BSP 1004 Lecture 2 - 2010 - TYPES OF BUSINESS ...

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Unformatted text preview: TYPES OF BUSINESS ORGANISATIONS LECTURES 2 & 3 Types of Business OrganisaAons •  A business can be run using any of the following 5 types of business organisaAons: SP P LP Co LLP •  Choosing a wrong type of organisaAon may affect the business and may affect the owner of the business. •  Can you convert from one form of business to another? SOLE PROPRIETORSHIP - PRELIMINARIES •  To operate a sole proprietorship, one has to register with ACRA: hTp://www.acra.gov.sg •  What typical informaAon must be given during registraAon? •  Why does the law require registraAon? •  However, there are some limited excepAons to registraAon, such as in the case of taxi drivers. •  If you do not fall within the excepAons and you don’t register it is an offence. •  RegistraAon is cheap and fast. •  Aside from registra,on, you may need to get licensing which is handled by other agencies/authoriAes: hTps://licences.business.gov.sg •  If licensing is required that may cost more and take more Ame. SOLE PROPRIETORSHIP - LIABILITY •  The sole proprietor is personally liable for the business debts and his personal assets can be seized to saAsfy business debts, as there is no separaAon between the sole proprietor and his business. •  Similarly, if he has some personal debts, can the business assets be seized? SOLE PROPRIETORSHIP - DISSOLUTION •  DissoluAon of a sole proprietorship is generally straight forward and can be: - Voluntary or - Involuntary. PARTNERSHIP - PRELIMINARIES • The Partnership Act defines a partnership as a group of persons carrying on a business in common with a view of profit. PARTNERSHIP - PRELIMINARIES •  For there to be a valid partnership, does there have to be a wriTen agreement? •  The minimum number of partners is _______ and the maximum is generally 20. •  The registraAon and licensing process (if any), is the same as that for sole proprietorships. PARTNERSHIP – LIABILITY •  In relaAon to business debts incurred by the partnership, the partners can be personally liable and their personal assets can be seized to saAsfy business debts, as the partnership is not a separate legal enAty. •  Example: -   A & B are partners -   Partnership Debts: $100,000 -   Partnership Assets: $0 -   A’s personal Assets: $150,000 -   B’s personal Assets: $200,000 -   What can the creditor do? PARTNERSHIP – LIABILITY •  However, in relaAon to personal debts incurred by partners, can all of the partnership assets or only the debtor partner’s share, be sort afer? •  Example: -   A & B are partners -   Partnership Debts: $0 -   Partnership Assets: $100,000 -   A’s personal Debts: $70,000 -   How much of the partnership assets can be sort afer by the creditor? PARTNERSHIP - RELATION BETWEEN PARTNERS •  The Partnership Act provides that unless the contract provides otherwise, all partners share profits and losses/ liabiliAes equally. •  The Partnership Act provides that unless the contract provides otherwise, all partners have the equal right to manage the business. PARTNERSHIP - RELATION BETWEEN PARTNERS •  The Partnership Act provides that all partnership property belongs to partners. •  Case Example: Ponnukon v Jebaratnam: -   PlainAff and Defendant entered into a partnership to develop a piece of land. -   Partnership tried to obtain a loan from bank to buy the land, but was not successful. -   Subsequently, Defendant got a loan from his relaAves and bought the land. -   Later the PlainAff brought an acAon staAng that the land belonged to the partnership. -   What do you think the court decided? •  How can this issue of who owns what, be made clearer? PARTNERSHIP - RELATION BETWEEN PARTNERS •  Partners owe a fiduciary relaAonship towards each other; ie: they owe a duty of trust towards each other. •  What could be some examples of a breach of such duAes? Breach of Fiduciary DuAes? •  Ritz- Carlton (US) and KMS, an Indonesian company, entered into a hotel partnership to run Ritz- Carlton Bali Resort which belonged to KMS. •  Later, Ritz- Carlton decided to build another hotel in compeAAon to the Ritz- Carlton Bali Resort. •  What do you think the court decided? PARTNERSHIP – RELATIONSHIP WITH THIRD PARTIES •  If a partner enters into a contract with a third party, is the firm or the other partners bound to the third party? •  The answer may be “Yes”, if the partner in quesAon has: -   Actual authority to do so or -   Implied (ie: usual) authority to do so or -   Apparent (ie: outwardly appears to have) authority to do so. PARTNERSHIP – RELATIONSHIP WITH THIRD PARTIES •  If a partner commits a tort or wrongful act (eg: he is negligent) in the course of the partnership business, which affects a third party, would the firm or the other partners be liable to the third party? •  Eg: A & B are partners of a modeling agency and B assaults a model who suffers injuries; is the firm liable for the losses? In the course of Partnership Business •  Lim Kok Koon v Tan