Advantages of a Limited Liability Company
There are many advantages that a limited liability company possess over the other forms of business organisation such as general partnerships, sole proprietorships and limited liability partnerships. The advantages emanate from the unique characteristics/ features a company acquires after it has been incorporated. The incorporation of a company transforms it into a legal person capable of having rights, duties and liabilities. Therefore, a company is treated as separate and different from its members. Most of the advantages of a company are derived from the features it possesses after incorporation.
There are many advantages of a company as a legal person. One is the limited nature of the liabilities of the members of the company. By virtue of the fact that a company is separate and distinct from its members then it is liable to pay its debt and liabilities as they incur. Moreover, the company is not liable for any debts and obligations that its members can incur in their own name. If Steve and friends decided to incorporate a company limited by shares then each of the shares will be given a certain minimal value. In case liabilities befall the company and it goes into liquidation their liabilities will be limited to the value of the fully paid shares(Wooldridge, 1991).
Two, Limited Liability Company enjoys perpetual succession. The company will continue to exist even if the members of a company keep on changing. When one member of the company dies, retire from the company, exit from the company, become bankrupt, turn insane or transfer their share, the existence of the company will not be affected. The company will continue to trade and carry its own activities. The company will cease to exist only if it winds up voluntarily by the members or involuntarily through the court process.
Moreover, due to the separate legal personality of a company, it can buy any property and register in its own name. The company will acquires a proper title to the property upon registration. It can therefore deal with the property as it wishes; it can sell or convey the property to a third party. It is advantageous for a company to hold property in its name because the legal title of theproperty will never change in case the members retire or move out of the company.
Moreover, if Steve and the friends will require more capital for purposes of expanding their investments the company will provide a proper avenue for raising the capital.Actually, the ability to raise capital is another advantage a company has over other forms of business organisation. They can easily approach any money lending institution like a bank for a loan. Alternatively, they can sell the shares to raise more money. The company can issue any of its assets either movable or immovable as a security to the loan.However, the fact that a property is a security of loan, it will not affect or interfere in the manner in which the company will deal with that property. It is, therefore, more convenient to raise capital using Limited Liability Company than other forms of business organization(Grier et al, 1998).
The company that it is advisable for Steve and the friends to register is a private company that is limited by shares. They want to engage in profit making activities, therefore, a company limited by guarantee is not best suited for that purpose. A private company limited by shares will provide an opportunity for them to protect their investments in forms of shares. When the company will wind up each investor will be entitled to have their capital contributed to the company back. Moreover,the company has all the advantages that the essay has already discussed and hence will suit their needs. Section 3of the Companies Act recognizes the private Company limited by shares; therefore, it is a legal entity within the UK jurisdiction.
Duties and Liability of Steve as a Promoter of the Company Steve being a promoter of the company will be required to bring the company into existence. Therefore, he is charged with the duties of ensuring compliance with all the registration process and registering the company. He will also enter into any contract that will facilitate the incorporation of the company. Moreover, he will find shareholders willing to invest in the new company and appoint directors(Dine et al, 2007).
Steve will be an agent of the company under incorporation and is bound by fiduciary duties. Therefore, he is under a duty to act in good faith. His duties will be fiduciary because the whole process of incorporating the company will entail acquisition of property. His fiduciary duty, therefore, bars him against concealing any profits made in such transactions. Moreover, the duty will require full disclosure of any commission he receives from transactions he will engage in when promoting the company (Cahn, et al2010).
The case of Erlanger v New Sombrero Phosphate Co (1878) 3 All Cas 1218 highlighted the obligations of a promoter in relation to their fiduciary duties. The court held a view that promoter should always strive work in the best interest of a company. Due to their position, they can be tempted to act arbitrarily and violate the powers vested in them. Thus, fiduciary duties imposed on them are meant to check their powers and enhance accountability of their actions while they are promoting the company.The interest of the company should always be prioritized over their personal interest. Therefore, disclosure of any amount obtained from sale of any of their own property is mandatory. Failure to disclose can lead to liability. Thus, if Steve fails to act in good faith in the course of promoting the company, he might risk losing his personal finances to the company.
