholders are not given any profits (Quadrini, p 47). However all the profits that are retained are taxed as part of the company’s income.  If a company is operating multiple limited businesses they are free to use cash from one business to offset debts of another business and if they are part of a similar consolidated group they can submit a group’s tax return once they have offset the debts of other businesses within their single entity. Any losses are allowed to be carried forward into the future of the business.

Limited liability partnership

The consumers of products from limited companies are protected by the competition and consumer act 2010. Some costs such as ASIC registration fee and ASIC annual review are usually associated with limited companies and the companies are supposed to pay license fees which in most cases are expensive for limited companies compared to sole traders (Boissay and Gropp, p 753). In case a limited company becomes insolvent the rights of creditors are protected by the creditors and insolvency act. For example in Australia these rights are covered under the Australian securities and investment commission. The operations of limited companies are regulated by various acts and are also governed by the constitution (Chatterjee et al., p 1561).

Therefore all the company stakeholders should be aware of such regulations that govern their working and they are varied among countries. The limited companies enjoy perpetual succession and are usually treated as legal entities which are distinct. This allows the various organizations to survive the staff turnovers as well as the death of members where the share ownership is dealt with in the deceased will.

Fiduciary duties are duties performed on the basis of trust between the directors and shareholders. This enables the directors to act with the best interests of the company at heart with honesty and in good faith. These duties may arise either under some contract, articles or the agreements by share holders. They also come up under the statute of the Companies Act 2006.

This role is well stipulated in the section number 171 of the companies’ act 2006.  The directors should ensure that power is only exercised for the right reasons. Initially directors have been seen plundering the assets of the company for their own personal enrichment. They have even made attempts to install mechanisms that frustrate the people who bid to takeover power from them. When such practices are tolerated they are seen to go beyond the main reasons as to why these directors were given some powers (Helland and Sykuta, p 170).This section emphasizes the rule which is equitable in the sense that a director should be able to act in line with the constitution provided by a specific company and is only allowed to exercise powers for the right purposes.

However the section does not clearly clarify all the aspects of the director’s duty to exercise some powers for the right reasons. For example how these reasons are to be proved or rather the extent as to which a purpose that is not right can interfere with some decisions. In such cases such matters are only determined in relation to previous case laws in which the court has made an approach to the duty by clearly determining the reason as to why such powers were given to the director. This is followed by ascertaining as to whether that was the main purpose of the director while making use of such powers. However the liability is usually strict if the purpose of the director is not the real reason as to why the powers were given it then does not matter if the power he exercises is still in good faith or it will ultimately promote the company’s success for the members’ benefits (Hermalin and Weisbach, p 15). 

This role is stipulated in section 172 of companies’ act 2006. This is a replacement of the fiduciary duty of acting in good faith for the best interest of the company (Adams and Ferreira, p 230). In this section the provision is clear and it indicates that a director should take decisions in a way that is of good faith with the aim of promoting the company’s success so as to benefit its members. The director should therefore lay much emphasis on the employees interests, put in mind the long term consequences of the decisions made, work towards improving the business relationships between the company and its customers and suppliers, act fairly to all members of the company, have the desire to maintain the company’s reputation in terms of high standards of the conducts and ensure the company’s operations impact positively on the environment and community (Lefort and Urzúa, p 618).

If the purposes of the company are not in relation to the members benefits the director has to act in good faith while they strive to achieve such purposes. Some rule of laws has to be enacted to ensure the directors act in the interests of directors as well (Rajagopalan and Zhang, p 60). When the company nears insolvency such laws are displaced and could be modified to meet the interests of creditors. However one should note that;

The duty applies to all the director’s decisions and not just the formal decisions by the board.

Success in such a context will thus mean long term increases in value especially for commercial companies. This in the end promotes the success of the company and all that makes up the success is as a result of the director’s judgment of good faith (Harris and Shimizu, p 791).

The need to regard any of the listed factors is subordinate to the duty of promoting success of the company with an aim of benefiting the members. However such an obligation is a must and cannot be assumed.

The factors cannot be exhausted and the directors should therefore regard other matters that are relevant to the duty so as to ensure the success of the company is attained.

