Fred and Anne have been operating in partnership for several years, running a business that renovates flats for rental. Occasionally Fred, who is responsible for repairs, has failed to get urgent repairs carried out when they are notified by tenants. One of the tenants, Lisa, has announced that she intends to raise a legal action against Fred, Anne and the partnership on the ground that the floor of her living room was allowed to become rotten and she fell through it and injured her leg. Inspection confirms the floor is rotten, and Lisa has evidence that she notified this to Fred many months earlier. When Fred heard about this legal action, and in an effort to escape liability, he immediately gave notice to Anne that he wished to terminate the partnership. Anne says that the problem was Fred’s fault and she and the partnership are therefore not liable. Anne spends a lot of her time at social functions where she does a lot of networking. Recently she heard about an opportunity to purchase a building for conversion to flats. Anne then immediately formed a private company, Cheap and Cheerful Ltd, with her husband as the sole shareholder and director, and without Anne saying anything to Fred, Cheap and Cheerful Ltd has now bought this building at a good price and renovated it and has let it at a good profit. Much later, Fred has found out about this and wishes to make a legal challenge. For his next venture, Fred is wondering whether a private limited company would be a safer business vehicle than a partnership, for a flat renovation business, and would welcome information on how to form such a company.
Advise Fred and Anne on all the legal issues relating to the law of partnership and company law that arise in this question. Answer: Partnership according to the Partnership Act of 1890(S.1) is the relationship that subsists between the partners carrying out the business with the view of profit. ‘A partnership arises when a number of individuals are in business together, rather than in an employer-employee relationship. The legislation governing partnerships is the Partnership Act 1890.’ (Rati Shah MBE, 2011) Here, we see that Fred and Anne have been engaged in a partnership for many years. They run a business of renovating flats to be given on rent to the people. Fred being the partner in the business would usually take up the responsibility to do the repairs in the rented flats, if any. But he failed to make the urgent repairs when notified by the tenants. Lisa, being one such tenant, said that she would file a case against Fred, Anne, and the Partnership for not fulfilling their responsibility of making the repairs on the floor of her house which was rotten and due to which she fell and injured herself. Fred sent a letter to Anne to terminate the partnership (because he didn’t want to face the liability all by himself). Anne clearly told that the fault lies in the hands of Fred and that neither the partnership nor she herself can be held liable. Anne later started off a private company, Cheap and Cheerful Ltd. with her husband. Without informing Fred about the new company, Anne through Cheap and Cheerful Ltd has now bought this building at a good price and renovated it and has let it at a good profit. Fred wants to make a legal challenge against Anne. He is also confused as to which would be a safer form of business for his next venture. A partnership or a private limited company? Well, there are many differences between a partnership and a private limited company. A company has more complexity in its structure when compared to a partnership.
More people are involved in the decision making process. The shareholders decide as to how they can manage and run the company. Where as in the partnership, the whole business including the liabilities and profits are shared among the two or more partners of the partnership firm and its structure is simple. In a partnership, the partners are held legally responsible for all the debts and liabilities of the firm. On the other hand, in a company, the shareholders are not held accountable for the company’s debts. The company is a separate legal entity. Thus it holds itself liable for all the legal fees and the shareholders of the company are not jeopardy of losing their assets. A company is an artificial person. This makes the company in a position to make legal actions for and against those making legal actions in favor of or otherwise of the company. While, partnership isn’t considered to be a legal person and the partners own the properties of the firm and will be held liable for all the actions undertaken by the firm. The liabilities of the shareholders in a company are limited only to the extent of the shares that he holds. While in the case of partnership, the partners liabilities in unlimited. That is the reason why the partners’ personal assets can be taken to pay off the liabilities and debts of the partnership firm. Insolvencies of the company do not make the members of the company insolvent. But in a partnership, if the firm is insolvent, the partners are also considered insolvent. Partnership has lesser formalities and is simple. Whereas, a company is more formal and complex. Like for example, when a company is to be dissolved, strict formal rules are to be heeded while in the case of a partnership, dissolution can take place even by mutual consent. There is a Board of Directors who is elected by the shareholders of the company. But in a partnership, it is different. The firm is looked after by one or a group or by all the partners of the firm. No election takes place. Perpetual succession is present in a company. This means that if a shareholder of a company passes away or is considered insolvent, the company doesn’t cease to exist. It continues.
This is in contrast to a partnership firm where if a partner dies or is considered insolvent, the partnership ends and there is no such perpetual succession. For a company to come into existence, it has to get registered with the Companies Act, 1956. But in a partnership, that isn’t necessary. In a company there must be a minimum of two members (in a private company) and seven members (in case of a public company). But in a partnership there is a need of only two partners. In a public company the maximum number of members can be infinite and in a private company, they can have not more than fifty members. Contrastingly, in a partnership, the maximum number of members is twenty in a trading firm and ten in a banking firm. A shareholder in a company can transfer his shares but a partner can’t transfer his part of the shares without the assent of the other partners of the firm. In a partnership, the profits can be distributed equally or in proportions decided by the partners but in a company, the profits are distributed on the basis of the articles provided by the directors. Auditing plays a vital role in a company. But it is not necessary in a partnership. One the basis of the above differences between a private limited company and a partnership, I would advice Fred that a private limited company would be safer to be established for his next venture. They can start their business as soon as they receive the Certificate of Incorporation. There is no requirement of a minimum capital. A private limited company needs only a single director even though more can be elected. But, it is not allowed to have its shares listed on the Stock Exchange. It has lesser obligatory official procedures. All these make a private limited company more advantageous than a partnership firm. Especially when it is a flat renovation business, the risks can be minimized as formalities are less and the liabilities are only to the extent of shares held by the member(s).
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