Main Features Of Sole Proprietorship, Unlimited Partnership And Limited Liability Partnership

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TASK 1:

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

TASK 2:

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

Assessment criteria:

• Knowledge and understanding of relevant legal principles
• Structure
• Analysis and application of law
• Use of sources and academic conventions
• Clarity of expression (grammar, spelling, punctuation)

1) Sole Proprietorship- When referring to a sole proprietorship it refers to a business which does not have an independent existence from the owner of the business. There is a single owner. Thus the losses and incomes are taxed on the basis of the personal income tax return of the individual (Pickernell et al., 2011). A sole proprietorship is perhaps the simplest form of business under which a person can carry on his or her business. Within such business, a single person is the owner of the business and is personally liable for the debts created under the business. A sole proprietorship form of business can be operated by using the name of the proprietor (Sealy and Worthington, 2013). It can also be run under a fictitious name like Mary’s Boutique Salon. The name of the business which is fictitious refers to merely a trade name. Thus a sole proprietorship business is not a legal entity. It does not create a legal entity which is different or separate from the owner of the sole proprietorship business. Hence it is a popular form of business because the simple nature, easy to set up and minimum costs incurred. A sole proprietor is required to register only his or her name and avail for local licenses. If these requirements are fulfilled, the sole proprietorship will be capable for conducting business (Birds et al., 2014). However there is a disadvantage in carrying on such business. The owner of the business always remains personally liable for the debts incurred by the business. Thus if the business of the sole proprietor runs into money related problems, the creditors of the business have the right to bring a lawsuit against the owner of the sole proprietorship business. In case the lawsuits go in favour of the creditors, the owner is liable to pay the debts of the business from his or her own financial resources.

Contracts are usually signed by the owner of the sole proprietorship business in his or her own name. This is done because the sole proprietorship does not have an independent entity as per law. Thus if one is a sole trader, he or she will run the business either as self employed or as an individual. A sole proprietor is entitled to keep all business profits once the taxes are being paid on the revenue. Thus sole traders under United Kingdom have to get registered under Her Majesty’s Revenue and Customs (HMRC) (Cahn and Donald, 2010). On the basis of the registration they have to follow certain rules and regulations pertaining to carrying out and naming the business. A sole proprietor has to maintain records of the sales and expenses of the business. They have to send tax returns pertaining to self assessment every year. The sole owner has to pay income tax on his or her profits and with respect to Class2 and Class4 National Insurance. For setting up a business in UK, a sole trader must apply for a National Insurance number. In case the turnover of the sole proprietorship is more than £ 85,000 it is necessary to pay value added tax.

Unlimited Partnership

2) Unlimited partnership- When referring to unlimited partnership it generally means unlimited liability. Under a business having unlimited liability, there are joint owners who have equal responsibility for liabilities and debts that are accrued within the business. There is no limit or cap on this liability (Davies, 2010). In such cases the debts can also be paid off by seizing the personal assets of the owners. These partnerships are different from limited liability partnerships. These kinds of liabilities usually are present in general partnerships and sole trader concerns. When speaking about unlimited liability it refers to certain situations. It is immaterial as to what debt accrues from the business. Each and every owner of the business is responsible equally and in case of default in payment, the personal wealth of the owners can be seized to compensate for the debt incurred (French et al., 2014). Thus this kind of liability is usually risky and avoided by most of the businesses. Most of the companies usually opt for limited partnerships. They prefer not to risk losing their personal assets through the creation of unlimited liability partnerships. The concept of unlimited liability enterprises is most common in jurisdictions where the company law is created as per English law. Within the purview of United Kingdom, unlimited liability enterprises are formed and incorporated by registering under the Companies Act, 2006. There are other countries where unlimited liability companies are formed as per the English law (De Lacy, 2013). These include countries like New Zealand, Australia, India, Ireland and Pakistan. It is true that this form of business exists in several countries across the world but they are not very popular forms of business structure. It is because these kinds of business puts heavy burden on the owners in terms of covering the debt of the company especially in cases where the business runs into liquidation.