Cheng Yew: •  Lawyer who was partner in law firm, took cheques from the client issued to his name to act as a “personal trustee” – eg: make investments. •  Lawyer absconded with the money. •  Was the law firm liable to the client? PARTNERSHIP - DISSOLUTION •  The Partnership Act provides that unless the contract provides otherwise, a partnership can be dissolved automa,cally without referring the maAer to court in some situaAons such as the following: -   A partner gives noAce to dissolve it, -   A partner dies or -   A partner is made a bankrupt. •  The Partnership Act also provides that where a partnership cannot be dissolved automaAcally, reference may be made to court to dissolve it in some situaAons such as the following: -   One partner is guilty of conduct prejudicial to the carrying on of the business, -   It is just and reasonable to do so (eg: there is a deadlock between the partners). COMPANY - PRELIMINARIES •  Companies have also to be registered with ACRA. Licences from other authoriAes may also be required. •  However, the registraAon process is slightly more complex and expensive compared to registering other organisaAons. •  In parAcular, 2 important documents have to lodged: •  (a) Memorandum of Associa,on. The memorandum of associaAon contains certain basic informaAon about the company. - •  (b) Ar,cles of Associa,on. The arAcles of associaAon contain rules relaAng to the internal management of the company. Instead of designing their own arAcles of associaAon, the persons incorporaAng the company may wish to use model arAcles of associaAon provided for in the Companies Act (also known as “Table A”). - COMPANY – DISSOLUTION •  In relaAon to dissoluAon, the process may also be more complex and expensive compared to the dissoluAon of other types of organisaAons. COMPANY - SEPARATE LEGAL ENTITY •  Though comparaAvely more complex and expensive to set up and dissolve, a company may be aTracAve because it creates a separate legal enAty. •  The separate legal enAty concept has various implicaAons: CONSEQUENCES (1): SEPARATE LEGAL ENTITY •  Firstly, a company unlike a partnership can own property in its own name. - Eg: A & B own business “C” – can they buy a property (eg: office) in the name of “C”? •  However, correspondingly also note: property of the company belongs to the company and not to the members (ie: shareholders) or directors. - Eg: A runs a business “C” and takes things out of C for his personal use; will he face consequences? CONSEQUENCES (2): SEPARATE LEGAL ENTITY •  Secondly, debts of the company belong to the company and not to the members (ie: shareholders) or directors. •  Eg: A & B own a business “C” and C has incurred a debt; would A and B be personally liable? CONSEQUENCES (2): SEPARATE LEGAL ENTITY •  However there are some narrow excepAons to this rule to prevent abuses. -   For instance, secAon 340(1) of the Companies Act provides that when a company is being would up or is being sued, if it appears that the business of the company is carried out with the intenAon to defraud creditors, the persons responsible could be made liable for the debts of the company. •  Also note: because of the limited liability, there is a need to protect ______ and so there is _______ regulaAon. (eg: may need to have auditors, may have to submit reports/ returns to ACRA - breach of which may result in criminal liability). Thus a company is also more complex to run. CONSEQUENCES (3): SEPARATE LEGAL ENTITY •  Thirdly, being a separate legal enAty, potenAally the company can have perpectual succession, ie, even afer its original members/directors have died, the company can sAll carry on operaAons. This is good as there will be no ________. CONSEQUENCES (4): SEPARATE LEGAL ENTITY •  Fourthly since a company is a separate legal enAty – it can sue and be sued in its own name. -   Eg: A & B are members (ie shareholders) and directors of company C. If X causes C a loss, who can bring an acAon against C? •  However, there are excepAons, such as where there is fraud, whereby members can bring an acAon on behalf of the company. - Eg: A & B are members (ie shareholders) and only A is a director of company C. If A misappropriates money from C, whose loss it? Who can sue? COMPANY - TYPES •  There are several types of companies. However, when commencing operaAons, a typical business which wants to set up a company, would register a “private company” “limited by shares” (abbreviated as “Pte Ltd”). •  The term “limited by shares” means that the members’ (ie: shareholders’) liability to company is limited by their shares. •  The term “private company” refers to a company whose the arAcles of associaAon have: - restricAons on share transfers and -   limit the number of members to 50. COMPANY - TYPES •  A “public company” unlike a private company would not have such restricAons/limitaAons. Thus for instance, companies listed in the Stock Exchange would be public companies. •  Why wouldn’t a typical business which intends to set up a company, commence by registering