a) Advantages of Incorporation
Incorporating a company offers James many advantages, even if he is doing one-person business. Some of these advantages are:
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Separate legal personality. A corporation is by law recognized as a separate legal person. Since a partner in a general partnership represents an agent of the business, when a change happens about partners, it in most times differentiates the partnership. On the other hand, a corporation is not dependent on the life of shareholders, directors, and officers, and will not be affected by changes in, deaths and retirement of its members since it is by law recognized as a separate ‘person’.
Furthermore, the day-to-day business is running unaffected. As a separate person, a company can enter into transaction in its own interests, and contractual agreements which mean it can employ people and purchase assets, sell goods/ services, break the law, and be sued. This advantage also makes it easier to bring in outside investors and partners, and transfer ownership.
Salomon v. Salomon Co. 1897 is a case in point. Salomon had run a successful business for many years as a boot merchant. In 1892, he decided to take advantage of incorporated status, and convert his business into Limited Liability Company. To do this he set up a Limited Company, which he called Salomon & Co. Ltd, and made himself and members of his family shareholders in the business, with himself as the majority shareholder and Managing Director, thus retaining control of the company.
As a separate legal entity, Mr. Salomon then sold his merchant leather business to Salomon & Co Ltd for £39,000, which in 1892 was far in excess of its real value. Mr. Salomon took payment from the company in the form of £10,000 in cash, £1in 10,000 shares and the remaining £9,000 he left in the business as a loan to the company, which he secured against assets of the business.
Within months the company ran into trouble, and within a year went into liquidation. Even though it would mean suppliers and employees who were owed money would go unpaid, Mr. Salomon claimed his secured loan back from the company.
When the case went to court, even though it was plain to see that Mr. Salomon was the business in reality, in the eyes of the law he was a shareholder and private individual, who had leant this company in bad faith. As a shareholder he would lose those shares, but in reference to the secured loan, the courts allowed Mr. Salomon to secure his shares before suppliers and employees could make any claim on the assets of the company.
Obviously, the law protected a man who had clearly acted unethically, but what the courts were really defending was the principle of 'separate legal identity' for incorporated business.
This terminology and hence bring in the idea of limited liability.
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Limited Liability. Asked about reasons given for incorporating a majority of advisers (56 per cent) and of companies who were not advised (61 per cent) mentioned limited liability. While a sole proprietor or partner in a general partnership has unlimited liability to creditors of the business, a shareholder’s liability for the debts of the company is limited to the amount of funds that shareholder has invested in the body corporate. As he usually pays for the shares in full he does not owe the body corporate anything if it winds up owing debts to creditors. In case of a lawsuit against his business, no one can seize his personal assets, such as, his car, house. By this, James may protect his personal assets, and attract passive investors to put limited sum of money into a business without further risk. (www.businesslink.gov.uk)
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Capital acquisition. A corporation may offer greater sources of capital than unincorporated vehicles, such as, sole proprietorships and partnerships. Incorporating a company enhance the ability to borrow. As Company Act 1985 states, the shareholder can pay one fourth of the share. Then, James may borrow another 70,000 from the bank, as his factory or house becomes mortgaged. So, James may ensure the management of the business in an efficient way, and maintain all the profit on his own.
Also, a corporation takes an advantage of the contributed capital of shareholders. When James borrowed loans from the bank, he must pay interests in a regular basis. But, it is rare to worry about it, if funds are available from the members. It is the board of directors who decides when and the amount of dividends to be delivered. Of course, this is under some certain conditions. For example, you invest a huge amount of money in a profitable project, and find lack of cash in short term.
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Credibility and prestige. Incorporation may help provide your business credibility and prestige in its business dealings.
b) Private or public company?
Section 1(3) defines a public company as a company limited by shares or by guarantee with a share capital whose memorandum states that the company is a public company.
It is unusual for a company to incorporate as public company. Someone points out that a public listed company is easier to acquire a great amount of capital, expand its business, enhance its prestige and public awareness, and finally increase the profitability of the company and the wealth of the owner.
However, it is true that it is an expensive and time-consuming process to incorporate as a public company which is required a good amount of legal, accounting and consulting documents to be done.
Money does matter. The fee to incorporate as a private corporation is £20 although the subsequent costs of complying with the legislation on accounts, audit and disclosure may occupy some percentages of the total costs. However, the price to set up a public company is amount to millions. Professional advisors, such as, lawyers and accountants, are extensively involved in the going public process in order for the company to avoid costly errors, and protect the benefits of the public. Once the company listed in the stock market, it must retain professional advisors to meet the complex requirements of the regulatory securities regime. It also costs incredibly huge amount of money to deliver the company information to the existing and potential investors, by advertising or some other way.
Moreover, the public companies face increasing reports and corporate governance, which may indicate that a portion of management’s time and energy is taken up dealing with the regulatory documents and generating market interest overtime. Besides, the bureaucracy of the management team may be foreseeable, which would lead to the inefficiency of management. Conflict of interest may also arise which would damage the whole objective or achievement of the company. For example, a local junior manager may make decisions to meet the shop’s best interest, based on the Return on Investment of the local shop. In doing so, he may reduce the company’s overall Return on Investment.
