COMPANY FORMATION

Types of companies

Sole trader

Partnership

Company
sole trader
A person who carry his business on himself or herself. and
a person who is responsible entirely for its own
organization. He invest money into the business and own
assets. there is not distinction between the business and
the proprietor. in law they are viewed as one. any liabilities
that the business has, must be ultimately found from the
proprietors own personal wealth. should the business not
be able to pay them.

Advantages of sole trader

(company and partner ship has same advantages and
disadvantages but the limited liability partnership is
different from partner ship)
Advantages
no formal procedures
No detailed accounts required
Independence
Self accountability
Personal supervision
All profits are owners

Disadvantages

Unlimited liability
Dependence on owner to invest money
Death of the owner
Owner may have only one skill
Small size organization

Types of partnership
Partnership
Limited partnership
Limited liability partnership
Partnership
it is the relation which subsists between persons carrying
on a business in common with a view of profit . it is in effect
a sole trader but has more then one persons who owns the
business . therefore it has the same advantages and
disadvantages like sole trader
A partnership has a minimum of 2 people and maximum of
20 people. In an organization any more than this should
have to register as company how ever there are some
exception of this rule like an accountancy firm
Limited partnership
Partners have unlimited liability but the partnership act of
1907 allows that if they want to limit their liability but as a
result were not allowed to involve to management of
partnership at all. So effectively a sleeping partner

Limited liability partnership(LLP)

According to partnership act of 2000 partners are allowed
to become limited liability partnership being a separate
legal entity from the members .
Difference between partner ship and limited liability
partnership
o LLP must be incorporated
o Statement of compliance and incorporation documents
must be file to registrar of companies
o Rights and duties set out in partnership agreement
o Must prepare more detailed documents
o Sign the documents
o Must appoint auditors (if above audit threshold)
o Lodge with the registrar of companies
TYPES OF PARTNERS
o General partner
Actively involved in the day to day business
o Sleeping partner
Takes no parts in the running of business
o Limited partner in limited partnership
Contributes a specific amount of capital . liability limited
to amount. Can not take part in the management of the
firm
o Salaried partner

Not a real partner but receive a share of salary

Company
A company is a corporation being an artificial separate legal
person .It has its own legal identity and has rights and
duties ( salomon v salomon &co ltd 1897). There are four
different ways of incorporation
Registered companies
Corporation sole
Statutory corporations
Chartered corporations
Registered companies
Registered under the companies act usual method of
incorporation
Corporation sole
Filed by one person at any one time e .g the crown
Means regestred through court
Statutory corporation
By act of parliament e .g nationalization ( govt purchase
shares of different private companies )
Chartered corporation
Given by the crown being a royal charter e .g CIMA ACCA
ICAEW BBC

Veil in incorporation

This is the term used to describe the concealment of the

owners of the company through shares . the company is a
separate legal entity in its own right and the veil helps
establish this. The owners are not liable for the company
debts.

Lifting the veil of incorporation

In some situations the separate legal identity of a company
is ignored and the owner and the company are one . this
can be done by the courts and statute to prevent owners
making unfair dealings .the usual consequence of this is
liability will no longer be limited to the company but extend
to the members or share holders
Examples of lifting the veil of incorporation
Fraudulent trading and wrongful trading
The company is in the process of winding up had made
transactions which were designed to defraud creditors
then the directors may be responsible for these
transactions and be asked to contribute towards these
purchases. this would also apply to any wrongful
transactions.
Public company members falling below from two
Where a public company shareholders below 2 these
remaining shareholders become liable for the debts of six
months after this occurrence. Because he is effectively
carrying on the business as a sole trader.
Wrongful use of company name
If the officer of the company signs a document on behalf
of the company where the name is incorrect then he is

personally liable if there are any problems (E.G a

company cheque is signed which creditors declined
because of incorrect company name)
Lifting the veil with regards to a group
A group consist subsidiary and parent company. these
are recognized as separate legal entities albeit part of the
same group . Therefore should be accountable for their
own debts and liabilities.
Case refrence ( parent not liable )
Rule parent and subsidiary both are separate legal entities
(Adams v cape industries)
2nd case veil lifted between parent and subsidiary
(DHN food distributors ltd v London borough of tower
hamlets)

Types of companies
Limited by shares
This is a company which owned by members or
shareholders who have contributed monies in exchange for
parts of the company or shares .the shareholder are limited
to amount that they have invested and if the company
should have liabilities it cant afford to meet. The
shareholders are not asked to ultimately meet this liability.
Limited by guarantee
This is when each of the members provide monies
towards their share of the guarantee amount that the
members will pay should the company go into liquidation.
if it is not enough then the members who left the company
in the last 12 months will be asked to contribute.

 Unlimited liability
This is when each of the members have unlimited liability
to the company . should the company go into liquidation
they will have to meet all liabilities owned by the
company.if this is not enough then the members of the
company who left the company in the last 12 months will
be asked to contribute ( Advantages of such company is
that not need to file accounts and can buy back shares
from its members without formality. It also provide the
separate legal entity for assets and liabilities to be kept.
Public limited company
This is a company limited by shares where in the
memorandum of Association it states speciafically that it
is a public company and the name end in plc the share
capital must have a nominal value of at least 50000

Private limited company

This company is limited by shares or guarantee and is the
way the majority of compnies are formed,

Difference between a public company and private

company
Public company
Nominal share capital more than or equal to 50000
Name must end with plc
Shares or debentures to the public
Only limited by shares or guarantee
Must be at least paid up on nominal and fully on any
premium on the shares

Must have at least two shareholders

Must have atleast two directors
Company secretary is qualified
Accounts filed with in 10 months of a year
Additional rules on capital maintenance including the
raising of finance
Must hold AGM and re appointment auditors annually
Can not start business on incorporation until it has
received a certificate from the registrar

Private company
No minimum share capital requirement
Name must be end with limited unless unlimited
Cannot offer share debenture to public
Can be limited of unlimited by shares or guarantee
No any requirement of capital paid up or premium
Must have at least 1 shareholder
Must have at least 1 director with a different person
being the company secretary
No any requirement of company secretary
qualification
Accounts filed within 7 months of the year end
Rules are less straight
Can pass a resolution dispensing of AGM and
reappointment of auditors
Can commence business on incorporation not need
to wait for trading certificate.