The Type of Business Organizations

Business is the most important issue in our daily life, especially with the trend of globalization and the increasing competitions. Business includes a variety of things, such as the type of business organizations and the debtors’ protection. The type of business is very important to the company, so we should choose the right type in accordance with their purposes. The aim of this report is to get a good understanding of the type of business organizations which are suitable for the purposes of three cases and the 1974 Consumer Credit Act.

2. The type of business organizations

Based on what I learned in lessons and an in-depth reading of the relevant cases, I found there are several types of business organizations, for example, the partnership business, the listed company and the limited liability company. The strategy for me to analyze these cases is first to find which type will be more suitable for their purposes, and then point out the advantages and disadvantages combined with the cases.

2.1 The partnership business

According to the Partnership Enterprise Law(2006), the definition of a partnership is an business organization which individuals make a contract, in a spirit of cooperation, intends to contribute by combining property, knowledge or activities; common manage and share its profits and risks. That is to say, the partnership should base on a contract which plans to common manage, share earnings and the risks. As to Baxter, in my opinion, limited partnership business is most suitable for his purpose because limited partnership has following advantages.

First, it has no requirement on the minimum registered capital, this will not cost so much burden on the partners at the beginning and the partners can withdraw their contributions with the consent of other partners. Second, it has a strong personal nature, namely, the partners are well-known of each other or mutual trusting, this will be of great help in common management. The partnership is formed by two or more persons, so the partners in the partnership usually have a good relationship, for example, friends, relatives or workmates. Based on the personal nature, if the partners are not in harmony with each other, they can terminate the partnership whenever they reach the agreement. Third, the general partners are share equally in both responsibility and liability. Just in this case, Baxter wishes to set up a small grocery shop, considering the scale of grocery shop, so I suggest Baxter should use partnership, for it has no requirement on the minimum registered capital. What’s more, he wants to run this shop with three of his best friends, this form can make them common manage, share earnings and the risks.

However, there are some disadvantages that the partnership has. For example, the partnership must undertake an obligation of strict liability to third parties injured by the partnership, if the assets of the partnership cannot pay off the debts, the partners should use their own properties to pay off. In addition, each general partner is deemed the agent of the partnership. Therefore, if that partner is apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons.

2.2 The public company

A public company, according to the usual understanding, is a company that sells its securities to the general public, typically through a stock exchange, or through market makers operating in over the counter markets. It is able to raise funds and capital through the sale of its securities, namely it is easy for a public company to obtain large amounts of capital for further expansion, this is the reason why publicly traded corporations are so important. And the public company has sound organizations and internal management rules and regulations, these offer the public company a effective and standardized operation.

In this case, Vern is already the sole proprietor of a chain of restaurants, and she wishes to raise huge sums of money quickly for further expansion. If she makes her companies listed, by selling her securities to the public, she can quickly raise a huge amount of money. Although this business form may requires higher minimum registered capital, considering her condition, I think she can easily handle it. Since the public company obtain large quantities of money by selling securities to the public, so many countries provide the obligation of the public company to publicly disclose information. For example, according to the Political Research Associates (2008) reported, the firms whose stock is traded publicly should report their major stockholders each year. The disclosed information may also include some financial information which is very useful to the competitors, so it will be a threat to their market share and market access. The public companies have higher minimum registered capital requirement compared with the limited company. Apart from that point, in order to ensure the interests of the public, the public companies are required to spend more for certified public accountants and approval documents.

2.3 The limited company

A limited company is a company in which the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. It is a form of enterprise that blends elements of partnership and corporate structures. According to Keating (1992), the first limited liability company act appeared in 1977 which provided the structure and the rule of the limited liability company. Register capital entirely by all partners collective and contributive. The limited company requires much less administrative paperwork and record keeping than a corporation, it will be work-efficiency and cost-saving. The shareholders in the limited company undertake limited liability to the company’s debts, this will effectively protect the interests of the shareholders.

