1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136 
TO FORM A LIMITED COMPAN1 OR NOT!
Page 72
Page 73
If you've noticed an error in this article please click here to report it so we can fix it.
CHANGES are in contemplation for companies, as the Government has recently introduced a bill for this purpose. At this stage, these changes are merely under examination by Parliament, and no one can say when they will come in, or whether they will ever be enacted. Nevertheless, it raises the question of the desirability of transforming a business into a company, particularly in the case of the small business such as is still very common in road transport. Up to now, there have been 'several advantages in the company form of organization, although not without some disadvantages. Some of these advantages, particularly that of liability, are likely to be lost under the new legislation, if it becomes law, and so the whole question needs re-examination.
It is first necessary to get some clarity on the various forms of business organization, there being three different kinds: sole traders, the partnerships, and the companies. It is clear, and easy to understand, that when a man starts up in business on his own, then he becomes a sole trader. He may expand, and employ staff, but he takes all the responsibility, collects the monies, and pays the debts; if there is anything left over, that becomes his own return, or profit.
But often two or more men desire to work together in promoting a business; it may provide them jointly with more capital, or with more expertise, or there may be other reasons. This creates a partnership. Even when son comes to work with father, this is often a partnership in reality. A partnership can exist without there being any formal deed of partnership, but it is usually far wiser to get a proper deed of partnership drawn up.
The partnership
The partnership was the original form of joint business organization, but it has quite a number of serious disadvantages. It is inflexible, in that it is almost impossible to increase or decrease the number of partners; if one partner dies, out of a partnership of four, then the remaining three have to start afresh and create a new partnership. It entails all the individual members of the partnership still being personally responsible for the debts of the partnership; there is no limitation of their liability. The drawing up of a really satisfactory partnership deed is often a task of some complexity. Moreover, the taxation affairs of a partnership are complicated.
In order to get over some of these difficulties of partnerships, the idea of the company gradually developed over several centuries. It took many years to get popular acceptance, and to iron out the many difficulties. One of its main features is the concept of the separate existence of the company, which took a long time to. be generally understood. This is still a fundamentally important point to grasp. The company of today is a separate body—in Latin it is called a separate persona. It acts like a separate individual, or separate person; it can sue for its money, and be sued. Whatever changes may go on with directors, with shareholders, with secretaries, with its financial structure, the company still remains in existence.
After various attempts by Parliament to put this useful idea of companies on a sound footing, the Act which is now operative is the very important Companies Act of 1948. Whilst a great deal of this Act is mainly concerned with the large public companies,' it also provides the legal basis for the many small private companies that spring up, and which alone will concern us here.
Business names
We must digress for a moment to deal with business names. This provides a frequent cause of misunderstanding. If we see a letterhead of "J. Smith & Sons", this is almost certainly no more than a business name, or a trading name. The real owner. of that trading name may be a sole trader, or a partnership, or sometimes even a company. It is impossible to take out a writ for debt against a business name, because it is first necessary to find out who is the person, or the partnership, or the company, behind that business name. These trading names should be registered under the Business Names Act which is a very simple procedure, but this procedure is not always carried .out.
With the foregoing explanation of how the company fits in with other forms of business organizations, it is now possible to begin to assess its benefits. particularly so far as the small business is concerned.
It is easy to make changes in the individuals who own the shares, or who hold office as directors or secretaries. It is an exceedingly flexible form of organization, and even the death of one of the main members of the company does not affect the continuing life of that company. It is true that such a calamity may affect its business edge, and its commercial fortunes. But the shares in the company held by that individual just pass, first to the executors, and secondly to whoever enjoys the legal succession.
Limitation of liability
One most important attraction of the company at the present time is in its limitation of liability. It is only liable for its debts to the extent of its available assets. Even though some of the members of the company may personally own some valuable assets, if they are not part of the assets of the company, owned by the company and showing in its books, then these outside assets cannot be touched to meet any debt of the company. Thus, a director's own house, privately owned by that director, will still remain untouched by the company's creditors, if that company should run into bad times.
Some people have long considered that this opens too many loopholes for abuse. Certainly it is an unfortunate fact that many small companies go bankrupt, year by year, including many in road haulage, and this always leaves a number of creditors suffering from financial loss. This is greatly to be deplored, but it is not primarily a fault of this kind of business organization. The problem turns upon the integrity of the individuals who are members of the company, and their commercial ability to create and maintain a successful business. If such a person traded as a sole trader, he could still go bankrupt, the only difference being that, as a sole trader, his creditors can press for distraint on every one of his assets.
Change proposed
To deal with this sort of difficulty is undoubtedly one of the reasons for a change now proposed by the Government's new legislation. In the past, "private exempt" companies, which is the description of most of the small companies we know, have not had lo file their annual accounts. Under the new legislation they will not only have to file accounts annually at the company's office, but also provide some additional particulars, sUch as directors' emoluments, and arranging for their accounts to be set out in a specified form. Disclosure of all this information, hitherto regarded as confidential, might indeed be embarrassing. Whether it would be of any real value to creditors, by the time this information gets on to the file, is an open question. It really constitutes a serious disadvantage, if this legislation is enacted, of the limited liability company. The Government has offered a way out, by allowing these companies to .go "unlimited", and this point will be taken up again later.
When two or more people want to go into business together the company form of organization, as described above, obviously offers many advantages, particularly in its flexibility and adaptability to all sorts of circumstances. But it even has advantages where a single individual is contemplating whether to convert his business into a company. There is first a technical point, in that every company has to have not less than two members. But this technical
point is quickly got over by the main entrepreneur taking 99 of the shares, and allotting the odd one share to another individual, perhaps his wife, or accountant.
