The Process of Converting a Sole Proprietorship Into a Company

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Table of Contents

Synopsis
Introduction
Discussion
Conclusion
References

Synopsis

The process of converting a sole proprietorship into a company involves the transfer of all the assets and the liabilities of the business to the ownership of the new entity. The sole proprietor is entitled to 50% voting rights, and should enjoy such benefits for at least five years. The business, after the conversion to a company – is not exempted from taxation – like before. From changing into a company, the liability of the business will be limited, thus the assets of the owners cannot be used to meet the obligations of the business. Ted has the option of converting the business into a public or a limited company, but the public limited company option is better, as it will allow him to receive further investment from the public, as well as limitation from the liability of the business. This paper extensively analyzes this situation based on facts.

Introduction

The process of converting a sole proprietorship into a company involves the transfer of all the assets and the liabilities owned by the sole proprietorship – into the ownership of new company under formation. The sole proprietor entering into the change of the business – should hold at least (50%) of all the voting rights represented by the company – which dictate the voting power of the establishment. The sole proprietor should, also, enjoy these benefits for at least five years after the institution of the company. The sole proprietor is warranted receiving consideration in the establishment, in the form of the shareholding of the company. There is also the requirement for the company to withdraw from the exemption expressed by the provision US 47 A (3). Under this provisional change, the principal gain which was not subjected to taxation – is placed under taxation, due to the shift of the business into the company’s deposal. There is also the requirement, that all the partners of the business become the shareholders of the new Company – the already held proportion of their capital withholding, at the start of the succession.

Discussion

In establishing the company, which is also referred as the incorporation of the company, the business will change from being considered one entity with Ted, to introduce the aspects of limited liability – which means that the business will be considered an entity, different from the owners and operators of the business. During the setting up and registration of the company, there are a number of legal structures available to Ted. The different structures will present a number of advantages and disadvantages; therefore, Ted will be advised on the easiest and most advantageous option to take. Assuming that Ted was forming the case of the U.K formation, he will be able to get the company formed the same day of application – as this is done electronically. This process will require the input of a single person, a group, specialized agents, accountants or solicitors – who will engage in the registration of the company. Access to the services of a specialized solicitor will be possible in the UK, since there, he can hire one for £100 or less.

The company will be formed under the Companies Act. The Act allows one or more parties to form a company, for any lawful dealing – which, in this case, will be done by subscribing to the entity’s memorandum of association. For easier options, ted can choose to adopt ready-made companies, which are available at company formation agents. In this case, Ted will purchase a shell company, which has all the documentation done – and the entity assigned a generic name, for instance New “12345.” This service can go for about £ 200 per company entity.

The formation of a new entity will be a better option for Ted, and the process will include the creation of the memorandum of association, which describes the company’s existence. This document must be signed by the applicants – in this case Ted and it will show this information: the company’s name with name “LTD” at the end, address of the registered entity, the object of formation, for instance business and trade; a limited liability statement, the issued share capital and the name of the subscriber, in this case, Ted. The second step will be the drawing of the articles of Association – which governs the running of the company. This will describe the voting rights of investors, conduct of share owners and powers of management, these including director’s meetings. The contents of this document will include the classes of shares, restriction on the issue of shares, restriction on share transfer, the purchase made by the entity of its own shares, as well as how and when directors will be appointed. Form 10 will also be formulated, giving details of the first directors of the company, the secretary and the address of the company. Other details of these parties will be required. In the case of a sole directorship company like the one formed by Ted, he is not able to become the company secretary. Form IN01, which describes the intended situation of the registered office – giving the details of the consenting secretary and directors, particulars of the subscribers, and the details of the shareholding in the company –in the case of a company limited by shares. This form, also, expressly notes the statement of compliance – showing that the necessities of the Companies Act have been satisfactorily adhered to. This can be signed by Ted, as the sole director or the solicitor overseeing the formation. This document should also, be signed in the presence of a commissioner of legal authority, for instance a commissioner of oaths. The choice of the company’s name will also be done taking care not to use that of another company, a name that implies connection to the government or local authorities, or one which is offensive. From meeting all these conditions, Ted will be able to register the company; therefore, it is possible for him to do the registration of his company.

The particular requirements in establishing alternative types of company: For Ted, the best option of the company to be formed is a limited company, as he intends to get limited liability status – where the business meets its obligation without involving his personal assets. This company will be limited to its assets and finance in meeting its obligations. The case of Ted, will involve a limited company, preferably – one limited by shares, as it has enough worth – to act as guarantee. These include the turnover of USD 1.5 Million and the USD 2 Million in assets. The options available to Ted will be those of creating a limited public or a limited private company. The formation of private company limited by guarantee, will present the threat that Ted will have to agree on a fixed amount to be paid, in the case of liquidation. This is in opposition, to his desire to be limited from the liability of the company, therefore not a good option. A private company limited by shares is another option for Ted, but will limit him, as he does not have any other shareholders in mind – who are ready to invest in the company – and this option will not allow him to expand the business through the investment of other parties in the capital holding. Ted has been in need of expanding the business, using extra capital investment – as he is, also concerned about the risk of investing more, in the business. The best option will be a public limited company, which will allow him to get the opportunity to trade the reputable company on the stock exchange, thus raise more capital holding from the public. This company will also be limited to its assets – thus will meet the expectations of Ted.

