Company Law Assignment

Company Law Assignment

Semester 2 April 2013

Submission Date: 12 April 2013

Assignment on Company Law April 2013

Michael Morgan has been trading as a successful sole trader for around ten years, but due to the volume of his work and the success he has had, his accountant has advised him that he should avail of the benefits of a different form of trading. This document is designed to give information to Michael as to what type of company should he choose and why. There are many options Michael could choose, with two main types; a private company or a  public company. Both main forms also have a limited type and an unlimited type, which means that the shareholders only stand to lose the amount of money they have invested in the shares in the limited company. A major difference, among others, is that a public limited company can sell shares to the public to raise capital whereas the private limited company usually uses shares for control, mostly selling to friends or family. There are also private and  public companies limited by guarantee, but these are usually charitable and professional  bodies, not for-profit organisations. The most popular form of trading in Ireland is a private company limited by shares, due to certain benefits it has over trading as a sole trader, such as limited liability, separate legal entity of the business and the greater ability to raise finance if needed. There are also certain  benefits from choosing a private limited company over a public limited company, such as Michael would have to have at least 7 other members if he chose a public company, whereas the number in private company is 2. There are also a number of legal formalities in forming a  public company as it must be fit to trade in the Stock Exchange. For Michael this would be an unnecessary hassle as he is looking to keep control of the company and not trade shares with the public. Michael was worried about risks connected with trading as a sole trader in the current economic climate as he could possibly lose his personal property if the business went  bust. This would effectively be counteracted by the limited liability of a limited company, where the shareholders only stand to lose the amount of money they have invested in the share capital. On the other hand, Michael has enjoyed having total control over the company previously and he does not wish to lose this; thus he should form a single member company. This is a  private limited company where all the shares are owned by one person and the company is controlled by one person. Nevertheless the company does need two directors under the current legislation. This could be Michael’s life partner, as they have complete trust in each other and could rely on each other. Another option would be to nominate one of the trusted 1

Assignment on Company Law April 2013

employees of the company as the second director as they would be committed to the business,  but the former is more common practice. The company would also need a secretary to keep track of all the paperwork related to the company, but the secretary can be a director so Michael would likely take this duty on. Even though Michael would, in a single member  company, hold all the shares, it should be noted that the other, mandatory director would also  be held responsible if the business failed due to suspected reckless trading or broke the Companies Acts. There are no companies or business names registered in the Companies Registration Office called Michael Morgan Plumbing and Heating, which means that Michael could use the  business name that he already as a sole trader would have had to register, as a company name. However, many plumbing and heating companies in Ireland decide to drop the “heating” when they register for a domain name to make it more practical. On top of this, Michael should consider registering for a domain name such as mmplumbing.com or  morganplumbing.com to shorten the name. His customers would still be able to recognise the  business and could stay loyal to Michael. Michael has many options open as to how to transfer his assets to the private limited company. Firstly, he can sell the business to the company in exchange of cash or a loan. This would mean paying the capital gains tax on the sale. Secondly, he can transfer the business in exchange for shares in the company. By doing this he can defer the capital gains tax. The latter is the more popular option, and it has been done for years, one example being in Salomon v Salomon & company in 1897. Salomon sold his business to the company and received shares, cash and debentures secured by a floating charge. This made Salomon not only the majority shareholder, but also the main creditor of the business. However, as Michael personally owns all the vehicles, stock, equipment and the premises there is a possibility of creating even more security for future. For instance, say Michael rents the premises to the company; he would receive rent as a personal income on top of any salary he makes as the company director. In the future, if Michael decides to sell his business on, he would have to transfer all the assets of the company to the new owners, but he could still keep renting the premises to the company and thus have a secured income. He could also create a fixed charge over the premises, where Michael would loan the company the premises and the company would then repay the loan in the form of a mortgage. Until the premises are 2

Assignment on Company Law April 2013

fully paid, if the company goes into difficulty and defaults on the loan, Michael has top  priority with all the creditors. Another possibility is to value the assets and bring them into the company as a director’s loan. The best option, considering the uncertain economic climate, would be to transfer some assets in exchange for shares, some in exchange of cash and retain control of the premises to earn rent income. To develop a working structure for shares for the company, the company needs to be valued. As sole traders often tend to overvalue their businesses, it would be safest for Michael to ask  his accountant to come up with the evaluation. The evaluation would not only include the  physical assets of the company but also the customers and the good reputation that Michael has built up over the years. The company needs to have authorised share capital from which to issue share capital up to the value of the business. The shares must be issued against real consideration to protect the potential creditors of the company; the shares would be issued to Michael in exchange of the assets that would be transferred from Michael to the company. For example, the company could have authorised share capital of 1,000,000 shares but only issue 20,000 shares to Michael at €1 each or €0.50 each, depending on the evaluation. If Michael decided to expand in the future, he would need a loan from the bank or other  investor as he would be unable to sell the shares to the public. The bank might be unwilling to lend the business money as they may be reluctant to loan in exchange of a floating charge over book debts or inventory. Michael would have the possibility of creating a personal guarantee over the loan, but that would counteract the limited liability that the company would otherwise enjoy. However, it is possible to create a fixed charge over book debts that oversteps the Revenue Commissioners if the company is wound up, such as in Keenan Bros Ltd [1985]. This would be achieved through a blocked account, where the company can only operate on the account with the charge holders’ consent. The Revenue Commissioner will have to be notified of the creation of the fixed charge, but banks are more likely to borrow when they have a fixed charge as they have more security and are thus better protected. Michael could also use the other assets potentially owned by the company as security, such as machinery. To ensure that Michael would be able to sell the business in the future if he wanted, he would need to insert clauses into the Articles of Association to make it possible. He could also  potentially sell part of his shares and stay on in the business as an investor; for instance, he 3

Assignment on Company Law April 2013

could introduce a clause where, in case of the business owners changing, he could convert his shares into preference shares that would earn a cumulative dividend carrying a fixed  percentage. If Michael wanted to take on more shareholders and was worried about losing control, he could put in a clause whereby his shares would always carry a voting right or that whatever future decisions the company makes it would require Michael’s agreement. When changing from a sole trader into a limited company, the directors take on more responsibility for keeping proper books and filing annual returns. In the first year of a new company Michael would not need to file the company accounts with the annual return but the accounts would have to be accurate to file the annual return. At the moment, Michael could  probably avail of the audit exemption as he employs less than 50 people and he has an opportunity to file a timely annual return. If Michael or the other director does not make sure that proper books of account are kept, they could possibly face prosecution in certain circumstances. In addition, if the company does not file the annual return on time, it could lose its audit exemption or get struck off from the register. All in all, Michael would have vastly more responsibilities as a company director than as a sole trader. The Companies Acts are there to protect the creditors of the business and also the public. In addition to making sure that proper books of account are kept and annual returns are filed timely, he needs to make sure that the company is not in breach of the Companies Acts. The director must also always put the company’s interests above of their own.

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Assignment on Company Law April 2013

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Companies Registration Office. (2013). Retrieved March 26, 2013, from CRO: http://www.cro.ie/en/homepage.aspx Hegarty, M. (2012, August 21).  Moving from Sole Trader or Partnership to a Limited  Company. Retrieved March 25, 2013, from Irish Formations: http://www.irishformations.ie/blog/moving-from-sole-trader-or-partnership-to-a-limitedcompany/ Meharg, S. (2012, March 22). Changing from a soletrader to a limited company . Retrieved March 25, 2013, from Stuart Meharg Chartered Accountants: http://www.stuartmeharg.ie/2012/03/bye-bye-sole-trade-limited-company/

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