Transcript The legal forms of organisation

The legal forms of
organisation
Chapter 12
© Luby & O’Donoghue (2005)
Legal form affects a business
Taxation requirements
Legal requirements
Audit and financial requirements
Sources of finance available
Legal forms
1.
2.
3.
4.
Sole proprietorships (trader)
Partnerships
Limited liability companies
Not for profit organisations
Sole-traders
The sole trader legal form of organisation comes
into being when an individual sets up in
business and starts to trade in his or her own
name.
The individual is the sole owner of the business.
A sole trader can also register a business name
such as John Ryan trading as "Ryan & Sons".
Sole-traders
Advantages
1. The simplicity and ease in setting up in business.
2. The lack of legal controls and constraints (need
records for Revenue Commissioners).
3. Privacy as the accounts of sole proprietorships are
not required to be published unlike the accounts of
companies.
Disadvantages
1. Not protected by limited liability.
2. Sourcing finance can be difficult.
3. The rates of tax on profits for sole traders for are
higher than for companies.
Partnerships
A partnership can be described as an association of
persons carrying on business in common with a view to
making a profit. The agreement between the persons can
be in a verbal or written format.
Advantages
1. Simplicity and ease in setting up business.
2. The general lack of legal controls and restrictions compared
to limited liability companies.
3. Partners often have a blend of skills and experience, which
help to create a more effective organisation.
4. Partnerships have greater access to capital due to the fact
that there is a greater pooling of capital and borrowing
capacity.
5. Privacy as the accounts of partnerships are not required to
be published to the general public but are required for tax
purposes.
Partnerships
Disadvantages
1. Not protected by limited liability.
2. Sourcing finance can be difficult.
3. The rates of tax on profits are higher than for
companies.
4. Partnerships can be quite unstable and break-up over
relatively minor issues.
5. The life of the partnership can be limited by
agreement or by the life of the partners.
Companies
A company is a corporate body, which has a
legal existence quite apart from the owners
(shareholders). Limited liability companies can
have a perpetual life since ownership is
represented by shares that are transferable.
This ensures that companies can exist beyond
the lives of their original owners. This is unlike
sole traders or partnerships where the business
ceases to exist on the death of the owners or
partners.
Formation of a limited
company
The formation of a limited company is handled by
solicitors who draft the necessary legal documents that
form its make-up. These documents are then registered
with the company’s registrar where upon a certificate of
incorporation is issued to the company. The company is
now registered and can commence trading.
The main legal documents required are:
1.
2.
3.
4.
memorandum of association.
Articles of association.
Statement of nominal share capital.
Statutory declaration of compliance with all the requirements of
the relevant companies acts.
5. List of persons who have consented to be directors.
6. Form of consent to act as directors from those who have agreed
to be directors.
A private limited company
A private limited company is a company that has between
two and fifty shareholders that have restrictions on the
transfer of shares but are protected by limited liability.
Key characteristics:
Between 2 and 50 shareholders (min of 2 ).
Business can commence immediately on incorporation.
The right of transfer of shares is restricted as there is no
market to actively trade in the shares.
The company is prohibited from inviting the public to
subscribe for its shares or debentures.
Accounts must be audited each year.
All companies must file their annual accounts whether
audited or not with the companies registrar.
Generally private companies are formed to ensure their
owners benefit from limited liability.
A public limited company
A public limited company is a company that has a minimum of
seven shareholders that are protected by limited liability.
Shares are freely transferable as they can be traded publicly and
are quoted on a stock exchange.
Key characteristics
A min of 7 shareholders and no maximum limit.
Shares are freely transferable, a market exists to buy and sell the
shares.
Shares of Plc’s may be quoted on the stock exchange (subject to
permission by the stock exchange authorities).
Though incorporated a Plc cannot commence business until the
registrar of company’s issues a Trading Certificate to commence
business. This cannot happen until €38,092 of share capital has
been subscribed.
Accounts must be audited each year and a copy filed with the
companies registration office.
