Business Associations

Ch 3. Companies

Chapter 3 Companies 3.1 Introduction A business can be conducted through the medium of a body corporate , or by an individual as a sole trader, or under a partnership. 3.2 Sole Trader This is the simplest and therefore most common form of business entity since there are so few legal requirements involved. The sole trader is his own boss without any shareholders or co-directors or partners to answer to. Sole traders' affairs are their own and there is no legal requirement to register accounts. One important disadvantage is that a sole trader is personally responsible for all debts and obligations incurred in relation to the business. The other main disadvantage of the sole trader is that he will find it more difficult to raise capital. For commercial purposes, banks prefer to lend money to a formally structured company rather than to an individual trader. 3.3 Partnership The simplest form of partnership is merely an extension of the sole trader. A partnership is not a separate legal identity. It is essentially a grouping for business purposes of a number of individuals with the intention of making and sharing a profit; 2.2. Profits and losses may be shared in agreed proportions according to the amount of work and expertise each partner will be applying to the business, and the amount of money they have each invested. The advantages of a partnership are the same as that of the sole trader - it is cheap and easy to form and attracts the minimum of legislation. The disadvantages too are the same as the sole trader except that a limited 52 Business Associations partner's liability for the firm's debts is limited to the amount of his capital contribution. 3.4 Body Corporate 3.4.1 A completely separate legal entity is created by the formation of a body corporate under CO which was originally based, to a large extent, on the Companies Act 1929 formerly in force in Britain but now replaced by various statutes culminating in the Companies Act 1985. However, following recommendations made by the Companies Law Revision Committee (June 1971 and April 1973), several parts of the Companies Ordinance - notably those dealing with prospectuses, accounts and audit - were amended and now incorporate most of the relevant provisions of the Companies Acts of 1948 and 1967. Most of the remainder of the recommendations in the committee's second report are given effect in the lengthy Companies (Amendment) Ordinance 1984, which was enacted in January and came into force on 31 August 1984. 3.4.2 To be formed and registered, a company may be either: (a) a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them (a company limited by shares); or (b) a company having the liability of its members limited by the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up (a company limited by guarantee ); or (c) a company not having any limit on the liability of its members (an unlimited company). This chapter deals mainly with companies limited by shares as they are the most popular among all the registered companies. 3.5 The Concept ofLegal Personality A company is an incorporated association of individuals or companies or of both individuals and companies. It has a legal personality Companies 53 distinct from the respective personalities of its members. In contrast a partnership is not a legal entity and has no existence separate from that of the partners carrying on the partnership business. Salomon v. Salomon & Co. Ltd. [1897] AC 22 Salomon was a boot and shoe manufacturer trading on his own account under the firm name'A. Salomon & Co.' He had been in the trade over thirty years. Later, he turned his business into a private limited company. The subscribers to the memorandum were Salomon , his wife, and five of his children who were grown up. The subscribers appointed Salomon and his two elder sons directors. Salomon's business was sold to the company at a price of £39,000. The terms of sale were approved by all the shareholders. £9,000 was paid in cash. 20,000 fully paid shares of £1 each were allotted to Salomon, so that Salomon's wife and children held one share each...