In this situation, it is an old and established musical society that wants to be incorporated as a company. If it chooses the form of listed company, the scale and the registered capital may not meet its requirement while the limited company has a great deal of flexibility and the required minimum registered capital is low compared with the listed company. What’s more, it also has a little nature of personal. But as the limited company is completely set up by the shareholders’ contributions and not permitted to raise money by selling securities, so it is difficult for the limited company to raise money for its further expansion. What’s more, Tricia（2007） in his article pointed out if some type of fraud or misrepresentation is involved, the owners of the limited company must undertake the personal liabilities. In addition, it will be difficult to determine who actually has the duly authority representing the limited company due to the principals of the limited company using many different titles.

3. The 1974 Consumer Credit Act

The 1974 Consumer Credit Act is an Act of the Parliament of the United Kingdom that significantly reformed the law relating to consumer credit within the United Kingdom. In the light of Consumer Credit Bill (1973), the Act was first introduced to Parliament as the Consumer Credit Bill at the beginning of November 1973. Since consumer credit business developed fast, the Parliament must enact some laws to regulate the consumer credit business. So what’s the purpose of this Act and how it provides the protection to debtors?

3.1 The aim of the 1974 Consumer Credit Act

According to Rogerson and Arthur(1975), the 1974 Consumer Credit Act is based on the 1971 consumer credit reports which proposed by Grams Russel Committee. This Act was enacted because the consumer credit business developed dramatically and many old regulations cannot keep in pace with the new situations. The Act caused widespread reform since it not only incorporates all forms of consumer credit transactions into a regulation but also extended the original legislations to all forms of consumer credit transactions and abolished some old regulations. As consumer is more vulnerable group in the business transactions, the Act makes great efforts to increase protection for consumers.

As far as I’m concerned, by improving the original legislation and extending it to all forms of consumer credit transactions, the aim of this act is to better protect consumers, regulate consumer credit market and improve the consumer credit market environment. It also aims to promote the consumer credit transactions a healthy and benign development. What’s more, this Act complies with the spirit of fair, just, good faith throughout the business activities, especially in the consumer credit agreements. In order to protect the consumers’ interests and create a better credit environment, the Act introduces the national government license, which will better supervise the consumer credit business.

3.2 Provisions on protection to debtors before and during the agreement

Provided by the Consumer Credit Act (1974), there are several provisions on protection to debtors before and during the agreement.

I. Ensuring the debtor’s right to know. There are certain formalities which should be covered by certain regulations for entry into a regulated agreement. The certain regulations must provide the rights and/or duties conferred on the debtor by the agreement, the amount and rate of the total charge for credit and the protection and remedies available to him. That is to say, the agreement should ensure that the debtor understand his right and duty and remedies under the contract.

II. Acquiring signed and legible document. The creditor usually should give the “signed and legible document which contains all the prescribed terms, including the term providing the debtor’s cancellation right and ensures that these terms should be legible when presented to the debtor. This provision not only requires the debtor and creditor understand the terms of the contract but the terms should have legitimacy.

III. The right of cancellation. This Act gives the debtors cancellation right. If there were false oral representations made to the debtor by somebody acting for the creditor, the debtor has the right to cancel this agreement. This will minimize the debtor’s loss.

IV. The issue of security. As security will affect the debtor’s rights and interests, so it must be given at the request of the debtor. If a “signed and legible” document is signed on or on behalf of the debtor, a security is considered properly executed. If the security is provided before the regulated agreement is made, a copy of the security agreement must be given to the debtor within seven days of the regulated agreement being made. This will ensure that the debtor know the existence of this security.

V. Licensing. The 1974 Consumer Credit Act provides types of license. The licenses are all issued by the Director General of Fair Trading. Through licenses, the Director General of Fair Trading will examine the eligibility of the creditor. A person without a license cannot engage in consumer credit activities, if he does so, he will commit a criminal offence and will be punished. This will better protect the debtors’ interests for the interceding of the national government.

4. Conclusion

Following the analysis-solutions instruction, I get a more in-depth understanding of the type of business organizations, the advantages and disadvantages of different types and the 1974 Consumer Credit Act. The type of business organizations is an imperative issue in setting up a enterprise, because only a suitable type can make the most of the business resources and benefit the owners. Besides, in the business activities, we should better protect the consumers’ rights and interests, especially in the credit agreements, for they are vulnerable group. Most importantly, what I learned from this report is that the report increases my accumulations on relative concepts and theories on the type of business organizations and the content of 1974 Consumer Credit Act. The report makes me more familiar with the content and application of the knowledge that I learned from the course.