1. Introduction
This chapter provides an outline description of the four most common forms of business organization (sole proprietorship, partnership, corporation, and limited partnership) and the legal consequences, which flow from setting up a business in each of these entities. First, though, it is necessary to gain fundamental understanding for each of these forms, (the reasons for choosing amongst these are wide-ranging because no one form of business is right for everyone) which are recurring themes in the law relating to business organization - legal personality, corporation, and limited liability.
The Law of Commercial Enterprises provides for the creation of four types of legal persons, namely general partnership, limited partnership, private limited company and public limited company. The scope of this Law only relates to legal persons created for the purpose of carrying on business with a view to profit. It does not embrace the creation of non-profit organizations.
The provisions regulating general and limited partnerships are from Romano-Germanic origin. Hence, in this area, the Law of Commercial Enterprises is in harmony with the civil law tradition of the Kingdom of Cambodia. The Cambodian Code de Commerce of 1951 (as revised in 1961) that was based on French law and the Québec Civil Code were used to model the partnerships provisions.
A general partnership ("société en nom collectif") is a contract between two or more persons. Each partner is severally and jointly liable toward the partnership's creditors. All partners manage the business of the partnership. In carrying on the partnership's business, the act of each partner binds the partnership.
A limited partnership ("société en commandite ") is a contract between two or more persons where there are two types of partners. The general partners ("commandités") are severely and jointly liable and are the sole partners entitled to manage the business of the partnership. The limited partners ("commanditaires") are only liable for the amount of their contribution to the capital of the partnership. The limited partners are not entitled to manage the affairs of the partnership.
The provisions regulating both private and public limited companies are from Anglo-Saxon origin. The Corporations Act, Title 8 of the State of Delaware, United States of America and the Canada Business Corporations Act - Chapter C-44 were used to model these provisions.
The choice of the Anglo-Saxon concept of company instead of the French "société par actions" is easily justifiable when comparing the legal mechanisms involved in the creation of this type of legal person. The Anglo-Saxon law of company is easier to apply as well as to administer. The same decision was taken by Japan, which general body of law is from Romano-Germanic origin.
Private and public limited companies are created by filing articles of incorporation with the Director of Companies. In the Anglo-Saxon tradition, a company is not formed by a contract between persons. The formation of a company is conditioned upon the filing of the articles of incorporation and the issuance by the Director of Companies of a certificate of incorporation. In issuing this certificate, the Director of Companies authorizes the formation of the legal person. The certificate of incorporation is like the "birth certificate" of the legal person. A company is not human; it is abstract in its form.
The most important distinction between a public and a private limited company is the fact that the public limited company may issue securities to the public in general and it may do so, by using the mechanism of the stock market. Private limited company cannot issue securities to the public.
2. Choice of Organization Form
The decision to start a new business is both scary and exciting. Small businesses provide most of the new employment opportunity on our economy. The four most common forms for a business are sole proprietorship, partnership, corporation, and limited partnership. The reasons for choosing amongst these are wide-ranging because no one form of business is right for everyone. This chapter presents a cursory introduction to the tax and non-tax implications of the choice, plus some of the characteristics, advantages, and disadvantages of each. The chapter also details some of basic operational requirements for corporations.
Suppose Sam and Vuth plan to open a flower shop. Sam will run the shop; Vuth will put up the money. The organizational forms that they can use to structure their for-profit business exist along a continuum. Each form can be manipulated to approximate the characteristics of the others. Keep in mind, however, that whatever structure Sam and Vuth choose, it will not significantly affect how they will conduct the business of selling flowers. The organizational form determines their legal relationship, their responsibilities for business debts, and their tax liability.
There four common choices available, which they may choose from.
(a) Sole proprietorship - as single individual, Sam, own the business assets and is liable for all debts and obligations; Bud would then be her employee. (Or Sam could be the proprietor and Vuth would just lend him the money to start the business.) Proprietorship involves one person conducting business in his or her own name or under a fictitious name.
(b) General partnership - shall Sam and Vuth arrange to carry on the business while sharing controls, profits, and losses they are effectively created a partnership. Each partner is jointly and severely liable for other partners' actions within the scope of the business. Partnerships are prevalent in service industries such as; law, accounting, and medical practices - where trust must exist amongst the partners and capital needs are minimal.
(c) Limited partnership - has characteristics similar to both a corporation and a partnership. Sam and Vuth can form a limited partnership in which both shall provide capital and are liable only to the extent of their investment. However, there are general partners who have control and run the business and personal liability, and there are limited partners who only put up money and whose liability is limited to what they paid for their share of the partnership (like corporate stock). Limited partnerships combine tax advantages and limited liability.
(d) Corporation - Sam and Vuth can form a legal entity called a corporation. Shareholders provide capital whilst directors and officers manage the business. Unless there is fraud and/or negligent that justifies "piercing the corporate veil", shareholders, directors, and officers are not personally liable for corporate debts; only the corporation is liable. Corporations are the principal means of organizing businesses with complex operational structures and large capital requirements. The corporate form, however, works for any business' size, including a one-person "incorporated proprietorship".
