Company law problem

The legal framework of a business will influence the way a business operates and develops1. Therefore it is necessary to decide whether Archie, Bob and Catherine should form a partnership or a limited company. A partnership, defined in section 1(1) of the Partnership Act 18902 (PA 1890), is the 'relationship which subsists between persons carrying on a business in common with a view of profit'3. A partnership is a relationship which has no separate legal identity they cannot make contracts, commit crimes or be sued and confers unlimited liability4.

This makes it possible for each partner to be liable without limit for debts incurred by other partners in the course of partnership business5. A partnership is formed by an agreement which is contractually binding subject to contract law6. The agreement takes the form of a deed and sets out the terms and conditions of the partnership7. There are three forms of partnership, an ordinary partnership governed by the PA 18908, a limited partnership governed by the Limited Partnership Act 19079 and, governed by the Limited Liability Partnership Act 200010, the limited liability partnership11.

However despite these different forms, a partnership is simply the partners who comprise a business12. In contrast a limited company is a corporation which has a separate legal identity to that of its members13; this comes from Salomon v A. Salomon14. A limited company is known as a 'persona at law', that is an artificial legal person, which has perpetual succession meaning that it's existence is maintained by the constant succession of new members to replace those that leave15. A limited company confers limited liability meaning that members are only liable for debts to the value of the amount of capital they have contributed16.

A company is formed by registration under the Companies Act 198517 and can be limited by either shares or guarantee18. There are two main types of limited companies, public limited companies and private limited companies19 which can enter into contracts, employ people, commit crimes and be sued20. Having identified the structures we must now compare them in view of what Archie, Bob and Catherine would like. Firstly they would like to be able to share profits equally. Under section 24(1) PA 189021, 'all partners are entitled to share equally in the profits of the partnership'22.

There is no need for the profits to reflect the capital contributions23; this comes from Ward v Newalls24. As an essential criteria for a partnership is mutual sharing25, the profits would be shared equally between the partners26. With a company the capital is raised by selling shares making each shareholder entitled to a share of the profits27. Section 119(c) of the Companies Act 198528 states that 'a company pays dividends in proportion to the amount paid on each share' and Table A provides that all dividends shall be paid according to the amount invested29.

This means the profits will only be shared evenly if every member contributes the same amount of capital. Here each partner is contributing i?? 5000 meaning that whether a partnership or a limited company is formed, the profits can be shared equally, a partnership because it is based on mutual sharing, and a limited company because they are each contributing the same amount. Secondly they wish to be able to retire from the partnership by giving three months notice. In a partnership there is a general rule that death, bankruptcy or retirement automatically dissolves the business30, this comes from section 33 PA 189031.

However a report on partnership law by the Law Commission32 established a rule which allows a partnership to continue providing two partners remain33. This results in a technical dissolution which allows the business to be reformed by the remaining partners34. This is however subject to the partnership agreement35. In addition to this, section 26 PA 189036 provides that a signed notice given by the retiring partner shall be sufficient37. There is no provision for the amount of notice to be given but this could be included in the partnership agreement. On the other hand a member of a company can retire by transferring his shares38.

The company will not be dissolved because of retirement due to perpetual succession39. However there is no need to give notice of retirement in a limited company meaning therefore that a partnership would be the best option. Notice of retirement will allow the remaining partner's time to reform the business. They would also like to be able to purchase an outgoing partners interest in the partnership. Section 43 PA 189040 allows for the transfer of an outgoing partner's interest by holding that their interest is a debt due to them from the remaining partners; however this again is subject to the partnership agreement41.

In a report by the Law Commission42 it was recommended that an outgoing partner should be bound to transfer his interest to the remaining partners43. However a partner cannot transfer his shares without the consent of all other partners44 and is again subject to the partnership agreement45. In contrast a member of a company can freely transfer his shares46 unless the companies articles of association provides otherwise47. Therefore it may be contained in the articles that the remaining members have first refusal to an outgoing members shares, however if this is not the case then the shares can be transferred to anyone.

This would make a partnership more suitable as they would be able to maintain control themselves; this may not happen in a limited company. Finally they wish to use the name 'Archie's Fitness' but Archie also wants to ensure that in the event of dissolution, no one else can use this name. With regards to a partnership section 1 of the Business Names Act 198548 applies where the name does not consist only of the partners surnames49 and under section 4 of this Act50 a partnership must disclose the names of each partner along with an address on all business documents and at the business premises51.

Therefore they would be able to use the name 'Archie's Fitness' so long as all partners names and addresses are displayed on all documents and premises. However the Business Names Act 198552 does not prevent more than one partnership from using the same name53, although from Ewing v Buttercup54 if a name is used to deceive and divert business that firm can use the tort of passing off to prevent their name from being used55. It may also be included in the partnership agreement that if the partnership ends or someone leaves, no one can trade under the name 'Archie's Fitness'.

With a company it may be acceptable for the members to use their own names if they are having difficulty having another name accepted however more than the name may be required56. In addition to this a company cannot use a name that already exists on an index kept by the Registrar of Companies57. This means that should the company come to an end, no one would be able to trade under the name 'Archie's Fitness', making a company more suitable here. Following this Archie, Bob and Catherine would be best suited to a partnership.

Due to the PA 189058 and a partnership agreement, the profits can be shared equally, a partner can retire by giving notice, shares can be transferred to existing partners and Archie may be able to prevent the others from using the name 'Archie's Fitness' if they leave or the partnership ends. Although a partnership confers unlimited liability they can be shared between the partners while at the same time allowing greater knowledge and expertise to be brought to the partnership.