Generally public companies are significantly larger than private
(although this is not always the case) and they tend to have more of
an international dimension.
Generally public companies are formed to raise capital from the
public.
Private
LTD
Public
PLC
Number of shareholders between 2 - 50
Minimum of 7
Right of transfer
Is limited
Not restricted
Public subscription
Prohibited
Not prohibited
limited
Very detailed
Not quoted
May be quoted
Publication of results
Stock Exchange
Companies limited by
guarantee
This is a company where the members usually
do not provide money/capital on its formation
but guarantee to pay its debts up to a certain
limit in the event that the company goes into
liquidation. Usually the sum is a nominal
amount. This method of incorporation is used
by non-profit making organisations such as
clubs, charities and societies.
Unlimited companies
An unlimited company is one which ensures its
member can be personally liable for the debts
and liabilities of the business. This liability can
be totally unlimited or limited to a certain
figure. This is a big disadvantage, unlimited
companies have the following advantages.
The right to reduce issued capital without court
permission.
Exemption from filing accounts (privacy advantage).
Limited liability status
Advantages of Limited liability company status
1. Investor’s liability is limited.
2. Companies tend to have greater access to capital.
3. The business continues despite the death or incapacity of the
investors.
4. Profits are taxed at the corporation tax rate of 12.5%
(2004).
Disadvantages of Limited liability company status
1. Limited companies are more regulated than either
partnerships or sole traders.
2. It is more difficult to withdraw money from a company than
it is for a sole trader or partnership.
3. Once incorporated, companies must file their accounts with
the companies registrar and hence there is a lack of privacy
compared to sole proprietorship and partnership legal forms
of organisation.
Legal requirements for limited
companies
The Companies Acts 1963
The Companies (Amendment) Act 1983
The Companies (Amendment) Act 1986
The Companies Act 1990
Company Law Enforcement Act 2001
Companies (Auditing and Accounting) Act 2003
Companies are legally required to
Keep proper books of accounts.
Accounts must be audited by an independent auditor.
All limited companies must register with the company’s
registrar in Dublin Castle.
The company’s registration office keeps a file on each
company which includes its annual accounts, names of
directors, location of business, business name etc.
Anyone can issue a search to get details of all companies
both public and private.
Must hold an AGM once in every calendar year.
Administration of limited liability
companies
An annual general (AGM) meeting should be held.
At the AGM shareholders can vote and appoint
directors to run the company on their behalf.
An annual report should be provided.
An audit is a legal requirement under the Companies
Act 1963
The company must legally keep what are called
statutory books which include the following
Register of shareholders.
Register of debenture holders.
Register of assets given as security.
Register of directors and secretaries.
Register of director’s interests in ordinary shares and
debentures.
Minute books of directors’ meetings and general
meetings.
Record of declarations by directors of interests in
company contracts.
Sole Proprietorships
Partnerships
Limited liability
Companies
Private - between 2 - 50
1 person
between 2 - 20 *
Public - minimum 7 but no
maximum limit
Set up costs minimal
Set up costs minimal
Legal fees and stamp duty
No restriction on
distribution of profit or
cash withdrawal
Profits distributed in
agreed proportions
Restricted under company
law
No legal requirement to
prepare accounts
No Legal requirement
to prepare accounts
Accounts must be prepared
and registered with the
Company’s Registrations
Office
No audit fees
No audit fees
Audit fees
No limited liability
No limited liability
Limited liability
Legal
No real legal restrictions
except tax law
Must obey Partnership
Acts
Restricted under companies
acts & accounting regulations
Taxation
Profits taxed at income
tax rates 42% & 20%
Profits taxed at the
income tax rates of
42% and 20%
Profits taxed at corporation
tax rates 12.5%
Ownership
Financial
Not for profit organisations
A ‘not for profit’ organisation is established to
achieve goals other than making a profit.
Making a profit is not their primary goal.
Examples would include the following:
Co-operatives
State sponsored enterprises
Charities