Leonard Kasler & Company Partnership or Limited Company(20 Things to Decide)
1. You need to decide whether you wish to conduct your proposed new business through a partnership or a limited company.
2. A partnership is well suited where the same parties own the business, can provide the capital (or can borrow it easily) and will manage the business. Very often they will both carry out the work of the business itself.
3. Where both partners cannot or will not find all the capital themselves so that the role of management and financier begin to be separated, then it will usually be better to use the vehicle of a limited company
Advantages of partnership
4. Simplicity of formation. No formalities are required to form a partnership. There need only be consent amongst the partners as to its terms. It is a continuing contractual relationship, which does not constitute a separate legal entity and confers no special legal status on its members as such.
5. Simplicity of Maintenance. The continuance of a partnership does not involve legal formalities or expense. There is no requirement for the partners to meet to appoint officers, to file returns or to have audit accounts which are required in the case of a limited company. In relation to accounts however the advantage may be illusory as in practice accounts will usually have to be prepared and audited for tax purposes.
6. Flexibility. The partnership is not restricted as to anything restricted in what it does. It may undertake anything that its partners may agree to. The powers of a limited company by contrast are restricted by the "objects" clause in its memorandum
7. Confidentiality. Partnership accounts constitution and returns are not publicly available and so the internal affairs of a partnership may remain totally confidential
8. A company however has to file accounts and certain returns at Companies House
9. Financial Flexibility. There are no difficulties with partners putting more money into the firm or withdrawing it. By contrast, there are rules and regulations governing the increase and reduction of the capital of a limited company
10. Taxable Profits. The partnership rules are usually more generous than a limited company in being able to deduct expenses and allowances against its assessment to tax.
Disadvantages
11. Joint liability. Each of the partners is responsible to third parties for the whole of the liabilities of the partnership.
12. The essence of the relationship is that each of the partners is the agent of all the others. This means that there must be a great deal of trust between partners.
13. In a limited company, the general rule is that once all the shares are paid up a shareholder is under no liability in respect of debts owed by the company.
14. In practice, however directors and shareholders in a small limited company usually find that in order to obtain finance from a Bank, the Bank requires personal guarantees.
15. Further, if the company takes leasehold premises then the landlord may well require the same people to guarantee the company's obligations under the lease.
16. To this extent, the benefit of limited liability is negated but as regards other providers of finance or credit the debtor is the limited company and not its directors or shareholders.
17. Lack of Continuity. The partnership has no legal existence apart from its members. The debt or bankruptcy of any partner will dissolve a partnership unless there is an agreement to the contrary and in any event the partnership cannot survive the loss of one of the partners. By contrast a company is a separate legal entity which may continue to exist indefinitely as long as the statutory formalities continue to be complied with.
18. Lack of Transferability. No new partner may be introduced without the consent of the existing partners, unless there is some agreement to the contrary. By contrast a member of a limited company is free to transfer all or part of his shares as he chooses. In practice, in a small company, there is a shareholders agreement which restricts his right to do so and generally requires him to offer his shares to the other shareholders first.
19. Cumbersome Management. Each of the partners is as much entitled as any of the others to take part in the management of the business, unless the contrary is agreed. A large partnership will make provision for a management committee with a defined range of authority and only refer to the wider body of members in the event requiring sanction for some important change. By contrast the limited company will probably have a smaller board of directors and they may make the day to day decisions
20. Borrowing. Bankers have difficulties in a partnership giving a general charge over its assets, as there is no way for the charge to be made easily known to the third parties. By contrast, a Company can give a floating charge over all its assets
Michael Breeze
Leoanrd Kasler & Company
Sunday, 13. October 2002