Unincorporated Business Organisations and the Fiduciary Duties of a Promoter

CASE LAW AND STATUTORY PROVISIONS
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Question One. This section is to examine two types of unincorporated business organizations, advantages and disadvantages of unincorporated business organizations, as well as the differences between the two types of businesses. Unincorporated business organization is a company that lacks legal registration as a business with the relevant government authorities.  This type of business is different from incorporated type of business which has independent legal existence. Individual owners of unincorporated business do not have to register their companies because technically, if they are not one. There are various types of unincorporated business organizations. The two types of unincorporated business organizations to be discussed in this essay are sole traders and partnerships. (i)                             Sole traders/proprietorships Sole traders are self-employed individuals who own and run the companies at a personal (individual) level. These businesses don’t have any legal identity separate to their owners, resulting to the idea of a sole trader, one becomes the business (Larson n.d.).  As a sole proprietor, you have full control over your company, its assets and profits after tax. Additionally, this type of business provides versatility, comparative simplicity and several advantages. The sole proprietor gets all profits after taxation and there is unlimited responsibility for all losses and debts. In this kind of business, a sole trader can use a trade name rather than its legal name. There are various characteristics of sole traders. These are: (1) Lack shareholders to invest capital. Funding for the business is raised individually by the sole trader. (2) No requirement to register the business with company’s house.  (3) Directors are not required to run the company. Instead, a single trader is necessary.  (4). Lack multiple partners. (ii)              Partnerships A partnership is simply a formal arrangement and agreement between two or more groups to operate, manage, and initiate a business with the aim of sharing profits. A partnership can be a business initiative taken jointly by several parties. The parties may include private individuals, non-profits enterprises, governments, or businesses. Some partnerships have varied goals. A partnership is classified into three categories: limited liability partnership, general partnership, and limited partnership. General partnership entails all parties in the arrangement sharing financial and legal liability equally. Everybody in the partnership has individual responsibility for the debts the partnership takes. Also, the members of the partnership share profits equally, in line with the partnership agreement.   Limited partnership is connected to or originates from general and limited liability partnerships. In this partnership, at least a single partner must be a general partner and have absolute personal liability for debts of the partnership. Also, at least another one partner is a silent partner with a limited liability to amount to invested in the partnership business. Limited liability partnership is type of partnership that limits the personal liability of the partners such that in any case, for example, if a partner is sued for a criminal offense, it does to put the assets of other partners at risk. In this partnership, the partners receive bonuses based on the profits made by the company. Advantages and disadvantages of sole traders The following are the advantages of sole traders: (1) there is profit retention, where a sole proprietor retains all profits generated from the business.  (2) There is control. A sole trader has full control of the business and it is not interfered by other people. (3) There is information privacy, such that the data about the sole proprietor is kept private and secure from the public. (4). There is limited delay is decision making. This is because the business does not rely on other decision makers. The following are the disadvantages of sole traders. (1) There is liability, where sole proprietors are subjected to unlimited liability. It implies that the business owner is liable in case the company encounters debts. (2) Sometimes it is hard for a sole trader to raise funds to finance the business. This has a negative impact in company’s future expansion.  (3) It is difficult for sole traders to take advantage of economies of scale. This forces sole traders to charge higher prices for their products and services to generate profits. Advantages and disadvantages of partnerships The following are advantages of partnerships. (1) Since there is more than one business owner, it is possible to raise funds through contributions and borrowing. (2) The partnership tends to benefit the business in terms of development due to the existence of vast skills and knowledge.  (3) It is cost-effective since the startup costs and expenses are shared among the partners. (4) The partnerships attract prospective employees who are given the incentive to become partners. (5). It is not subjected to income taxes. So, profits or losses in the business go to the owners who report them on their personal income tax return The disadvantages of partnerships are as follows. (1) There is a higher possibility of disagreements since decisions are shared. (2)  Profits are shared equally regardless of whether one partner had put in less time or efforts. (3) Most of the partnerships normally have limitations that prevent them from growing into larger businesses. (4) There is a challenge of flexibility because a partner has to consult another partner before making decisions. The differences between a sole trader and a partnership There is a great difference between the two types of unincorporated businesses. A sole trader business has a single owner, whereas a partnership has two or more owners. In a sole trader, the business does not depend on decisions from others, unlike partnership where decisions are made by many partners. Profits in a sole trade are enjoyed by one person, while in partnership many people are entitled to the profits and losses. Availability of various skills in partnership makes it good for more growth than a sole trader. Unlike partnership where every partner has information about the business, a sole trader enjoys data privacy since it is only the owner who knows the secret of the business. Question Two This section is about analyzing the fiduciary duties of a promoter in setting up a company and explaining the statutory position for the promoter’s liability on pre-incorporation contracts. The fiduciary duties of a promoter According to Companies Act, 2013, promoters are individuals whose names appear on face of prospectus, those who control the company’s affairs. Promoters play a critical role in promoting a good fiduciary relationship between the company and its investors and shareholders. They have to prevent conflicts of interest and ensure that there is a good care as they execute their duties. A promoted company can have a shareholder as promoter (Braymist Ltd. v. Wise Finance Co. Ltd, [2002] 2 All ER 333). And in a situation where there is the promoter is the only shareholder, the company is requir...