Monthly Archives: March 2012

Business partnerships

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Business Partnership

What is a partnership?

A partnership is one of the legal structures for forming a business and is an alternative to a sole trader or a limited company. There are different types of business partnerships: ordinary partnerships and limited liability partnerships. All partnerships have some similarities in that they will contain two or more partners (either as individuals or their businesses) who share the profits of the business as well as sharing duties and responsibilities. Businesses that are usually run as partnerships include: doctors, dentists and solicitors.

The partnership agreement

Most partnerships are governed by a “partnership agreement”, which is the contractual relationship between the partners of the business. In the absence of a partnership agreement, the business will be governed by the Partnership Act 1890. It is recommended that parties entering into a business partnership draw up a partnership agreement because the Partnership Act 1890 is a very old piece of legislation and does not protect against every possible outcome. For example, under the Partnership Act 1890, if one of the partners dies or retires the partnership is automatically dissolved.

A partnership agreement will allow you to depart from any of the terms of the Partnership Act 1890 and will help to avoid potential disputes. The partnership agreement should state things like how much each partner is contributing, how they will share profits, what their roles are going to be, what to do when a partner wants to leave, how to dissolve the partnership, how to admit new partners and how decisions will be made. If a partnership agreement is entered into then each partner should obtain separate legal advice.

Partnership rules for an ordinary partnership

There are no formalities for creating an ordinary partnership ie not a limited liability partnership; it simply requires two or more people “carrying on a business in common with a view of profit”. However there are some formalities regarding how the business conducts itself, for example, the names of the partners should be displayed to the public, such as on their website and letterheads.

Advantages and disadvantages of ordinary partnership

An advantage of a business partnership is the accounting and tax structure. Business accounts are not public records and partners complete their own annual tax returns like any other self employed person.

 A major potential disadvantage of a business partnership is that partners are joint and severally liable for the business debts. This means that in the event of a partnership insolvency situation, creditors can come after each partner’s individual assets to pay off any outstanding debt, even if the debts have been caused by one of the other partners. Essentially, according to J E Baring, specialist insolvency lawyers,  there is no protection for the partners should the business fail. Even a partner who has left the business can still be held accountable for the business if there is an issue surrounding something that occurred during their tenure.

 

Limited Liability Partnership (LLP)

A s seen above an ordinary partnership does not have many rules and is largely governed by the partnership agreement. However, limited liability partnerships have additional legal requirements.

A limited liability partnership (LLP) is more like a limited company in comparison to an ordinary partnership. LLP’s require at least two designated members who carry extra responsibility. If at any time there are less than two designated members then every member is deemed to be a designated member. LLP’s must also register with Companies House and they must file their accounts, which other partnership types do not have to do.

A key advantage of an LLP is that the partners’ liability is limited to the amount of money they have invested in the business along with any personal guarantees they have given, therefore they have more protection than ordinary partnerships.  The LLP is an entirely separate legal entity from the partners as individuals.

Some businesses have “sleeping partners” who make financial contributions to the business but have no involvement with its day to day running.

Additional resource for partnership law.

Company law

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Company Law

Company law, primarily the Companies Act 2006 provides the statutory framework within which a company or other business organisation must function. Other law also involved in the regulation of companies includes the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and common law.

Company law, also known as corporate law is vast and in practice has a considerable effect on commerce, politics, economics and social contexts. It is therefore important not only to think about the legal aspects of the subject but also practically, for example the implications it has on the company structure, shareholders, directors and fundamentally the impact it has on the way the business is operated.

There are two main strands to company law, corporate governance and corporate finance.

Corporate Governance

A company comprises of four components

  •  shareholders
  •  directors
  •  employees
  • creditors

Each of the above have their own rights and duties. Corporate governance moderates the rights and duties to avoid and prevent conflict by balancing the power each have. It recommends structure, administration, accountability and remuneration along with rights and duties. However, the company constitution (Articles of Association and Memorandum of Association both lay down the framework in which the company is to run and function) can freely assign the above as it wishes.

English law tends to favour the position of the shareholder giving them equality and the freedom to trade their shares in the market. The shareholders get to exercise their right to vote in company affairs in a General Meeting. The rights are minimum but it permits them to alter the company constitution and remove members of the Board (directors) by issuing resolutions (written decisions).

Where shareholders own a company, the directors manage it and make decisions on the day-to-day running of the business. Although the company constitution has to be adhered to, directors often have to exercise their own judgement and autonomy. It is therefore not surprising that company law seeks to place mechanisms in place to ensure the directors are accountable for their acts and omissions. Directors owe duties to the company and are required to perform their responsibilities with competence, loyally and in good faith. If this is not done, they can be vindicated in court.

Corporate Finance

Corporate finance, as the name suggests deals with matter of finance i.e. money and capital primarily concerning the shareholders and directors. There are two methods through which a company can function, equity finance (shares) or debt finance (loans).

Equity Finance

Equity finance is the more conventional method and involves issuing shares to build the capital of a company. The shares carry rights to dividends (share of the profit or surplus from the capital) and voting rights. The ownership of the company therefore lies with the shareholder.

