Unlimited Partnerships Versus Private Limited Company

Starting a new business requires the investors to decide on business type in legal perspective.  The United Kingdom business law recognizes different types that include sole proprietors, Partnerships, limited private companies, public companies, and cooperatives (Fleming 2000, p.17).  These types have unique characteristics giving them strengths and weaknesses.  It is essential for investors to make the necessary assessment to identify the specific business type that best suits their interests. The current case requires a choice between an unlimited partnership and a private limited company.    Partnerships in the United Kingdom are governed by common law, the Partnership Act 1890, Limited Partnership Act 1907, and Limited Liability Partnership Act 2000 (Walport & Lynn 2005,p.341). These sets of laws help one to have a clear understanding of the ramifications of setting up an unlimited partnership. In the common law, Waugh v Carver case   is used as a precedent of making partnership decisions.   The partnership Act 1890 defines a partnership and provides guidance regarding interactions among partners (Force 2009,p. 14-15). It spells out the duties and obligations of the partners in the business.  The Limited Partnership Act 1907 provides an insight on the liability of partners. It clearly spells out that only sleeping partners can enjoy limited liability in a partnership (MäNtysaari 2010,p.173). The main laws governing limited liability private companies in the United Kingdom are the Company Act 2000 and the insolvency Act 1987 (Grier 2016, p.5-10) The two laws provide a proper guidance in formation, operating, and terminating a company. Understanding the consequences of setting up a private limited company, therefore, requires one to closely examine the two laws to identify the pros and cons of a limited company. Unlimited partnerships and limited private companies have strengths and weaknesses that necessitate an investigation on each type when setting up a new business.

Pros and Cons

The best approach of choosing between unlimited partnerships and private limited companies is identifying the strengths and weaknesses associated with each type and comparing them. The nature of the business and the owner’s characteristics should also play a crucial role in identifying the fitness of a business. The best type of business is one that enables the owner to meet short term and long term goals.  A business is established with an aim of creating financial returns to the owners. The best type of business is one that supports the creation of maximum value to the owners in the short term and long term. Business growth is a major concern implying that the best type of business should allow growth regarding revenue, profit, asset base, and the market share.

Unlimited Partnerships

Unlimited partnerships also referred to as general partnerships are formed when people come together to form a business thus sharing its ownership. The number of partners ranges from two to fifty(Walport & Lynn 2005,p.341).  The partners contribute money, labor, and property to enable the business realize its objectives and also share profits and losses equally. The Partnership Act of 1890 clearly states that partnerships are only formed for the commercial purpose. Partnerships have pros and cons and each of them should be considered and used as a basis for making decision

Pros of Unlimited Partnerships

Partnerships are easy to form as they are not subjected to many legal procedures. The main document that requires preparation when establishing a partnership is the partnership agreement which is easy to draft (Pride, Hughes & Kapoor 2010, p. 129).  A partnership is also inexpensive to form regarding the legal fees and expertise involved in its establishment. Partnership benefits from skills diversity since partners apply their skills in running the business. Partnerships that are characterized by competent partners gain a competitive advantage in their respective industries. Partnerships offer an incentive to the employees by giving them an opportunity of becoming partners. It is easy to incorporate hard working employees in the partnership. Lastly, partnerships benefit from the financial support received from the partners. Partners contribute funds in case the business faces resources challenge (Pride, Hughes & Kapoor 2010, p. 129).

Cons of Unlimited Partnerships

The liability of partners in the business is unlimited implying that private assets of the partners can be sold to meet the liabilities incurred by the partnership.  A partnership can be faced by disagreement that hinders operations. Partners may hold different opinions that make it hard for the partners to remain together.  The sharing of profits is a major disadvantage of the partnerships. The partners share profits equally that reduces the benefits attributed to the owners. Partners are held liable for errors committed by other partners that can make some partners careless due to the shared liability.  Lastly, partnership lacks a wide access of financing since financiers cannot give a loan on a floating charge.

