A partnership or a company?

Articles of Association: This document together with the memorandum forms the constitution of the company. It sets out the internal workings of the company (e.g. general and board meetings) as to how shares are transferred from one member to an other.

A partnership however, requires no special formalities to be established. A partnership may be formed verbally or its existence may be implied from the actions of the parties. However it is recommended that a contract of co-partnery be made up. In relation to the running of a firms business, partnerships are not subject to any special requirements. There is no need for any public disclosure of information and no returns need to be made to any government departments except to the “Inland Revenue” for tax purposes. The major advantage of partnerships is their privacy.

      On the other hand, companies need to comply with many formalities such as, the company accounts that are open to public inspection and must be audited annually. An annual return plus copies of other documentation must be filled with the registrar of the company. Also, the lack of privacy and the higher administrative expenses could be considered as a disadvantage of companies.

Because of the separate legal personality in the case of a partnership the creditors must turn to the firm itself for payment. In the case that the firms assets cannot meet the business debts, then any one of the partners must pay all the business debts and after that is settled he may then seek repayment of his share from the other partners. This happens because the partners remain jointly and severally liable for the debts of the firm and the liability of individual partners for the debts of the firm is unlimited.

When we speak about limited liability we mean the responsibilities of the owners of a company are restricted to any money that remains unpaid. The partner (investor) is not personally responsible for the debts and obligations of the company in the event that these are not fulfilled.

Unlike the partnership firm, members of a limited company have the right to a limited liability. Any individual member’s contribution to paying off the debts of the company is limited to the amount of his shares. The limited liability enjoyed by the members of companies is regarded as a major advantage of forming a company rather than entering a partnership.

The number of members forming a partnership cannot exceed twenty in total and there must be a minimum of at least two, or else a partnership cannot be formed. However there is an exeption to this rule for firms of solicitors, accountants, stockbrokers and certain other professionals, which in their case they may have over twenty partners. Also it must be mentioned that apart from the normal common law duties of any member (agent) the Partnership Act 1890 provides the following:

• The partners must render true accounts to the firm and supply full information on everything affecting the partnership (S28).
• The partners must account to the firm for any benefit received without the consent of the other partners from any transaction concerning the partnership (S29).
• The partners must not compete with the firm without consent. Breach makes the partner liable to account to the firm for all profits made without consent from the competing activity (S30).
• Also, no new partner may be brought into the partnership without the consent of all others, unless they have agreed otherwise.
• And no partner can assign his/her share in the partnership with the effect of making the assignee a full partner in his place. The assignee cannot take part in the management, but only has a financial right (S31)

A public limited company must consist of at least two members and there is no maximum limit to the number of members to form a public limited company. Since the 15th of July 1992 private companies limited by shares may have one member, also here there is no maximum limit for the number of members.

Public and private companies can be distinguished by a variety of factors, the most significant differences between the two forms are mentioned below:

• Only a public company can offer shares to the public. A private company commits a criminal offence if it does this.
• A public company must comply with minimum capital requirements of 50,000 pounds issued in shares. A private company is not subject to this rule.
• A public company must have at least two directors whereas a private company only needs to have one.
• A public company must include a statement in its Memorandum that it states that it is a public company, and must also include in its name the words “public limited company”, plc., or the Welsh equivalent.

Every partner may take part in the management of the business, unless otherwise agreed. All this, according to the Partnership Act 1890 Section 5 which provides that every partner is an agent of the firm with the ‘supposed’ authority to bind the firm and his partners.

By contrast, members of a company are not agents and they have no right to take part in the management of the business since the management of the company is in the hands of the directors who may or may not be shareholders. The company directors are officers of the company who have power delegated to them by the company. Their powers are within the limits of the Memorandum and Articles of Association and they can not step outside them, or else if they do, their actions will be considered “ultra vires” (beyond their powers) and will not bind the company. Directors are agents of the company and their powers are exercised collectively as a board of directors.

Some of the consequences of a company being a separate person at law from its members or its directors are the following:

• The company enters contracts in its own name.
• It may be a debtor and a creditor in its own name and also may be debtor and creditor of its own members.
• It can hold both heritable and movable property in its own name.
• Constant succession applies to it, unlike the partnership. The legal personality of the company is not affected by changes in the personnel within it. Members can enter or leave the company, die, become insane or go bankrupt, without this having any effect upon the existence as a legal person of the company.

In Scotland though not in England, partnership firms have their own legal personality separate from the individual partners. These are the consequences:  

• Partnerships can contract in their own name.
• The firm can hold movable property in its own name.
• The firm can be debtor and creditor in its own name, and even of its own partners.
• The firm can become bankrupt, and the bankruptcy does not necessarily make the individual partners bankrupt.

A personal decision would be made after considering the above theory, the people involved, weighing up the advantages and disadvantages and the type of business being planned.