The Advantages of
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Forming a Private Company
The Various Points for and Against the Conversion of Businesses into Private Limited liability Concerns
THERE appears to be a definite
trend towards the conversion of businesses into private companies, and there must be few business men who, at some time or other, have not wondered whether this would not be a wise step for them to take.
Unfortunately, the old idea that forming a business into a company is a legal method of allowing the owner of the business to evade payment of his debts—and the consequent unwillingness of honest traders to concern themselves with such methods—is often set out as one of the main advantages of the operation. For this reason, many persons who could gain some advantage by forming their businesses into companies fail to do so, because they do not fully appreciate all the pros and cons involved.
Shareholders Not Liable.
It is, of course, quite true that the company is, so far as the law is concerned, quite distinct from the persons who are in control of it. Should the concern fail, the shareholders, provided that their shares are fully paid up, as is the nornial case, cannot be called upon to meet the obligations of the company.
It should not be assumed, however, that a man converts his business into a company in order to evade his liabilities. In fact, under present conditions, there is probably not one case in 1,000 where such an assumption would be correct.
If this be so, what, then, are the reasons for which a man converts his prosperous business into a company?
In the first place, many men naturally wish to take their sons into the family business. To effect this desire, the owner may give them the position of paid servants, enter into a partnership agreement, or form his business into a private company and give such shares in it as he thinks fit to his sons. To make his sons his paid servants would ensure that he himself retained complete control, but this procedure is not likely to be appreciated by the sons.
With regard to the question of partnership, he has to relinquish a certain amount of the control of the business to the other partners. At the same time, as the law stands at the moment, he remains responsible for the whole of the liabilities, although he is entitled to only a share in the assets and profits. Further, if he should eventually wish to retire altogether, he will be taking with him a large portion of the capital of the business, which may considerably handicap those continuing to run it.
The third course seems to offer most advantages, and none of the disadvantages of the othertwo methods outlined above. The usual method is for the owner to sell his business to the newly formed company, taking as the purchase price most of the shares. These he can dispose of to the members of his family in such proportions as he may think fit, either by way, of gift or for scime consideration.
Retaining Full Control.
If he wishes to remain in control of the business, he will make sure that he retains sufficient shares to give him a majority. He can also make an agreement with the company . (which, it must be remembered, is entirely separate from the individual) by virtue of which he will be appointed chairman of directors—or to such other office as he may think fit—for life, or some other term. His position will thus be assured, his liability will be limited, and his sons will have a definite interest in the concern—a position satisfactory to all.