There are certain positive points of having unlimited liability partnership. It helps the partnership business to derive additional capital and funds since the financers are given the assurance that the loan amount will be repaid. It acts as a caveat for careless and frivolous business activities since all the partners of the business are individually responsible and liable to the level of their private assets and earnings (Kershaw, 2012). Unlimited liability protects the business against carelessness and inefficiency of the partners in terms of managing the business. Unlimited liability results in increased credibility of the partnership firm before the public gaze. However there are negative aspects of a partnership business which has unlimited liability. The nature of unlimited liability is joint and several. Most of the businesses get discouraged to start such business since it puts the personal assets of the partners into risk. This kind of business is especially loss making and risky for the family members of the partners. This is because the debt and liability of their predecessors pass on to them even if they were not personally liable for such debts (Hannigan, 2015).

3) Limited Liability Partnership- This is an alternate form of corporate business. It has the flexible nature and structure of a partnership and it helps the members and the partners of the partnership with limited liability. These are relatively new forms of business. The governing legislation dealing with limited liability partnership in UK is the Limited Liability Partnerships Act 2000. Thus they have become popular forms of business since 2001. Limited liability partnership has the characteristic of separate legal entity which is different from its members and partners (Collison et al., 2014). When the partnership gets incorporated, it gets issued with a registration number that is unique by Companies House in the same lines as that of limited company. Throughout the lifetime of the company the registration number remains constant irrespective of the fact that the limited liability partnership changes their name. Similar kinds of restrictions are applicable to names used for registering limited liability partnerships (Becht et al., 2010). Thus a limited liability has unlimited capacity and is similar to that of a natural person. It is true that a LLP is treated as a separate legal entity from its members. However it is treated as a partnership for the treatment with respect to tax purposes. The members are taxed in the capacity of partners. They are personally liable for the taxation of the share of the gains and income of the enterprise. LLP form of business is flexible in nature. The provisions regarding their daily running of business are usually constituted in an agreement that is written. A limited liability partnership must have two chosen members (Dignam and Hicks, 2011). They are provided with the right to create floating charges. The procedures of trading disclosure of limited liability partnerships are very similar to that of a joint stock company. The provisions of accounting and filing of a limited liability partnership is also similar to that of a compan

Limited Liability Partnership

As per section 154 of the Companies Act 2006, all companies functioning in UK needs to have at least one director. In case of public companies the minimum number of directors has to be two. The reason behind this is that companies are artificial legal entities. They do not have the capacity of working all by themselves (Lan and Heracleous, 2010). Thus they need to function with the help of other individuals. Thus the directors of the company are individuals who are legally entitled to manage the matters and affairs of the corporation by representing the owners. Thus it can be said that directors act as agents of the owners of the company. The law of agency is applicable on the role of the directors. This is applicable even in the case of small private enterprises that have few shareholders (Schaffer et al., 2011). In such companies there has to be at least one director even if the director and the shareholder is the same individual. In such cases law makes a distinction in between shareholder’s interest of the owner of the company and the duties of the directors as person takes decisions on the behalf of the owner. As per the Companies Act 2006, every limited company is required to hire directors. The directors of a company are those individuals who take maximum decision regarding the affairs and issues of the company. There is no specific definition of directors under the Act. The closes explanation of a director is found in section 250 of the Companies Act 2006. It says that a director includes any individual who occupies the position of a director. Thus, in order to determine whether a person has been director of a company certain aspects have to be taken into consideration (Horrigan, 2010). It has to be taken into account whether the director has been duly appointed. The director has to be registered by following prescribed procedures. Most importantly it has to be determined whether the directors have been exercising their legal functions and have been part as a full member of the decision making process which director make on a regular basis.

It has always been considered that directors be treated as fiduciaries. A fiduciary refers to a person who has agreed to act for or on behalf of other person with respect to certain issues involving a relationship of confidence and trust. This can be seen in the case of Bristol and West Building Society v Mathew (1998) Ch 1. Thus directors are facing the same obligations which come out of the relation of confidence and trust as those put on professional advisers and trustees. The directors are supposed to act in a bona fide manner in the best interests of the individuals on whose behalf he is working (Newburn and Stanko, 2013). The directors should not misuse their position and trust that has been put on them. Some of the fiduciary duties will be discussed that the directors hold.