Other variants - a joint venture is basically a partnership with a defined, closed-end objective. For examples, two law professors writing a student text book or three corporations developing a new invention. A non-profit corporation on the other hand is usually used for organizations such as temples, churches, mosques, and other civic associations.
3. Sole Proprietorship
In a proprietorship, all accounts, property, and licenses are taken in the name of the owner. Such sole-proprietor has independent control of the business and all the profits are directly taxable, and business affairs are easily mixed with personal affairs. He or she is also personally liable for all debts and obligations of the business. The sole-proprietor provides all the start up capital; often this will involve a bank loan secured by a mortgage on the sole-proprietor's home. The sole-proprietor may be bankrupted by the creditors if the business fails and the business does not continue after the proprietor's death.
Simplicity is the main advantage. There is no organizational expenses.
4. Partnership
The partnership is the favored method of business organization for many professionals like doctors, lawyers, and accountants. They can share facilities in which a sole practitioner would be unable to afford. It is also very common for small businesses to operate from this base, as it enables start up capital and expertise to be drawn upon a number of people. Partners, like sole traders, often raise their contributions through a bank loan and are also personally liable for business debts.
a Forming a partnership
It is usual to formalize the existence of the partnership by written agreement; this is sometimes described as the partnership deed. Written agreement is not essential though. The partnership relationship shall be implied from the conduct of two or more persons carrying on a business in common (as joint proprietors) with the intention of making and sharing the profits arising from their enterprise. The partnership relationship, with all its ensuing rights and duties, exists from the time when the business is up and running. Planning to run a business does not in itself create the partnership.
For clarity and for evidential purposes it is wise to have a written partnership agreement, which indicates the nature and purpose of the business, its name and address, the amount of capital invested by each partner, and how profits are to be shared and paid. If there are sleeping partners, whose only involvement is providing capital and taking a share of the profits, the agreement should specify which partners are actually responsible for the management.
The partnership agreement, whether written or unwritten, is a contract governed by the rules which you have studied earlier in this book.
The partnership may trade under the names of the partners or under a business name.
b Numbers of partners
There must be at least two partners.
c The partnership relationship is a fiduciary one
This means that the partners are placed in a position of trust with each other and have the following duties:
(a) to make full disclosure to each other of all issues relevant to the business;
(b) to declare any personal financial benefit received by a partner in carrying out the firm's business; and
(c) not to compete with the firm without the consent of the other partners.
d Each partner acts as the agent of the others
When transacting business on behalf of the firm, a partner is treated as its agent. Partners can act only within their legal authority and must carry out their duties with reasonable care and skill. The Business Enterprises Law states that partners have apparent authority to carry out any transaction relating to the business, therefore, any resulting contract is binding on the other partners whether or not they actually authorized it. Failure to perform the contract could result in an action for breach against any or all of the partners. For example, if a partner ordered stationary paper for the firm, the other partners will be jointly liable for its cost, even though it had previously been decided by majority at a partners' meeting that new supplies were not needed. Similarly, if a partner committed a tort while carrying out the firm's business, the other partners would be vicariously liable for it. A negligently performed job could give rise to this sort of liability.
e The partners are jointly and severally liable for all partnership obligations
Since the partnership has no legal existence distinct from its members, all the partners are personally liable for its debts and other legal obligations. If the firm does not have sufficient funds, the partners have to make good the shortfall out of their own pockets. Legal action can be taken against a partnership in its own name, but the partners remain jointly or severally liable for what is owed. This means that if a judgment debt is not paid, it can be enforced against all or any of the partners. This may result in one partner having to pay the entire debt, though that partner may seek a contribution from the others.
Like a sole trader, a partner may be personally bankrupted if the assets of the business are not sufficient to cover its debts.
f Dissolving the partnership
Partnership shall come to an end for a number of different reasons.
(a) Lapse of time - most partnerships are formed in the belief that they will be continued indefinitely, but a specified lifetime may be stated in the partnership agreement. For example, two people might decide to run catering facilities for the duration of an exhibition or a trade fair.
(b) The sole purpose of the partnership is achieved - example above is also relevant here.
(c) Death or bankruptcy of a partner - usually the partnership makes provision for such occurrences, but failure to do so could result in dissolution.
(d) Illegality - if the purposes of the partnership subsequently become illegal, the partnership contract is voided. A partnership created for the import of certain goods would be dissolved if the import of those goods was subsequently banned by the department of trade and/or new regulations.
(e) Notice from a partner - unless the agreement provides otherwise, the partnership will terminate if one party decides to leave. Usually provision is made for this.
(f) Court order - a partner may ask the court to order dissolution on the grounds of mental or physical incapacity of a partner, or because of misconduct by a partner prejudicial to the business or which amounts to willful negligent and persistent breach of the partnership agreement. The court may also dissolve the partnership if it deem just and equitable to do so. Dissolution will be so ordered if the business cannot be carried on without making a loss. |
