incorporation
When a legal entity is incorporated such as a company or limited liability partnership, the entity obtains its own separate legal personality and existence. In the case of a company, this means that the company has its own existence separate to the directors and the owners of the business, the shareholders. It can own, buy and sell property in its own name, enter into contracts with third parties, and can sue and be sued in its own name.
There are goods reasons for incorporating a company or limited liability partnership. Primarily, the entity provides protection to individuals by the separate legal existence provides company officers and the proprietors of the business, and managing inward investment is simplified when compared with traditional partnerships and sole proprietorships.
Companies and Partnerships: Comparison
Category | Companies | Partnerships |
Management | Management is separate from ownership. For instance, shareholders in a private limited company do not necessarily need to concern themselves with the administration of the company. | Management regime depends on the Partnership Deed between the partners, or other agreement between them |
Transfer of Ownership Interests | Ownership of shares in a company may be freely bought and sold, subject to restrictions in the Articles of Association | Exit from a partnership may be cumbersome; each time a partner leaves a partnership, the partnership is dissolved; the partnership continues with the continuing partners |
Investment | The structure facilitates investment by others. Shares may be allotted and sold. Different classes of shares are able to be created with have different rights associated with them (voting shares, preferential shares, equity shares and the like). | Inward investment more cumbersome because ownership is governed by equity stakes in the business. Management is not typically separate to those owning the businesses. |
Cooperation | Joint ventures (aka partnering) with other companies is facilitated by entering into contracts with partners, or taking a share in another (special purpose) joint venture vehicle which would ordinarily be a company. | All of the partners are deemed to be parties to contracts with third parties, exposing them to personal liability |
Security Interests | Debentures such as fixed and floating charges, are able to be granted by the company to banks over the companies assets | Partnerships are not able to grant floating charges as a security interest as they are not able to be registered |
Taxation | Standard (and lower) taxation rates apply to companies than personal tax rates | Partners are taxed according to the personal income tax rates applicable. |
Limited liability / Exposure to liability | Limited liability applies to directors and members of a company; the separate legal existence of a company shelters the directors and shareholders from liability | Liability is unlimited; partners are at risk of losing all of their personal assets, including for misconduct by other partners |
Administration/Filing requirements | Incorporated entities are required to adhere to timetables for filing of documents about the company with Companies House which are published | Generally speaking, there are no reporting requirements other than for taxation |
Distributions to owners | Only accumulated profits may be distributed to the shareholders. Realised losses must be made good before dividends may be distributed to shareholders | No restrictions on distribution of profits |
Vicarious Liability | Companies are liable for the acts and omissions of its agents and employees, such as negligence | Partnerships are more likely to be owner administered |
Stock Exchanges | Public companies are able to be listed on stock exchanges | No ability for public trading of ownership interests on stock exchanges |
Where two or more people start a new venture with a company limited by shares, the shareholders often enter into a shareholders agreement to setup the legal relationship between them, which would include:
- allocation of shares;
- rights to appoint directors;
- rights to payment from the company;
- dispute resolution provisions, as disputes do happen; rights associated with shares;
- responsibilities of each of the shareholders;
- documenting the assets and skills which are brought to the company by each of them;
Partnership deeds are prepared for limited liability partnerships and traditional partnerships for the same purpose.
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