With a private company, these disadvantages may be deducted. Private companies are more concentrating on reaching long-term strategies without the regular distraction of reporting every three months to analysts, shareholders, and the media. It also indicates that its financing is less transparent. Since the share of private companies is not open to the public, their assets tend to be less liquid.
It is more common to incorporate as a private company and go public at a later stage. If James’s business has expanded sufficiently to benefit from going to the market so that the public can subscribe for its shares.
Differences between private and public company?
For a public listed company, it is free to buy and sell shares in the market; and there is no limit on the transfer of shares. However, the section 81 of the Companies Act 1985 makes it a criminal offence for a private company to offer its shares to the public. This suggests that a public company is more capital intensive.
Moreover, a public company is allowed to have at least 2 members without maximized limitation; meanwhile, it must employ at least 2 directors to manage the company. However, the number restricted a private company is obviously less. It is able to begin life with 1 member, with no more than 50. Also, there is a minimum of 1 director.
Limited by guarantee
A company limited by guarantee can be set up when there are a number of stakeholders whose interests have to be accounted for and where a profit motive is not the prime objective of the organization.
The difference between limitation by guarantee company, the limited amount that the members are liable to pay is payable only on the winding of the company (s.2 (4)), whereas in a company limited by shares it is expected that the whole amount that the members are liable to pay is paid as contributed capital while the company is a going concern so that the members have no further liability on winding up.
Obviously, James is aimed at the increase of the profit and dividends, and the expansion of the business; and he wants to invite more capital to come in. if he registers such a company which is limited by guarantee
Unlimited company
A company may be registered as an unlimited company, in which case there is no limit on the members’ liability to contribute to the assets: section 1(2)(c). When the company is wound up, the members are found personally liable for the debts of the company. But, if James is very confident with his money-generating ability shortly and have a good view on the economic environment around the years, this might be the type to incorporate. Since unlimited companies still have separate corporate status and perpetual succession.
Hugely important, there are certain special features relating to unlimited. For example, an unlimited company may reduce its capital by extinguishing liability on partly paid share or even repaying capital to the members by passing a special resolution to that effect and the permission of the court is not required, but only permission in the articles. However, a limited company can only buy back its own shares under the provision of Part V Chapter VII of the 1985 Act. When the company creates enough funds, it is able to buy back its shares, then, it may re-register as a limited private company as the unlimited liability is not protecting the owner’s personal assets.
In addition, an unlimited company enjoys privacy in regard to its financial affairs because it need not deliver copies of its annual accounts and the relevant reports to the Registrar and the public.
c) ‘Off the Shelf’
Over 90 per cent of companies are still bought off the shelf. James of course, may buy a ready-made company ‘off the shelf’ from company incorporating agents, today the time taken by the Companies Registry to process papers from incorporation is down to one week, and for an extra fee incorporation can be achieved in 24 hours. The name, the objects, the capital and the articles can be altered to coincide with the wishes of the shareholders.
d) Why assigning the benefit of his insurance policy on the company’s name?
The principle of Salomon’s case would dictate that on incorporation the company is a separate legal personality from its members and that if the insurance policy is in James’s name then he can make a claim only if he has an insurable interest.
In Marcaura v Northern Assurance Co. Ltd (1925) AC 619, the owner of business had sold his business to a company and he owned almost all the shares.
The insurance policy concerning the company’s property was in Macaura’s own name. He had not transferred the insurance policy to the company. The company’s property was then destroyed.
The House of Lords held that no shareholder has any right to any item of property owned by the company as the shareholder has no legal or equitable interest. Even a shareholder, who holds all the shares, would be treated as not having an interest in the company’s business or assets. The shareholder, according to the House of Lords, is only entitled to share in the profits of the company while it continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.
Conclusion
In conclusion, this paper comes up with the evaluation of types of company to incorporate.
James may adopt the suggestion to establish a private limited company by capital share. In order to obtain limited liability and perpetual succession, James is recommended to build up a body corporate. Then, it may not be a good idea to first incorporate a public company. Because it involves a very expensive process and James is short of money. To the third point, James is advised to an ‘off the shelf’ company to save time, investigation and money. Company Act 1985 states that a shareholder is permitted to change the contents of the article and memorandum by special resolutions. A quick company may be born and improved to best meet James’s needs. It should be mentioned that the company is better to be limited by a capital share, as the limited by guarantee is not very keen on the profit-generating process.
Bibliographies
Books
Andrew Hicks & S.H.Goo (2001) Cases & Materials on Company Law (4th ed.). London, Blackstone Press Limited.
Denis Keenan (1996) Smith & Keenan’s Company Law for Students (10th ed.). London, Pitman Publishing
Geoffrey Morse (1999) Charlesworth &Morse Company Law (16th ed.) London: Sweet & Maxwell.
Janet Dine (2001) Janet Dine Company Law (4th ed.). Palgrave Law Masters
Paul L. Davies (2003) Gower and Davies Principles of Modern Company Law (7th ed.). London: Sweet & Maxwell.
S. Kunalen & Susan Mckenzie (2001). Blackstone’s Law Questions & Answers- Company Law (2nd ed.). London, Blackstone Press Limited.
Stephen Mayson, Dereck French & Christopher Ryan (2000) Mayson French & Ryan on Company Law (17th ed.). London: Blackstone Press Limited.
Web materials
www.businesslink.gov.uk
Note: 2495 words