Duty of the directors to act within their powers

Advantages and Disadvantages of these forms of business organization

This duty has been discussed within section 171 of the Companies Act 2006. Under this section directors are supposed to act as per the constitution of the company. They should use and exercise their powers only for the purpose for which they have been reposed. Under section 171 (a) of the Act, the directors of the company have to adhere to all directions of organising company’s affairs and administering those which are mentioned in the constitution of the company (Knepper et al., 2016). They also have to adhere and comply with any kind of restrictions or limitations which are contained within the constitution regarding the activities which the company can get involved into. Thus it is important that the directors of the company should make themselves adept with the provisions and rules of their constitution (Richardson, 2011). According to section 171 (b) of the Companies Act 2006, there is a common law rule with respect to directors that their powers should be exercised only for the purpose for which they are provided. This rule is more commonly known as the proper purposes doctrine. This doctrine was created by courts to make the directors liable as agents of the company having wide range of powers regarding managing affairs of the company. They have to implement their powers according to the directions of the company who acts as a principal (Casey, 2010). The powers should not be used for any other purpose which is not in consonance with the interests of the company. The courts have struggled to create principles in determining the meaning of proper purpose. This has been seen in the case of Howard Smith Ltd v Ampol Ltd (1974) AC 821.

Duty to promote success of the company

When looking into the statement of general duties, it is perhaps the most important requirement. It is extremely important for directors to perform their duties as per the present legislation. This particular duty is given in section 172 of Companies Act 2006. The nature of word used in this section has been a major source of discussion. The courts have to test this section to know its actual impact (Sandberg, 2011). Thus section 172 has been divided into two parts that are interlinking. The first part is with respect to the statement of objective. Herein it is said that the director must act in such a manner which he or she considers to be bona fide and would provide success to the company and help the all of the members of the company. This section in a way modifies the common law rule mentioning that the directors have to act in a manner which they themselves acting in good faith would do with respect to the company. This has been seen in the case of Re Smith and Fawcett Ltd (1942) Ch 304. In case they are able to meet these requirements and standards, misjudgements of honest nature on their part will not be used as grounds of negligence against the directors. The courts usually do not interfere in aspects of business judgements and decisions. On the basis of the part 1, the directors have to give importance to certain aspects. They should know the future implications of their decisions (Hawley et al., 2011). They should take care of the interests of the employees of the company. They have to take into consideration the impact of the business activities on the environment and the community.

Duty to exercise independent judgement

This aspect has been mentioned in section 173 of the Companies Act 2006. Herein it is said that the directors have to use their independent judgement. However there are certain caveats or disclaimers to this section. Firstly there is no infringement of the duty to use independent judgement if the director works as per the agreement that has been entered by the company dealing with prohibition of future use of discretion by the directors of the company (Conaglen, 2010). Moreover the duty of using independent judgement also does not get infringed if the directors act in a manner which is warranted by the constitution of the company. These exceptions and caveats allow the shareholders of the company if they consider necessary to implement some control over the powers of discretion of the directors. With respect to this section there is an important case i.e. Fulham Football Club Ltd v Cabra Estates Plc (1994) 4. Under this case it was said that according to the common law rules and equitable principles pertaining to the respective duty, the directors exercising their fiduciary powers have a duty to the company to use their independent judgement (Aier et al., 2014). The directors should not reduce their powers by the virtue of contracts and through entering into promises with other individuals. This has been seen in the case of Clark v Workman (1920) 1lr R 107.

Duty to avoid conflicts of interest

This duty has been mentioned in section 175 of the Companies Act 2006. The directors have avoid such situations where they have some kind of interest which either conflicts or may conflict with the interests of the corporation. This section includes the common law rule that directors holding fiduciary duties have to adhere to the trust and confidence and not undermine and abuse them (Renneboog and Zhao, 2011). If there are situations where the conflicts arise between duties and personal interests, the interests and duties towards the company have to be given priority. Some cases may be discussed with respect to this section such as Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461. Under this case it has been applied that those individuals having fiduciary duties should not involve into acts which create conflicting personal interest with the interests of those that are to be protected.

Duty not to take benefits from the third parties

This particular duty is mentioned in section 176 of Companies Act 2006. Under this section a director should not take any benefit from an outside or third party which is provided to him being a director and exercising duties of one. This particular rule was made to make sure that a director is not hindered or distracted from exercising his or her duties towards the company due to rewards for doing nothing (Reiser, 2010). However, a caveat is present in section 176 (4) of the Act, wherein it is mentioned that a breach of duty will not arise if the benefit accepted by the director is not creating or likely to create conflict of interest.

Conclusion

All these sections speak about the fiduciary duties of the directors towards the company. These are not exhaustive and only form a part of the huge list of duties. Directors are treated as fiduciary agents of the company. They are provided with sweeping powers to take decisions with respect to affairs and matters of the company. The duties act as check and balance over these powers to ensure that the directors do not misuse and exercise these powers for ulterior motive.

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