Discuss about a Report on Business as a general partnership or as a limited liability company and Differenciate between an employee and an independent contractor?
Three friends want to start a new business. So, in this case, they required understanding the meaning of different kind of organisational setups. This paper finds the advantage as well as the disadvantage of different kind of corporations like the general partnership or a limited liability company. Both of these organisational setups look similar but different from each other in regards to the liability of members and structural framework. For a small business set up general partnership and limited liability Company both are helpful. To start a new small business, three friends need to understand the advantages and disadvantages of both this setup and then they can decide the about their future business plan. This paper defines the terms and major characteristics of the two form of incorporation.
The general partnership means an organisation that has no distinct legal personality other than its members. The members of a partnership firm are jointly liable for the action of each other within the ambit of the partnership agreement. General partnership initiated by a general agreement between the partners. The partnership agreement is important in al aspect. This is the main instrument that administers the factors in a partnership firm. If the agreement has not determined the rights and liability, the Partnership Act will take into consideration. In case of unincorporated partnership firm, no registration is required to start up any business. This is the simplest form of business to star up any new business. Consumer and legal aspect denote this setup as the basic formation of any business set up (Cahn and Donald, 2010).
The general partnership has certain special features. It starts with a partnership agreement. There can be two or more partners in a partnership firm. All of these members are denoted as partners who are jointly liable for the act with the scope of the partnership. In this connection, we have to mention that partnership firm and its members are not distinct from each other. If any act done in the name of the partnership firm, all the partners are equally liable for that. On the other hand, if any partner commits any act, the other partners will also liable for that connection. But the partners or the firm will not be liable for the personal debts of the partners.
The partners are the agent of the firm. The entire partner in common will be held legally responsible for any act or omission by the partnership firm. All partners enjoy the right according to their shares. The Limited Liability Partnerships Act 2000 will apply in this situation and this Act identifies the concept distinct legal personality concept. But in general, unincorporated partnership, the separate legal entity concept is not available. At the time of debt related liability, the partners will be liable according to their shares.
The limited liability Company is a corporation set up like a private limited company. It is a legal form of company that provides limited legal liability to its owners. This is a compound version of a company, single proprietorships or partnership. The main features of this kind of business setup include the limited liability to its creators. The legal accountability is restricted because it has the separate legal entity. For small business setups and single owners, these kind of organisational setup is appropriate. This is flexible that a company (Mancuso, 1999).
If we talk about the context of UK, it looks like a form of limited liability partnership. The limited liability is a body corporate that can sue or be sued in its corporate name. The members or owners are not personally liable for the act of the corporation because it enjoys the separate legal entity concept. But the main feature is that it needs to register in the appropriate manner as prescribed under the law. But the member can be sued or held liable if they act beyond their authority (Mancuso, 1998).
The separate legal entity concept provides the limited liability protection to its proprietors. If the Company act anything within the ambit of company’s limited arena, the members or owner will not liable personally for the act. For the debt or other financial issues also the members will not personally liable. The other members are also not liable for the act done by any other members. It has to be registered by its corporate name and uses the seal or all it activity. The LLC paid tax by it on the name and registered ID. The chief characteristic of a Limited Liability Company shared with commerce is limited responsibility, and the fundamental characteristic it shares with a corporation is the convenience of cross income taxation.
Prior to set up a new business set the three friends need to understand the difference between these two above mentioned formations. A partnership includes two or more persons who share possession and legal responsibilities in a trade. A partnership firm does not contain a legal individuality detach from the proprietors of the industry. On the other hand, a limited liability company unites the outfitted flexibility of the partnership with the individual property fortification that comes with working business. An LLC has a lawful continuation distinct from its proprietor (Morera Balcells, 2015).
Partnership firm structures mechanically at the time when two or more than two persons make a decision to go into trade jointly. General Partnerships are not obelised to file credentials with the state to begin the business. On the other hand, In case of LLC it required to fulfil all the relevant registration procedure in this regard.
