Question

Jim who recently quit his job after receiving a very large bonus payment is interested in forming his own business. He is not sure how to begin and he has
asked you to help him identify and analyze what company formation options he has available. He can set up his business in the UK, Canada or the USA,
he will go where you decide.
a. Please advise him on what it means to be unincorporated, the advantages and disadvantages
b. Then explain to him the significance of opening an incorporated business? What are the advantages and disadvantages of this type of business?
c. Then explain to him what is a Limited Liability Partnership? What responsibilities and liabilities do the partners have for themselves individually, to
the firm/to each other in the firm and to the public?
d. Explain to Jim if he needs additional capital to begin his new company what are some ways he could finance his new company?

Answer 1

a. The term unincorporated means the organization form to attract public either in the form of clubs , or political interest or for any charitable purpose.The term has word un in its name therefore they do not follow normal course of procedure instead in informal organization formed.In this category the business and the person are considered one and the person running the business is known as proprietor.

Advantages and disadvantages of these type of organization

Advantages includes:

• Easy to setup : The set up cost is very minimal and does not require much of paperwork, instead it can start within seven days of thinking of business idea.
• Confidentiality : Being the business o sole proprietor i.e. single person it does not need to maintain separate accounts nor needs to file any accounts with the authority therefore the confidentiality in the business maintained.
• Charitable : These association are used by people needed to invest the money for the society and to serve them better . Opening association for charitable purpose will helps the resources to be within the society.
• Clubs : To attract the public interest one can invest in this . The youth gather in this association to avoid the stress from the working life they have.
• Banks and financial institution : To provide loans and take deposit and involve public in its business the best option available is opting for banking institution.

Disadvantages includes

• There is no separate legal identity. For example the club owner themselves are the members in the clubs in case of any default or in case of non payment of debt they become personal liable.
• Unlike company it is not created by law therefore their existence does not help them in sue cases i,e, neither they can sue nor can be sued.
• They are formed by its owners only therefore if they want to make investment or lends money they cannot do it in the name of business alone interference of owners has to be there in these investments.
• The winding up by any authority can be done as they are not in existence in the eyes of law.

Opting for unincorporated business is good idea for short run but the Jim wants long term profit and want to be in the business line that opting these type of business is not a good approach.

b. The term incorporation means giving birth to the business using law. In these organization either there is formation of company, limited liability partnership or company formed for charitable purpose.

I advice Jim to opt for incorporated business as the benefits of this type of business is more than the disadvantages. Moreover to be ethical in the line of business one has to work keeping the compliance of the law.

Advantages includes :

• Legal Identity : Unlike Unincorporated business, they have a separate legal identity from its member i.e. in case of any litigation or penal provision the organization will b sued the members are not personally liable. The organization also have the power to sue in case they are victim of any fraud committed by others.
• No personal Liability : The members assets are secured and protected as the organization formed is separate from its members.
• Capital : The raising of capital is done ethically and as per the law therefore detection of fraud is visible. Moreover forming an incorporated organization helps to raise funds using equity and preference or any class of shares.
• Tax Advantages : The government often provide subsidies to small startups . The taxes saving helps them to gain advantage.
• Transparency : The formalities of these organization are clear and before the law therefore there is transparency maintained by the law makers and the business.
• Law : The birth of the organization is by the law therefore there is specific procedure created by law to end these organization.

Disadvantages includes:

• Paperwork: To maintain the compliance of law , there are lot of formalities and paperwork making it time consuming.
• Rigid: The incorporated business are rigid in nature as they carry separate identity and involving debtors and creditors on papers . Hence if you were a sole proprietor and making losses you could have shut and switch the business however this type of flexibility is not possible in incorporated business.
• Liability : Although there is no personal liability however at times of taking funds and taking investment there is need of personal guarantee on the parts of directors. In this case they become personally liable.

Hence opting for incorporated business is the good idea.

c. Limited Liability Partnership is the form of incorporated business. In this category there is the mixture of attributes of partnership and the company.In these unlike partnership the liability of the partners and limited in nature . They formed in such a way that they provide dual job of company and the partnership. They are flexible in nature and are quite common in today's era.

Liability of partners towards the firm formed :

• The liability of the partners are fixed and limited except the unauthorized acts .They are basically the agents of the firm whose main aim is to bring business to the firm.
• If the partner is involved solely in obscene or unauthorized act than the firm will not be liable for the act done by the partner
• They partners are bind by the agreement and supplementary agreements formed by them.
• Any act done ultra virus to the agreement formed will not be considered by the firms and the firms will not be responsible.
• The partners decide the occupation of professional to be carried under the agreement so formed.
• Hence as both have separate identity therefore acts of both cannot surpass on each other.

Responsibility of partners towards the firm

• It is duty of the partners to maintain the goodwill and dignity of the firm as it is the artificial person.
• The partners working as the agent of the firm will be responsible of the incomes and revenues generated to the firm.
• Transparency and accountability : Timely filing of forms to the authorities are depicting the true picture of the firm to the government.
• If due to the act of any partner the firm suffers loss. In this case the partner will indemnify those losses.
• The partners need to work in line with terms and condition defined in the partnership agreement.
• The partners should form the common interest and should work for the firm and not for the individual.

Liability and responsibility of partners towards each other:

• The liability of partners are limited to their own extent and contribution i.e. in this case all liable for one is not the approach instead the partners are liable for themselves.
• If the loss is incurred to the firm due to single partner then it becomes the responsibility of that partner only to indemnify the loss.
• In case of wind up also the partners are eligible for the profits as per their pre decided ratio.
• Hence it is more secure form as the ratios are fixed the liability is fixed and the profits are also depended as per the ratio.

Hence the above discussion make Jim understand that if he wants to opt of LLP then these are the things he needs to kept in mind.

d. Funding from different sources to start the new company

• Own Fund : The best possible funding is your own funds. In this case Jim has bonus and also in his job he might have saved and backup some funds for future those funds can be utilize now.
• Loan from banks : Maintain the good credit score in its lifetime will help them to acquire loan from the banks and financial institution.
• Funds through other means : The funds can be raised by asking from friends and relatives. normally there is no interest liable on these funds however depends from person to person.
• Using Angel Investor as a option: Strong planing and a good pitch will help to attract angel investors.
• Crowdfunding : Using website to pledge money
• Market : Often market helps the business to raise additional funds however the interest is high than bank in such cases.