Critical Evaluation of the Companies

Introduction

This paper aims to provide a critical evaluation of the Companies (Consolidation) Act 1908, s.16 (2), which is concerned with the effects of company registration. From the date of incorporation, the memorandum and other individuals may become one corporate body, and thus, perform all the required functions of an incorporated company. This paper will start by providing the nature of limited liability companies. Thereafter, it will provide how large scale investors are benefiting from limited liability companies. Following this, there will be the provision of sole proprietors, and the benefits they derive as compared to shareholders in limited liability companies. Overall, this paper brings forth a great use of opinion that company legislation framers failed in fully understanding and providing for the full range of businesses that could be useful towards taking advantage of company incorporation, and as such, it is evident that the law needs amendment.

Nature of limited liability companies

In the present business climate, it is evident that limited liability companies have been criticized by scholars such as McLaughlin (2018), to be of benefit to only large-scale investors. However, it is clear that this criticism is unfounded, owing to the fact that it is not proven that that was their intention from the outset. Essentially, a Limited Liability Partnership (LLP) is established through the registration of a document of incorporation with the company’s registrar, and as such, it forms a flexible business enterprise, which purposes to blend partnership elements, as well as corporate structures as a form of legal business that imposes limited liability to owners. In line with this, a limited liability memorandum states that members’ liability is limited and as such, in an instance where a company is limited by guarantee, then the clause may contain the guarantee terms, although this could be found in the Articles of association.

Individuals benefiting from limited liability companies

Notably, large-scale investors such as large capital investors have benefitted from limited liability, because their financial liability is limited to a fixed sum, thus implying that in case a company having limited liability has been sued, the plaintiffs can only sue the company and not the investors, or the owners. In this regard, they are not deemed to be liable for any of the company’s debts, other than the company’s investment value. Contrary to this, sole traders, as well as partners in partnership, are all liable for all the business debts, which then call unlimited liability. It is evident that unlike normal partnerships, the LLP members’ liability on winding up, is noted to be limited to the capital amount that the contributed to towards the LLP. The case of Salomon v Salomon brought forth exceptional circumstances, which have been delineated by legislatures and judiciary, especially in England and Ireland where courts are able to legitimately disregard the separate legal personality of a company.

Once a limited liability is created, a company then has an everlasting life. As such, it can remain dormant for the longest time possible. The subscribers of the memorandum together with such other persons as may from time to time become members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company. The expense connected with having the company kept in the register is £15.00 for registration of an annual return. Moreover, whilst the company is dormant, there are other documents, as well as yearly company balance sheets, which ought to be prepared and also filed at the companies House. The audit exemption of a dormant company may be claimed by a particular limited company that has previously not traded in any financial year, not unless it is a banking company, insurance company, or a person authorised. Employees, management, as well as directors are deemed as agents of a company. In an instance where they retire, die or even leave, the company still exists. This meant that the termination of a company can only be done through winding up, liquidation, a court order, or order from the registrar of company that provides great flexibility to the company’s investors whilst they make certain decisions. Clearly, the issue of transfer or shares’ sale poses as a process that is relatively straight forwards. However, existing shareholders are often protected through their rights of pre-emption and by the

legislation of the company that purposes to protect the interests of the investors. Significantly, the pre-emption allows shareholders to acquire new shares that the company issues, and this is not regarded as a public offering. As such, this right is also referred to as a subscription right, or rather, a subscription privilege. Notably, the lending process to a company is also easier as compared to other forms of business. In this regard, the lending bank can secure its loan against other business assets or against the business wholly.

Although the liability of the shareholders on the actions of the company is limited, it is worth noting that the shareholder could still remain liable for its acts whilst performing the functions of the incorporated company. Clearly, they are held liable for the debts in an instance where the company is unable to pay. However, other shareholders can fail to be liable. This is referred to as co-signing. Moreover, it is often difficult raising financial capital for an LLC, owing to the fact that investors may be comfortable in investing funds in the corporate form, having views towards the initial public offering. However, a solution could be forming a new corporation and merging to it, thus, dissolving the LLC and converting to a corporation. Notably, minority discounts provided in estate planning could be lower in a company having limited liability, as compared to a corporation. Owing to the fact that LLC can easily be dissolved, there could be great access to business assets. Company law scholars have the belief that limited liability companies’ discounts could only be 15 per cent as compared to 25 per cent to 40 per cent for a corporation that is closely held, thus investors are

able to get low dividends. Moreover, their earnings can be reduced, as most LLC members have their earnings subjected to self-employment tax.