Private Limited Companies

Private limited companies are privately business owned by shareholders and governed by the directors.  A private limited company is owned by at least one shareholder without a maximum number of shareholders (Collison et al. 2014, P. 10-12).  The shareholders elect the directors who govern the company on their behalf. The shareholders can be the directors of the company. The need to have competent directors makes the shareholders seek competent individuals from outside implying that shareholders do not manage the day to day operations of a business when an external director is engaged. Companies in the United Kingdom are registered at the Company House (Ferran 2001,p.516-517)

Pros

The liability of the shareholders is limited implying their private assets cannot be used to meet the liabilities incurred by the company. Companies have more access to finances than limited liabilities since the financiers can give a floating charge on the company’s assets. Ownership of the company has no restrictions since the law does not state the maximum number of shareholders in a private company.  Private companies have tax advantages since they benefit from wear and tear deductions and other capital and investment deductions (Brough 2005,p.6) Stakeholders such as suppliers and financiers have more confidence in private companies than partnerships.

Cons

Registration of companies is more complex when compared to partnerships and sole proprietors. The law sets high standards for the registration of private limited companies that complicates the registration process. Registration of companies requires documents such as the articles and memorandum of association whose preparation is time consuming. Administering companies is challenging since the law spells out the specific obligation of directors such as filing of tax returns.  The costs of establishing and running private companies are high. Companies incur high accountancy costs with an aim of ensuring financial statements are created in line with the existing laws. Non compliance with the regulations increases operation costs due to the arising penalties.

Running Unlimited Companies and Partnerships

Running a business is characterized by legal duties and obligations. Operations of a business have diverse impacts on different stakeholders that make it necessary to ensure that operations do not compromise the welfare of different classes of stakeholders. The overall health of an economic system depends on the performance of individual businesses. It is, therefore, necessary to create a legal environment that clearly states the duties and obligations of businesses.  Investors choosing between unlimited partnerships and limited companies needs to understand the duties and obligations associated with each type of business. The ideal business type is one whose legal obligations and duties are easy to fulfill.

Limited Companies

Directors are charged with the responsibility of running the company on behalf of the shareholders. They, therefore, carry the legal duties and obligations of a private company. Making of annual returns is one of the main legal obligations of a private limited company. The directors are required to file annual returns to the Company House that have been prepared in line with the necessary accounting and financial reporting standards.  The directors have a duty to ensure the accounting processes within the company lead to the creation of reliable financial reports that depict the state of affairs in the company.  In line with this obligation, the directors have a duty to ensure persons preparing the financial statements possess the right skills to enable them to create error free statements. The returns in consideration are tax returns and accurate financial statements.  In addition to filing returns, limited companies are required to notify the Company House regarding substantial changes to ensure the government maintains relevant and accurate information regarding the company.  The main changes include the alteration of capital structure, changes in physical address, and changes in main officials such as directors and company secretary.  Such changes are communicated to the Company House through WebFiling that is an electronic file transfer system implemented by the British government.  It is, therefore, the legal duty of the directors to establish the necessary ICT environment to ensure the company is able to communicate with the Company House electronically. A public limited company is expected to comply with the existing laws.  Directors are obliged to study the relevant laws and ensure compliance with these laws. Private limited companies are not governed by only the Company Act 2000 and the Insolvency Act 1987. They are artificial persons since they are separate legal entities. It implies that they should comply with other laws governing private citizens to enhance sustainable interactions between the citizens and businesses.  A private limited company has the obligation of paying its employees and making the relevant statutory contributions. The income taxes deducted from the employees should be submitted to the tax authority in full and on a timely basis. National Insurance Contributions should be deducted from the employees’ earnings and submitted to the relevant authority. A private limited company has the duty of meeting all the liabilities incurred during operations. Execution of this obligation ensures that the company does not defraud its creditors.