Company law dictates that any potential shareholder is given full disclosure of all material facts in the prospectus. Existing shareholders can purchase newly issued shares before outsiders (pre-emption tights) in order to avoid dilution of their stake and therefore control of the company. The company constitution will necessitate that the capital is maintained to benefit the creditors.

A company, specifically public limited companies are forbidden from financially assisting a person for the purchase of its shares unless the company taken of the listings (list of public companies) or is private.

As already mentioned above, UK law focuses on the protection of the shareholder. To provide further protection, insider trading (trading on private information) is prohibited as it could affect the value of a company’s shares.

Debt Finance

Where in equity finance ownership of the company is lost, with debt finance ownership and profits remain with the directors. Debt finance involves a company getting a loan with a fixed interest and repaying that. It is customary for lenders, in particular banks, to secure their interest by means of a charge over company assets (also known as collateral) so that in the event of insolvency (inability of the company to pay its debt repayments as they fall due), company assets can be taken to recover the value of the loan.

The other way for a company to raise capital is sell to bonds or debentures, both a form of contract to repay a loan with interest. Debentures can be converted into stock. Any person holding a debenture or bond should ensure the company has this duly noted so that they are treated as a creditor should the company become insolvent. Debentures allow a company to generate capital without having to give up ownership to their assets.

Codicils

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Codicil

What is a codicil?

A codicil is a formal document used to change an original will (legal declaration managing one’s estate after their death). It supplements and ‘republishes’ the will to which it refers, which means that the will is treated as if it were executed on the day the codicil’s execution.

What can a codicil amend?

The amendments implemented by a codicil can be smaller matters such as changing the executors (the administrators of the estate) or more significant ones such as changing the gifts under the will. For major changes to the will it is advisable to revoke the will and execute a new one.

What is the form of a codicil?

A codicil needs to comply with the same legal requirements as the will. These are as follows:

  • It must be in writing;
  • It must be signed by the person making the will (the testator); and
  • It must be witnessed and signed by at least two witnesses present at the same time.

It should ideally be executed at a solicitor’s office where the compliance with the rules can be ensured.

If you need a will or a codicil, there are several good options available at modest cost. You may choose to use a specialist wills solicitor or choose one of the available online will services.

Bare trusts – what are they ?

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BARE TRUSTS: THE RIGHT TO BOTH INCOME AND CAPITAL

Bare trusts are similar to other trusts in that the settlor still appoints trustees who take legal ownership of the trust property. However, the beneficiary of a bare trust has a right to the income and capital of a trust, and can, if he so wishes, receive control of the property/actual ownership. The trustees must therefore act according to the beneficiary’s wishes.

Additionally, establishing a bare trust could provide the settlor with various tax advantages. A bare trust could be a viable way of leaving property to your children/grand-children, but also prevent them from receiving any benefits until they reach a certain age. This allows the settlor to retain a degree of control over the trust property.

The Role of a Trustee in a Bare Trust

Although trustees normally have discretion over what income they could pay a beneficiary from trust property, in a bare trust the person creating the trust has a greater role in directing the trustees. The trustees therefore have little/no discretion over what income to pay the beneficiaries. He/she is therefore more like a nominee – their control is in title only.

The Named Beneficiary in a Bare Trust

The named beneficiary holds an “absolute entitlement” to the assets in the trust, but the trustee(s) hold the assets until that person reaches a certain age (specified by the settlor). Once the beneficiary reaches that age, they are immediately able to receive the assets.

The Tax Advantages of a Bare Trust

One of the main advantages of a bare trust is the tax advantage it can give to the settlor. This is because the beneficiary holds an absolute entitlement in the trust property. The settlor therefore does not have to pay any tax on the assets, as they are relieved from the legal title once they transfer the assets. Therefore, if the beneficiary is a child it is unlikely they will be earning, and so will benefit from tax exemptions. Creating a bare trust to benefit from these exemptions is a tax-efficient method of securing assets for the future.

It is important to note that if a settlor attempts to create a trust in order to avoid potential inheritance tax, they may still be subjected to this if they should pass away within 7 years of the transfer. This only applies to transfers that are £3000 or more.

How Can You Create a Bare Trust?

If you are unsure about creating a bare trust yourself, then it is probably better to seek legal advice before taking this step. However, certain organisations, like banks and building societies, provide forms and information that will allow you to create a bare trust yourself. It should be noted that an invalidly created trust may cause serious repercussions for the people you attempted to make beneficiaries, and so you should try to gather as much information as you can before attempting to do this.

If you have located the correct forms and information, and are confident that you know what you are doing, the next step is to forward your completed forms to your local Tax Office.

Discretionary Trusts: An Alternative

The main difference between a bare trust and a discretionary trust is that with the latter, the trustees generally have discretion as to how to utilize the income the trust generates. They therefore have greater responsibilities regarding the distribution of trust income, and can provide beneficiaries who have not yet reached the age required to access their trust property with income. Powers may include being able to determine how much income is paid, and to which beneficiaries, how often payments will be made, and whether the trustees will place conditions on beneficiaries in receipt of this income.