Advantages of sole proprietorship, which are overlooked by companies

The key advantages of sole proprietorship are that they are easily started up and are subject to few regulations as compared to other businesses. The owner has full autonomy towards business decision and can also be easily discontinued. Owing to the fact that a sole proprietor often has quick decision-making processes, and do not face any form of opposition whilst making decisions, they have total control of their business. All their profits and losses are accrued to them. Owners of sole proprietorship do not have tensions regarding conflicts amongst their partners, as there are no partners, thereby, solving problems that may result between shareholders and managers such as conflicts relating to control of the company. Notably, the LLC principals often use many titles such as manager, chief executive officer, partner and even president. In this regard, it is often difficult determining whoever actually has the authority of entering into a contact on behalf of the LLC. It is also notable although there are advantages associated with taxation for LLC, a sole proprietor does not pay any corporate tax, thus making tax filing simpler. Evidently, a sole proprietor is also not concerned with double taxation, yet a corporate identity would as shareholders are taxed,

both at a corporate level and at a personal level. Significantly, an unlimited company is advantageous in being a legal entity that is separate from its members, although lacks the advantage that is the members’ limited liability as sole proprietorship restricts the inclusion of other members, sole proprietors lack flexibility whilst structuring the management of the company and finally, the owners are liable for the debts, as well as liability of the business.

Moreover, it is evident that there are different investor sizes in LLC. According to the Companies Act 2006, section 7 permits the creation of a single member LLC. It is presently unnecessary having an “artificial” member existing in many private companies that have a sole proprietor, owing to the fact that he or she is bent to face many disadvantages such as taxing. The same is noted to be true for various subsidiaries that are either trading or dormant, especially where someone like a group secretary of a nominee of a separate company has previously held shares in the subsidiary, normally under trust declaration and bank transfer form, favouring the parent company, such that the shareholding could be recalled at any given time from the nominee. The aforementioned imply that LLCs only benefit large-scale investors.

Conclusion

Based on the above provisions, it is evident that in comparing the advantages associated with unlimited liability, the LLC investors are bound to benefit from limited liability. However, it is evident that the benefit can only depend on the nature, as well as the size of the company, and considering the shares proportion that they own. A disadvantage associated with sole proprietorship is that as the business becomes successful, various risks accompanying the business often tend to grow and this poses as a key role for the company to be able to minimize such kind of risks, thus maintaining the company. As such, this poses as a grand reason as to why investors purpose to invest in LLCs. This then makes it clear that the framers of the companies’ legislation failed in fully understanding or providing full range of businesses that could take advantage of incorporation. In this regard, it is necessary for the company legislation law to be amended.

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Bibliography

Cases

Salomon v A Salomon & Co Ltd [1897] AC 22

Statutes

Companies (Consolidation) Act 1908, s.16 (2)

Companies Act 2006

Books and journals

Bayern, S., Burri, T., Grant, T. D., Hausermann, D. M., Moslein, F., & Williams, R. (2017). Company law and autonomous systems: a blueprint for lawyers, entrepreneurs, and regulators. Hastings Sci. & Tech. LJ, 9, 135

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Bourne, N. (2016). Bourne on company law. Routledge.

Dine, J., & Koutsias, M. (2019). The Three Shades of Tax Avoidance of Corporate Groups: Company Law, Ethics and the Multiplicity of Jurisdictions Involved. European Business Law Review, 30(1), 149-181.

Hannigan, B. (2018). Company law. Oxford University Press, USA.

McLaughlin, S. (2018). Unlocking company law. Routledge.

Talbot, L. (2015). Critical company law. Routledge.

Watts, P. G. (2017). Shareholder Supremacy in Classical Company Law—With Particular Reference to the Making of Business Decisions by Shareholders on Behalf of Their Company. The Changing Landscape of Corporate Law (Centre for Commercial and Corporate Law, University of Canterbury).