Unlimited Partnerships

The legal duties and obligations of partnerships are executed by partners since they are not separate from the business. Partners are required by the Partnership Act 1890 to declare all the income generated from the business activities. The declaration helps in identifying the specific profit share going to specific partners. The partners are required to act in utmost good faith for the benefit of the partnership. In other words, they should not engage in activities that compromise the well being of the partnership.  A partnership has a legal obligation of maintaining accurate accounts that help in identifying the profits generated by the partnership. These accounts are used to ascertain the taxable income of each partner. The income tax of the partnership is paid by the respective partners after profit apportionment (Organisation For Economic Co-Operation And Development 2011,p.167-169).  However, a partnership has an obligation to pay the income tax of its employees and also the value added tax. A partnership has a duty to pay its employees and make the necessary statutory deductions such as the personal income tax and the National Insurance Contribution. Partnerships also have an obligation to meet the liabilities incurred in the course of business. Failure to meet financial obligations to the creditors exposes the partners to the risk of their private properties being sold to meet the business’s financial obligation to third parties.

Termination Duties and Obligations

Not all businesses are a going concern and at one time operations are terminated. British business law gives clear directives on terminating unlimited partnerships and private limited companies. The duties and liabilities during the termination processes are clearly spelled out. Termination of business operations affects different stakeholders making it necessary to ensure that the interests of all stakeholders during termination. The procedures, duties, and liabilities during termination in partnerships and limited companies vary substantially.

Private Limited Companies

Termination of a limited company can be voluntary or involuntary.  The discretion of involuntary termination lies with the Company House that has the obligation of ensuring  companies operating in the United Kingdom have  met  the standards set by  the law. Involuntary insolvent is commenced by the creditors or the Company House. A creditor has the right to apply for liquidation in a court of law to facilitate debt recovery. In such an application, the concerned creditor is required to prove that the company is insolvent.  Insolvency is a condition where a company cannot meet its liabilities. In such a condition, the liabilities of a company exceed its assets therefore compromising the ability to meet the financial obligations once they fall due. The court, therefore, has an obligation to decide whether the creditor is justified to call for liquidation by examining the company’s state of affairs. The Company House can terminate a company in case of absence of directors and there are no attempts to appoint a director(Collis Holt & Hussey 2012,p. 93-100). Voluntary termination is initiated by the share holders. They can call for the liquidation if the company cannot pay its debts. The assets are therefore sold with an aim of clearing the company’s debts. Shareholders can also initiate a liquidation process when they want to stop operations. During the liquidation process, the liquidator sells the assets of a company and uses the proceeds to pay the creditors. The remaining proceeds are distributed to the shareholders.  The distribution of the proceeds must happen before the company is struck off from the register. Any money remaining after removing the company from the register is forfeited to the state (Collis Holt & Hussey 2012,p. 93-100).

Unlimited Partnership

Partners have an obligation of formulating a partnership deed that provides proper direction on dissolution. A good partnership deed states clearly the events that lead to partnership dissolution.  In case the partnership agreement does not specify the dissolution events some events leads to the dissolution of a partnership. Some partnerships are established for a fixed duration and the expiry of the duration marks the end of the partnership.  Bankruptcy or death of one or more partners provides enough grounds for dissolution.  Partnerships are dissolved when a partner gives a notice of termination (Ornelas & Turner 2007, p. 187-189). Some partnerships are created to accomplish a specific project.  Projects have a life cycle and the completion of the project marks the end of the partnership. Illegality can also lead to the termination of a partnership. The law clearly identifies illegal business activities and engaging in such activities provides sound ground for dissolution (Morse 2010,p. 23-34)).

Purpose

Lonsoft is a new software company that will be dealing in software production, consumer electronics, and the distribution of digital contents. The London-based business will first venture in software production and then exploit the other two sectors based on the success of the initial venture. The best type of business for Lonsoft is a private limited company due to its many advantages over the unlimited partnership. Technology companies have many stakeholders and it is, therefore, necessary to build confidence with different classes of stakeholders. Stakeholders have more confidence in public companies that partnership. The UK government has established good laws that make it possible for external stakeholders to monitor business performance. As a result, they are able to ascertain the business risk associated with a company that provides a basis for deciding whether to engage a company. It is, therefore, necessary to make the business a private company with an aim of boosting stakeholder’s confidence.