a public company limited instead of, a private company? Limited Liability Partnership – Preliminaries •  This is a new form of business organizaAon introduced in 2005. •  There must be a minimum of ___ partners. •  To carry on operaAons as a LLP, must also be registered with ACRA. Licensing from other authoriAes may also be required. •  RegistraAon process less complex and expensive compared to registering a company (eg: need not submit memorandum and arAcles of associaAon) but slightly more complex and expensive compared to seqng up a sole proprietorship or partnership. Limited Liability Partnership – Features •  The LLP combines features of both a partnership and a company. •  Internally – it is like a partnership (eg: unless contract provides otherwise: every partner has a equal share of profits, equal say in management, etc). •  Externally – it is like a company (eg: partnership property belongs to the LLP, there is limited liability, it has perpetual succession, etc). In relaAon to dissoluAon too, it is like a company (ie more complex and expensive). - Eg: A & B, set up a LLP called “C”. C owes creditors. Are A & B personally liable? Limited Liability Partnership – When Suitable? •  LLPs are ideal for persons who want to have the informality of running a business which is characterisAc of partnerships but who at the same Ame want limited liability which is characterisAc of companies. •  Some may sAll prefer seqng up a company compared to a LLP because, for instance, a company would generally be in a beTer posiAon to raise finance (why?). •  Some may sAll prefer seqng up a partnership compared to a LLP because, for instance, the LLP being a limited liability organisaAon, there are some statutory duAes/liabiliAes, breach of which can result in criminal liability. Limited Partnership •  This is a new form of business organizaAon introduced in 2009. •  There must be a minimum of 2 partners (at least one general partner and one limited partner). •  To carry on operaAons as a LP, must also be registered with ACRA. Licensing from other authoriAes may also be required. Limited Partnership - Features •  A general partner would be liable for the all debts and obligaAons of the LP. •  A partner registered as a limited partner would not be liable to third parAes for the debts and obligaAons of the LP beyond the amount of his “agreed contribuAon”. •  However in return, the limited partner cannot take part in the management of the LP. If he does so, he would become liable for all the debts and obligaAons of the LP. •  LP does not have separate legal enAty. Limited Partnership – When Suitable? •  A limited partnership is very much like an ordinary partnership with the excepAon that the limited partner has limited liability to the extent of his “agreed contribuAon” and cannot take part in management. •  Thus an LP is especially aTracAve to an angel investor who just wants to make an investment without incurring more liability than what he invested or agreed to invest. •  Eg: A and B are partners; A does something wrong in the course of partnership business which causes a loss to C. Who can C sue and to what extend? InternaAonal Comparisons SP P LP LLP Co US Yes Yes Yes Yes Yes Private and Public: Corp or Inc UK Yes Yes Yes Yes Yes Private: Ltd Public: Plc Japan Yes Yes (Go- mei Gaisha) Yes (Go - Shi Gaisha) Yes (Yugen Gaisha) Yes (Kabushihi Kaisha) Public: Various types China Yes Yes (普通合 伙) Yes (有限合 伙) Yes (特殊普通 合伙) Yes Private: 有限 公司: Public: 股份 有限公司 India Yes Yes No Yes Yes Private: Pvt Ltd Public: Plc Malaysia Yes Yes No No Yes Private: Sdn Bhd Public: Bhd Summary •  When seqng up a business organisaAon, there are five types of organisaAons to choose from. •  All types of business organisaAons have to be registered in one way or another. Licensing may also be required. •  Unincorporated business organisaAons, namely sole proprietorships and partnerships, expose the owners to unlimited personal liability. The same is true of general partners in a limited partnership. •  Incorporated business organisaAons such as companies and limited liability partnerships generally do not expose the owners to unlimited personal liability. But to balance this, the law imposes more duAes and liabiliAes in relaAon to the running of these types of organisaAons, breach of which may result in criminal liabiliAes. Further, it is comparaAvely more complex and expensive to set up and dissolve such organisaAons. •  The best type of organisaAon to choose depends on the circumstances/ needs and choosing the wrong type of organisaAon may affect the business and may affect the owner of the business. Readings: Chapter 10 of RC including the comparaAve table and/or Chapters 9 and 10 of BT and case referred to from Lawnet.com. ...
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This note was uploaded on 11/01/2011 for the course BIZAD BSP 1004 taught by Professor Ravichandran during the Spring '11 term at National University of Singapore.

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