In case of owners, LLC may have a single owner but in case of a partnership, it requires at least two members. In case of liability, this two organisational setups are very different from each other. The partnership firms have to separate identity. The members are liable for the act of partnership firms. On the other hand, LLC has the separate legal identity. So, the members are not liable personally for the debt and other circumstances in the company. The partners in a partnership firm administer the day to day affairs of the firm as prescribed in the partnership agreement (Morse, 2001). In case of LLC, the members may control or administer the matters or appoint people on their behalf to take the required action. A partnership Firm may be dissolved if partners make a decision to sell or dissolve their possession and interest in the firm. If a partner dies, then also it can come to an end. Alternatively, an LLC possibly will have a limitless life; if not a specific closure date is scheduled in the article of the corporation. Characteristically, a buy-sell contract will permit an associate to buy out other associate’s portions that make a decision to sell out his portion of interest in the business (Shenkman, Weiner and Taback, 1996).
According to my opinion, three friends need to understand the basic characterises of the two formations. Both of this formation is appropriate for the small business enterprises. To start with a new corporation, the partnership is the very appropriate business it does not require any registration procedure. It can dissolves any time by the use of the partners. For small business enterprises, it is the basic criteria. But the partners are liable in every circumstance. On the other hand, if they form LLC it may require the registration procedures but provide the limited liability protection. The member may not be personally liable for the act of other members or the corporation as a whole. So in this regards both this form is appropriate, it need to introduce according to priority.
Introduction (Aim Of The Report)
There are certain distinct differences between an independent contractor and an employee in any organization. Understanding the differences between an independent contractor and an employee is very important. This is important because both these forms of employment impose different kinds of liability on the employer. The responsibilities and forms of actions depend on the difference between the two contractual natures. Not only the liabilities, but also the privileges too differ with the difference in the two forms. Hence, it can be said that for every company it is very essential to understand the difference between the nature of an independent contractor and an employee so that the rights and liabilities in every matter can be kept compartmentalized into water shed partitions.
The express dissimilarities between an independent contractor and an employee is very essential to be understood not only to give a proper skeleton to the legal implications, but also to hold back income tax regulations, communal securities and the charges over Medicare facilities etc. Though there is no crisp definition of the expression “independent contractor”, yet it can be said that an independent contractor is one upon whom the manager exercises his control in such a way that the consequences of the service is managed by him but in no way does he exercise control over the technique of completing the service (Nannicini, 2006).
As per the control test, a self governing contractor is one who carries on his own business. An independent contractor can be any person ranging from a sole proprietor or a person owning a business under limited liability, any other business house or any other corporation. An independent contractor is generally capable of making his own business earn profits by running his business under the governance of another person to whom he serves. It is also to be noted that an independent contractor is typically not supposed to earn any benefits under the employer’s insurance schemes or other benefits like maternity leaves. On the other hand, he is supposed to pay his own taxes from his profits earned (Tarantolo, 2006). This control test is the traditional test which is used to establish the nature of a relationship. The test had its origin in the concept of vicarious liability that arose in tort. The test mandates that in order to examine the relationship between an employer and his employee, the one that plays a crucial role to come to a conclusion is the fact that who exerts control over whom? If the employer exercises total control over all the affairs of the employee while he is under the scheme of employment, then undoubtedly, it can be said that the relationship is that of an employer and the employee and not that of an independent contractor. This test was successfully applied by the courts in the cases of Stevenson and Ors. v MacDonald (Stevenson and Ors. v MacDonald and Evans, [1952]) and Evans and Yewens v Noakes (Yewens v Noakes, [1881]). There are certain inadequacies of this test and in order to overcome those inadequacies, the organization test was established.