Technology companies need enormous resources to enable them to exploit opportunities presented by the ever changing technology environment.  The three main approaches to financing a business are equity, debt, and retained earnings. Companies are best placed to exploit the debt and equity financing. Financiers have more confidence in limited companies than unlimited partnerships.  It is, therefore, easier to secure financing from a financial institution when Lonsoft is formed as a limited company. Also, limited companies are able to access larger loans that unlimited partnership.  Companies can access funds based on the floating charge thus enabling them to access more funds than partnerships. Equity financing is more available in limited companies than in partnerships. Partnerships can hold a maximum of fifty partners implying that their ability for the owners to raise money is limited. On the other hand, limited companies have no maximum owners thus providing unlimited equity financing. It is also easy to convert a private limited company into a public company.

Branding in the technology sector is importance as only firms with strong brands are able to penetrate the market. A company is a separate legal entity from its owners that makes it easy to build a brand that is separate from the owners. Lonsoft seeks to implement diversification strategy producing different categories of technology products. The brand “Lonsoft” will be used in different products with an aim of building brand loyalty. The company and all its products will have a common brand to increase the ability to create a strong brand. Other technology firms such as Microsoft and Samsung use a common brand to identify the company and its products. These companies have managed to create strong brands that are separate from the owners.

Establishing Lonsoft as a company will motivate employees by giving them a chance to become shareholders.  Employees are the most valuable assets in an organization and they are key determinants of the ability of an organization to realize its objectives. It is, therefore, important to ensure the employees are motivated to contribute towards the realization of organizational goals. Separating ownership from control will pave the way to the engagement of competent directors who are conversant with the technology sector. The fact that directors are in charge of the day to day operations of a company implies that they will be able to employ their skills in the company’s operations.

In  conclusion establishing a new business requires the investors to make a decision on the ideal type of business. Unlimited partnerships and Private limited companies are some of the common types of businesses. The two types have unique characteristics that make it necessary to evaluate their pros and cons. The duties and legal obligations associated with each type vary substantially. They also differ based on dissolution regarding the process and the events that lead to dissolution.  Based on the evaluation conducted on both types of businesses, Lonsoft should be established as a limited company.

List of References

Brough, G. H. (2005). Private limited companies: formation and management. Edinburgh, Thomson/W. Green.

Collis, J., Holt, A., & Hussey, R. (2012). Business accounting an introduction to financial and management accounting. Houndmills, Basingstoke, Hampshire, Palgrave Macmillan.

Collison, D. et al., 2014. Financialization and company law: A study of the uk company law review. Critical Perspectives on Accounting, 25(1), p.5-16.

Ferran, E., 2001. Company Law Reform in the UK. Singapore Journal of International & Comparative Law , (5), p.516-568.

Fleming, L. 2000. Excel preliminary business studies. Glebe, N.S.W., Pascal Press.

Force, L.I., 2009. Partnership Act 1890. Notes, 1890(X), p.1-28.

Grier, N 2016. Uk company law. Place of publication not identified], Edinburgh Univ Press.

MäNtysaari, P.2010. The Law of Corporate Finance: General Principles and EU Law, Cambridge: Cambridge Scholars Publishing.

Morse, G. (2010). Partnership law. Oxford, Oxford University Press.

Organisation For Economic Co-Operation And Development,2011.Implementing the tax transparency standards a handbook for assessors and jurisdictions. Paris, OECD.

Ornelas, E. & Turner, J.L., 2007. Efficient dissolution of partnerships and the structure of control. Games and Economic Behavior, 60(1), p.187-199.

Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2010). Business. Australia, South-Western/Cengage Learning.

Siems, M.M., 2009. Regulatory Competition in Partnership Law. International & Comparative Law Quarterly, 58(4), p.767-802.

Walport, M.J. & Lynn, D.W., 2005. Research funding, partnership and strategy – a UK perspective. Nature reviews. Molecular cell biology, 6(4), p.341-344.

 

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