The advantages and the disadvantages of a private company limited by guarantee include the following: it generally should be a non-profit making entity, it holds no share capital, has members and not shareholders, the owners are not limited from the entity, does not distribute its profits to its members – thus can apply for charitable status. These advantages and disadvantages are against the interest of Ted, who has the sole motive of business for profit. A private company limited by shares presents the following advantages and disadvantages: the liability of the company is limited to the capital investment, and shares cannot be offered to the public – which is evidently against the interests of Ted, who desires to get more capital investment from the public for business expansion and reduction of personal risk. A public limited company, it has its minimum share capital limited to £ 50,000 – which is available for Ted, they can be listed on the stock exchange – thus is fit for the needs of Ted, as he desires to get more funding from the public, it is for profit making, and that he will have limited liability. This is the most appropriate type of company to be formed by Ted, as it will meet the interests he has, as explained above. On the issue of converting the business in the future, this type of company can be converted to become a private limited company. This can be done through re-registration to the status of a private limited or a private unlimited company – at any time, depending on their preference – with few formalities put in the way. This can also be done, in the case where the share capital falls below the statutory minimum – where the move may also be directed by a court.

The formation of a company must meet the following requirements: in the case of the paper formation process, which is done under the Companies Act 2006¹⁰, the persons intending to form the company are obligated to the sending of the documents explained below, and the registration amount required to the office of the registrar of companies. The papers include Form IN01, which explains the intended situation of the registered company, giving the particulars of the consenting secretary, directors and subscribers. A statement of compliance as per the requirements of the Companies Act should be offered. A memorandum of association is also required, giving the names and signatures of the subscribers forming the company. In the case of electronic registration, the registering parties do it at the Companies house eFilling platform, where they use an account with the Companies House. Ted as a shareholder in the company – can be held liable for the back salaries of the workers of the companies, as the case was – with Dumas v. InfoSafe Corp., 320 S.C. 188 (S.C. Ct. of App. 1995). This is the case, as there is an inherent responsibility among the shareholders, to ensure that the management of the company meets the full wages and salaries of its employees. The failure to do this amounts to personal liability. This is the case, when a closely held company is held into insolvency after meeting its obligations to its creditors. In preventing such a situation, authorities like Delaware governments secure the payment of employee salaries as per (8 Del. C. § 300). Ted maybe liable to his actions as a shareholder, in the case he does not conform to the principle of “entire fairness” in dealing with the company – where the fairness extends to the company, other shareholders, creditors, and workers as well. Ted as a shareholder will be personally liable to the reception to the reception of illegal distribution of illegal company funds knowingly. In such a case, they are required to pay the amount back to the corporation. Ted may also face shareholder liability in the case of a “watered” stock offering. In the case the services tendered are less than the fixed price of the stocks secured; the difference in the value is called the “water” and is held as personal liability to him as a shareholder (8 Del. C. § 152).

Conclusion

Further advice to Ted, before starting the company include that he should recruit shareholders who have an interest and passion in their line of business, have back up funds to nourish the company, in the case of hard times; and engage the advice of specialist and experts in the field in questions, including partnering. Ted should also make an evaluation of client availability before making expansions, act in a professional manner since the start, and that he should get professional in all activities of the company, and lastly that he should meet all requirements – these including taxes and legal issues.

References

Chapter 281 of the Acts of 1995, chap 165, sec 1

Dumas v. InfoSafe Corp., 320 S.C. 188 (S.C. Ct. of App. 1995)

General; Corporation Law: 8 Del. C. 1953, § 152

General; Corporation Law: 8 Del. C. 1953, § 300

LCB Gower, ‘Some Contrasts between British and American Corporation Law’ (1956) 69(8) Harvard Law Review, 1369

LexisNexis, Companies Act 2006, section 172.

LexisNexis, Companies Act 2006, section 3.6

M. Genearl Laws: Chapter 156C, §65

M. General Laws: Chapter 156C, §12

M.General Laws. Chapter 156C, §19.

Reiner Kraakman Et al., The Anatomy of Corporate Law Oxford University Press, 2004).

SCHENCK v. U.S., 249 U.S. 47 (1919) 249 U.S. 47

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The Process of Converting a Sole Proprietorship Into a Company

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