The organization test will be looked at now. Usually, an employee is that individual who works for a company in its production process and earns remuneration for it. The employer exercises his control over the employee and also gives direction regarding the way in which the work is to be done. An employee is said to be that person who acts under the obligations that are imposed on him under the employment scheme of the company. The employee remains bound on the terms of the employment and effectively works for a single company at one point of time. It is also to be noted in the relationship between an employee and the employer that the privilege to end the employment of the employee solely rests in the hands of the employer and all the requirements to carry on the employment effectively are managed by the employee himself. On the other hand, in the case of an independent contractor, there is no specific relationship between the employer and the employee and the contractual obligation can be carried on with them in any way allowed and accepted under the law. The contractual relation between the independent contractor and the employee is totally governed by the articles of association. Also, in employer-employee relationship, the working hours are specified and generally there is no scope of part-time working. On the other hand, an independent contractor can work in any way that he pleases. The only requirement is that the work must be finished off in time. Moreover, a manager or an employer remains legally bound for the acts done by the employee. On the other hand, no such liability for either negligence or wrongful conduct befalls an employer for the acts done by an independent contractor (Studer, 2005). This test was expressly used by the courts to come to a conclusion in the cases of Addison v London Philharmonic Orchestra (Addison v London Philharmonic Orchestra, [1981]) and Hillyer v Governors of St Bartholomew’s Hospital (Hillyer v Governors of St Bartholomew’s Hospital, [1909]).
There are also multiple tests that determine the differences between an independent contractor and an employee. This test was for the first time seen in the case of Ready Mixed Concrete (South East) Ltd v Minister for Pensions and National Insurance (Ready Mixed Concrete (South East) Ltd v Minister for Pensions and National Insurance, [1968]). It was decoded and provided in this case that the determining factors to differentiate an employment from an independent contractor are to understand whether the worker or the employee pays his own taxes and claims for the insurance contracts (Fishman, 1997). Moreover, if holiday pays are given, then, it shall be a employer employee relationship. There should be no bridging the gaps between the employer and the employee and there should be no concealing facts between them. This criterion is not there in case of a contractor (Fishman, 2008). This is because a contractor is supposed to deal with a specific project and once that project comes to an end, there remains no contractual obligation. Hence, the determining factor in this case is that in en employment. The relationship is very clear like water while in independent contractor, there may be various concealments. Ackner LJ submitted that there is a list of exhaustive factors to be taken into account before determining the relationship between an employer with his employee and an employer with an independent contractor. These are whether remuneration was received by them in the course of employment or not. Also whether performance was done under the proper exercise of control y the company is yet another question to be taken into consideration. Whether clothing and equipment is provided by the company or not is yet another determining factor in case of the relationship.
In conclusion, we can say that an employee works for a single employer at a single time frame while an independent contractor works for several managers in different time periods. The working hours are specified in case of an employee while they are not so in case of independent contractors. An employee may be terminated from his work at the will of the employer by the employer but this cannot be done in case of an independent contractor. The employees are under the protection of the work place while the same protection is not given to the independent contractors. The labor safety laws work for the employees and not for the independent contractors.
Though as per the nature of the work, both may look to be very similar, but there are distinct differences between the two and the same can be easily found out if looked into with greater detail.
Addison v London Philharmonic Orchestra [1981]ICR p.261.
Banoff, B. (2014). Company Governance Under Florida’s New Limited Liability Company Act. SSRN Electronic Journal.
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Hamilton Hart, J. (1906). A NEW LIMITED LIABILITY COMPANY AND A DISCLAIMER. The Lancet, 168(4346), p.1688.
Hillyer v Governors of St Bartholomew’s Hospital [1909]KB 2, p.820.
Mancuso, A. (1998). Form your own limited liability company. Berkeley: Nolo Press.
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Ready Mixed Concrete (South East) Ltd v Minister for Pensions and National Insurance[1968]QB 2, p.497.
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Studer, Q. (2005). 15 tips on creating a standards-of-behavior contract to encourage employees’ best behavior. Employ. Relat. Today, 32(1), pp.11-18.
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Yewens v Noakes [1881]QBD 6, p.530.
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