Protection of Capital Investment The best way Steve can protect his capital investment is by turning the capital he intent to invest in the company to shares. The shares will determine his interest in the company both in terms of liability and the interest that accrue from the company. By having the shares, then he will be entitled to many rights in the company. The most important right, apart from the right to vote and getting dividend when they are shared, is the right to have his capital back when the company winds up in the future. The fact that he will be able to get back his capital when the company winds up is sure security to his capital investment.
Moreover, upon registration of the company his shares will be his personal property and it will be owned by him and not any other person. It is notable that under the common law it presumes that all shareholders are equal. Therefore, all the shares a company has are of equal rights and the same. All the shares that have been completely paid for and those that have been partially paid for have equivalent rights when the net assets of a company are divided among the shareholders. Moreover, the ordinary and preferential shareholder are entitle to equivalent rightswith regard to the capital they invested in the company. However, where there is a specific provision in the memorandum of association that confers different rights to the shareholders then the provision will prevail.
Therefore, the Memorandum of Association can do away with this presumption of equality of shareholder by requiring different shareholders to enjoy different rights. Thus, Steve has to be careful when they are drafting the memorandum of association. The class of shares should be provided for in the Memorandum of Association. It is advisable that he should be a preference shareholder because he is making a greater capital investment than his two friends. He will, therefore, be able to enjoy a fixed rate of dividend. Moreover, his capital investment will be returned to him in the amount he invested plus any interest thereof.
The approach on the management of the company The issue on the management of the company can be approached in two ways. Firstly, Steve can decide to leave Ramesh and Trevor to manage the affairs of the company. Therefore, Trevor and Ramesh will constitute the board of directors. Steve will not participate on any of management issues of the company. The two directors must exercise due diligences while discharging their duties and they are under fiduciary duties to act in good faith and in furthering of the interest of the company. However, if they fail to exercise due diligence and act in good faith, they will be held accountable during the meeting of the shareholders.During such meeting, Steve will have the powers to remove any of the directors in case they did not execute their duties effectively.
Secondly, Steve can also decide to be among the directors of the company since it is a private company it can have more than two directors. He will, therefore, take part in the management of daily undertakings of the company. Therefore, the company will have three directors who will also be part of the shareholders meeting. Both the board and the shareholder meetings will participate in the making of decisions for the company. (Atkinson,
It is worth noting that Steve by investing $15000 dollar in the company will be a majority shareholder in the company. He will own 50% of the shares of the company and therefore he will have substantial influence on the management decisions by virtue of being a majority shareholder. He will manage to control almost a half of the voting powers in the company. Therefore, his level of influencing significant management decisions and business operation of the company will be high. It is worth noting that when the majority shareholders arrive at management decision then that decision will be treated as the position the company has taken(Griffin, et al 2000).
In the case of Foss v Harbottle 1 WLR 149where minority shareholder brought a suit against the directors of the company for selling their land to the company and rewarding themselves with price greater than the true value of the land. The company lost money in the process. During the shareholders meeting, the majority shareholders had decided not to take any action against the directors on grounds that the loss that occurred was not their responsibility. The court dismissed the suit and held that the majority shareholders approved the acts of the director and such approval was the true position of the company. It further held that the minority shareholders were not appropriate plaintiff to the suit because the alleged loss was the company’s loss and not the minority shareholder and that the company can act only through majority shareholder.
Research Approach The major type of research employed in this work is desk research. Several sources were, therefore, consulted in the preparation of this work. The sources included: legal journals, case laws, statutes relating to company law in the UK, textbooks, encyclopaedias, legal dictionaries and scholarly articles on company law. Textbookswere consulted to specifically to get information on the several aspects and features of a company. The information was appropriately analysed and the advantages of a limited liability company deduced from the information. Moreover, the textbooks were helpful in building argument on the issues to do with structuring of the management of the company and security of the capital investment. The information from the textbooks was never direct for easy application in the answering of the question. However, with critical analysis of the information and appropriate deductions relevant conclusion was arrived at and applied to the question.
The statute and the case laws were consulted purposefully to provide the position of the law on the issues the essay was addressing. Case laws were not that straight forward; they also required an analysis to deduce the appropriate principles to be applied to the circumstances of the question. The statutes also required an appropriate interpretation before application to the issues raised in the question. The journals and the scholarly were a resourceful source of opinions on the issues the essays was addressing. Finally; the legal dictionaries were very resourceful in offering meaning to the legal terms that had technical meaning.
Advantages of a Limited Liability Company