With regards to all the factors then the need to ensure reasonable care, skill and diligence are exercised is very important (Sarkar and Sarkar, p 7). It’s therefore necessary to seek advice from experts if one wants to satisfy the duty especially if it relates to impacting on the environment and community.

Should the directors give precedence to the current members interests compared to the future members? According to history, this specific duty has often been interpreted through the identification of the company with its al shareholders who are both in the present and future. The directors have been required to strike a balance between the long term and short term interests. The directors are therefore advised to seek professional guidance on this matter until the meaning of this section is well stated (Adams, Almeida and Ferreira, p 1411).

Are the directors supposed to document their compliance with this section? However it’s advised that the minutes document that the directors have taken all the factors set out in this section while exercising their duties (Braun and Sharma, p 121).

Whether there may be a rise in the class action style litigation from the interest pressures of single groups that have a believer of the company not giving good consideration to the issues of interest.

This duty is well stipulated in the section 173 of the companies’ act 2006. In this section the provisions are that a director should exercise judgments that are independent. This duty is not infringed by any director who acts in relation to any agreement that has been entered into by the said company and which may set limits on the discretions by the director in the future or in any way by the authority from the constitution of the company. All the delegation powers should therefore be set out in the article (Andres, Azofra and Lopez, p 200). 

This duty is very relevant in making some key decisions in the company. The act for this duty ensures that the directors are not in any way influenced by people with personal interests in the decisions regarding important matters in the company. Once the judgment made is independent of external influences chances are that it’s likely to be a fair judgment to all parties involved. However this duty should be exercised with much keenness without nay biasness so as to get good impacts of whatever the judgment may be.

Conflicts of interests have in most cases led to poor management of several institutions and it’s therefore the duty of any director to ensure they do not act under the influence of conflicts of interests while running any company business. To deal with this the directors should shy away from employing their close friends or even relatives into the company (Bhagat and Bolton, p 260). This duty is covered under section 175 of the companies act and it replaced the no conflict rule that applied to the directors in which any director was not in any way supposed to put themselves in situations where there was a possibility of nay conflict whatsoever without the knowledge of the company. This conflict may have been between the duties he does for the company and his personal interests or any duties he performs for a third party.

This duty greatly applies to the property, opportunities or information exploitation as well as to whether the company is likely to take any advantage of such opportunity, property or information (Coles, Naveen and Naveen, p 348). This duty came into place as of 1^st October 2008 and before then the fiduciary duty still applied. Therefore prior to the set date companies were allowed to amend their articles so as to take advantage of the statutory relaxation of the rule that was equitable. This rule gave permission to independent board members that should make up a quorum to be able to authorize any conflicts of interests that were related to any exploitation by directors’ on a personal basis.

The exploitation could either be of the information, property or opportunity in the company.

In situations packing sufficient independent directors then the approval of a conflict can be achieved by the members of the company (Lange and Sahu, p 16).However the exercise of this duty does not apply to any conflict of interest that may arise relating to arrangements or transactions with the company. The duty relating to avoidance of conflict of interest however continues to apply even once someone seizes to be a director due to the exploitation of opportunity, property or information in which he/she was aware of in their capacity as a director.

Conclusion

When one has an idea of starting business they normal put all the factors into consideration and depending on the size of the business one may opt to run a sole, unlimited or limited business. All these business entities have their own merits and demerits. In many situations sole businesses are small business enterprises and the owners are solely responsible for the operations of these businesses. In case of profits and losses they are shouldered by the business owners. For the unlimited business entities the responsibilities of running the business are for all the stakeholders. In case of any debts by the company the owners have to settle the debts equally. Most business people do not enter into such partnerships because they are protected in any way in case of bankruptcy by the business. The best business partnerships are the limited business entities in which the shareholder is not responsible for the losses incurred by the company.

The losses brought about by any shareholder are settled by them entirely without tampering with the shares of other stakeholders. All these companies operate under the duties of directors and especially the big companies. The fiduciary duties are wide and varied depending on the companies in mention. Some of these duties include the duty to act with powers, the duty to ensure the success of the company is promoted, the duty to exercise independent judgment and the duty to avoid conflicts of interests. Once all these duties are performed to the best interest of the company the company thrives well in doing business with less failure.   

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