To change over his business into a company will bring in its train the several advantages described above. He will have the benefit of limited liability. If he decides later that he wants to bring in a partner, it is easy to do so by selling to that partner some of the shares in the company. If he should want to sell out completely, he can arrange to sell the shares in the company; and all the contracts and assets held by the company remain untouched. One of the main assets of a small haulage company is of course its holding of carriers' licences. The fact that the carriers' licence remains with the company has been one of the big attractions for the conversion of haulage businesses into companies.
Difficulties and disadvantages
Put in this way, this makes the procedure sound so easy and attractive that it would seem insensible for any haulage business not to be converted into a limited company. But there are often difficulties and disadvantages, and to understand these we must examine the structure of a company more closely.
There are various reasons why an intending purchaser may not be prepared to take over the company. The purchaser, on the day that he takes over the shares and becomes the director, also takes over all the liabilities of the company. The normal way of covering this point is by the purchaser insisting upon receiving an indemnity from the vendor that he (the vendor) will discharge all the debts and answer for all the liabilities incurred by the company up to the date of the transfer.
The accountants of the two parties, vendor and purchaser, will already have been called in to examine the books and to agree upon monies still to come in for work already done (to be credited to the vendor), and upon expenses incurred but not yet paid off (to be paid by the vendor). But the trouble is there can be all sorts of undisclosed liabilities; in the worst cases the vendor might be seriously at fault by knowing of these liabilities and not disclosing them, but in other cases he may just not be aware of them: After all, any haulage business by the nature of its activities over the public highways is always in risk of incurring liabilities to all sorts of members of the public or to the public authorities, and some times these sorts of liabilities take a little time to come home to roost.
Indemnity from the vendor
Therefore, the purchaser demands this indemnity from the vendor when he buys himself into a company by purchasing the shares. It really all turns upon the worth and reliability of the vendor's indemnity. The weighing up of the value of the indemnity given in these cases is a problem for every purchaser. In many cases, it is true that the purchaser is satisfied to accept such an indemnity, maybe because he knows the vendor personally, the vendor is a man of general repute, or maybe because the inspection of the vendor's conduct of the business discloses that it has been carried on with care and attention.
But cases often arise where the purchaser is unwilling to buy the shares in the company. Whether for good reason or for insufficient reason, it is a matter for the purchaser to decide. The books may be in a muddle; there may be uncertainty about outstanding tax liabilities; there may exist doubts about possible past infringements of regulations such as drivers' hours, or B licence conditions; there May be dislike of the existing name of the business. More serious difficulties arise, also, when the company has other assets which are not to be included in the sale. Whilst sometimes these non-included assets, such as a director's car, can fairly easily be taken out of the business, others cannot so easily be dealt with (e.g., if there is a house or garage owned by the company but not being sold in this sale). Another cause of difficulty is with directors' loan accounts to the company. Such accounts often arise because the vending proprietor has not put capital into the company as such, but has gradually created the capital of the company by leaving part of his own drawings from the company as a loan account.
Export advice desirable
I hope it is now clear, therefore, that whilst the purchasing of the shares of the company may seem to be a simple operation, it is potentially thwarted with many difficulties, and so needs to be handled with care, and almost certainly with expert advice. The time involved in completing a sale, after vendor and purchaser have agreed upon price and other details, is often an important consideration. It is the usual impression that, when using the method of purchasing the shares, the time involved is very short. Whilst this can be true in a number of cases, the procedure often proves in practice to be very protracted. It is sometimes difficult to get the accountants to find the time to make the necessary contacts with each other, in order to prepare their essential figures. And so one delay leads to another.
The carrier's licence
The carrier's licence is obviously one of the fundamental assets of every haulage business. It is indeed the jewel on which everything else pivots. It is the franchise, or permission, without which it cannot function at all. Perhaps we have had to traverse a lot of ground before reaching this topic of considering the carrier's licence in relation to the form of business organization, whether proprietorship, partnership, or company.
The carrier's licence is strictly and solely held by the "concern" whose name it bears. If that name is a sole proprietor, any change can only be dealt with by an application to the Licensing Authority by the new intending owner. If that name is a partnership, any change in the members of that partnership has to be dealt with by a similar application to the Licensing Authority. But the change in the ownership of a company does not of itself require any such application. This appears to be the great advantage of the company. So long as the difficulties inherent in the transfer of shares as referred to above can be overcome, this advantage of not requiring any application to the Licensing Authority remains as an attraction.
So far as the Licensing Authorities themselves are concerned, they are broadly content when there exists a genuine business which is making use of the licences. They are apt to become concerned and inquisitive if it should reach their ears that there is little, or no, business activity, and the only real asset being transferred is the licence. There is no obligation in law to inform the Licensing Authority of a change of directors, or a change of shareholders, in a.company; but some operators do so inform the Licensing Authority.
Unlimited liability companies
In the past, when thinking of companies, we have usually had the limited liability company solely in mind. The power of limiting the liability of the owners of the company has had so much attraction. Nevertheless, it has always been possible to form a company which did not seek any limitation on its liability. In these cases, the owners would be completely liable, personally, for the debts of the company.
Under the new legislation now proposed it may be necessary to turn more frequently to this unlimited-liability form of company. Such companies will not be required to file their accounts, nor to disclose the remuneration of their directors. The Government is also simplifying the procedure for converting limited liability companies into unlimited liability companies. We may therefore see many more unlimited liability companies in the future. This might well be a very good move for the commerce of the country and lead to more fair and honest dealings.