“The advantages of limited liability combined with the ease with which a member of a family or a provider of capital or an adviser can be given a stake in the business without the financial risk involved in being a partner, usually turns the scale in favour of incorporation as opposed to a partnership.” Discuss.

This question is based on the advantages of partnerships and limited liability companies and explicitly suggests that the scale generally turns in favour of incorporation reason of the advantage of limited liability and the wide spectrum of membership.

Generally, incorporation brings with it certain basic advantages unavailable to unincorporated associations for example partnerships.

The most fundamental attribute of incorporation from which all other advantages flow, is that, the company becomes a legal person distinct and separate e from its members. It acquires an independent legal existence. It becomes a body corporate with rights and subject to obligations. This is the rule in Salomon V. Salomon and Co. Ltd. 1897.

The salient advantages of incorporation include:
• Limited Liability: section 4 (2) (a) and (b) provides inter alia that liability of members may be limited shares or guarantee. In Salomons Case, Salomon was not liable to contribute to the assets of the company as his shares were fully paid.
• Sue or be Sued: members cannot generally be sued for the wrongs of the company and are not obliged to sue on its behalf. (Foss V. Harbottle (1843).
• Owing of property: under section 16 (2) of the Act a company has capacity to hold land and other property. (Macaura V. Northern Assurance Co. Ltd 1925).
• Capacity to contract: registered companies have capacity to enter into contractual relationships e.g. can hire and fire. They have capacity to invest to enhance profitability.
• Perpetual Succession: The fact that a company has capacity to exit in perpetuity encourages investment on a long term basis.
• Wide Capital base: reason of the wide spectrum of membership.
• Transfer ability of shares: shares in public and private companies and transferable membership keep on changing from time to time.
• Qualified or specialized management: companies are managed directors elected members in general meeting.
• Borrowing floating charge: companies are free to use their movable assets as collateral. This interalia enhances their borrowing capacity.

Partnerships, on the other hand enjoy certain advantages for example,
• Sharing of losses: this reduces the amount borne a single partner therelessening the burden.
• Shared management: partners shares ideas on various matter affecting the firm.
• Easy to form: there are no legal formalities to be complied with and expenses if any are minimal.
• Flexibility: partners are free to change the nature of the firms business at any time.

The foregoing demonstrates that whereas limited liability companies enjoy certain advantages.

Partnerships too have certain advantages and hence the balance may tilt on either side. However, it is undeniable that the advantages of incorporation outweigh those of partnerships far.

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