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Forms of Business Ownership, Coursework Example

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Coursework

The decision to invest in a business especially while targeting the wealthy clients requires not just a bigger capital base than £20,000, but also a business bigger in its operations. Unlike sole traders, a business that targets wealthy clients can be formed as a one-person company or as a multinational, owned by many shareholders. According to Barnet and Muller, partnerships and sole traders expose themselves to the risk associated with unlimited liability for debts of their businesses, which company owners enjoy. This is the major advantage of companies over all the other forms of business ownerships. Due to the non-distinction between the business and its owner, a sole trader does not enjoy some remunerative tax-free benefits because of not offering employee plans such as retirement benefits or medical plans. Similarly, lawsuits targeting the business will directly impact on the owners personal savings, just as the owner’s assets can be used to repay the liabilities of the company.

According to Mandura a sole trader is a business form whereby the owner and the business are one and the same. As the simplest business ownership, any amount of capital is needed, and no legal documents are filed during the formation. The owner also enjoys complete control of the business operations, benefiting from business profits and using his personal funds to finance business debts. This aspect of unlimited liability separates sole traders and partnerships from companies (163-165).

Unlike a sole trader, a partner will be held liable for the actions of another partner, further increasing the liability to the partnership. The demise of a partner implies that the partnership agreement is void, hence end of the business. However, the partnership has the power to hold property in its own name, and incur debt. Although, it does not file returns on its income, the partnerships pay an informational tax with the IRS (Mandura 167).

On the other hand, a company is formed through incorporation into a ‘corporate person’ or a separate legal entity different from the owners. The company formed by registration under the Companies Act 2006, are allowed ‘like a person’ to own property, sue and be sued. The separate legal personality of a company is linked to the famous case of Salmon v Salmon & Co, Mr. Salmon while in a leather business formed a company Salmon & Co Ltd. He and his family of 6 held all the company shares; with his wife and each of 6 children holding one share. Unfortunately, poor performance forced the company into liquidation and a liquidator was assigned to sell the company assets to repay the debts. In the liquidator’s view, the ownership of 20001 shares of the company meant Mr. Salmon was the owner of the company and was liable for the debts. In the ruling by the House of Lords, ownership of shares was not relevant, and as long as a company is incorporated through the Companies Act, it becomes a separate person; with the debts of the company belonging to the company and not its shareholders (Mandura 169).

Furthermore, the position of a separate legal personality is supported by the case Macaura v Northern Assurance Co, where Macaura sold all the timber in his yard to a company in exchanged for the company’s shares. While in his possession, Macaura insured the timber under his name, but were destroyed by fire two weeks later. In pursuit for the insurance to pay, Macaura was informed that he did not have an insurable interest in the timber, as he was no longer the owner, but the company was. To this, the House of Lords agreed. This implied that as the separate legal identity of a company grants its members a limited liability, it is in the same way that the company assets belong to the company and not its members.

Effects of a ‘Separate Legal Personality’

A company acquires a separate legal personality upon its incorporation in accordance to the Companies Act of 2006. Consequently a company benefits from the status of an “artificial person”, primary of which includes limited liability to its shareholders; perpetual succession, even upon loss of shareholders; owning business property; suing and being sued in a court of law; liability in crime and tort; and idea of majority rule (Goosen and Berndt 112).

The separate legal personality grants the members a limit beyond which the debts of the company cannot surpass. The company’s debt will be repaid according to the proportion of shares each member has in the company, such as the liability of paying the full amount of the shares owned by a member of a company limited by shares; or paying the amount guaranteed to pay if a company is wound up, by a member of a company limited by guarantee. According to Goosen and Berndt, the company’s perpetual life is not affected by changes in the membership of the company, through death or bankruptcy. Property in the business is owned by the company and not by the members; hence in case a creditor is owed by a shareholder, he cannot take action against company assets over the debt. As a “legal artificial person”, the company can sue, and be sued in a court of law. It can also enter into contracts as a “person” with an unlimited contractual liability for its debts (114-21).

Despite the benefits accruing from its positions as a separate legal personality, the company is entirely responsible for the torts committed by its employees. Such include crimes of recklessness or intentional crimes. Because directors rarely participate in the daily running of the company operations, prosecuting companies whose directors had the required mental element has proved impossible.  Lastly, the power of the ‘majority rule’ from the ruling of the case Foss v Harbottle, requires that the majority of members must unite to pass a court action in case a company suffers injury. It is not possible for a single member to raise such an action, unless the majority concur (Barnet and Muller).

Therefore, with a contribution of £20,000, it is advisable to start a company as than a partnership or a sole proprietorship.

Works Cited

Barnet, Richard, and Muller, Ronald E. Global Reach: The Power of the Multinational Corporation. New York, NY: Simon & Schuster, 1974.

Goosen, Wynand, and Berndt, Adele A. Forms of business ownership. Johannesburg: Lex Patria, 1990.

Madura, Jeff. Introduction to business. 4th ed. London, UK: Cengage Learning, 2006.

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