June 2002, Question 1(a)

Royal Enterprise is a partnership with nine members. The business produces footwear for the

local market. The partners are contemplating the formation of a public limited company.

(a) Explain to the partners FIVE MAJOR DIFFERENCES between a partnership and a

public limited company. [15]

(a) Five major differences between a partnership and a public limited liability company

are:

1. Incorporation: A partnership is an incorporated business whereas a public limited

liability company is an unincorporated business. This means that, in the eyes of the

law, the partners and the partnership business is one and the same legal entity. If the

business is sued or enters into a contract, legally the partners are also sued or are

parties to the contract. As for a company, the shareholders and the business are

separate and distinct from each other.

2. Liability: The owners of the partnership may have unlimited liability depending on

the type of partnership that is formed. In an ordinary partnership, all partners have

unlimited liability; in a limited partnership, at least one of the partners will have

unlimited liability (the others will have limited liability). As for a public limited

company, all owners have limited liability. Limited liability is preferred since it

means that the maximum the owner can lose if the business fails is what he/she

invested in the business. With unlimited liability, the amount that may be lost is

greater than what was invested and a person’s personal assets may be sold to meet the

debts of the business.

3. Raising capital: A partnership cannot raise capital via the stock market whereas a

public limited company can have its stock traded on the stock exchange. This impacts
 upon the amount of capital that and be raised. It also impinges upon ownership and

control of the business.

4. Management: A partnership is often managed by its partners. Whereas a public

limited company is usually managed by a Board of Directors (which may constitute

major shareholders) and a professional management staff (who are not usually

shareholders).

5. Number of owners: The minimum number of owners in a partnership is two (2) and

the minimum number of owners in a public company is seven (7). The maximum

number of owners in a regular partnership is twenty (20) whereas in a public

company, there is no maximum number of owners. This impact upon the amount of

capital that can be raised.

6. Continuity: There is very little continuity in a partnership. When a partner retires or

dies, the partnership usually comes to an end. However, there is greater continuity

with a public company, when an owner retires or dies, the company can continue its

operations relatively unaffected.

7. Formation: A partnership can be formed very easily just by a verbal agreement among

the partners. There is no need for a formal registration. A partnership deed is not

even a requirement to its formation (although it is highly recommended). However, a

company must lodge its Articles of Association, Memorandum of Association and

Statement of Nominal Capital with the Registrar of Companies for approval and

should only commence trade when it has received its Certificate of Incorporation.

8. Taxation: A partnership does not pay corporation taxes. Its partners pay income taxes

on their earnings from the business. With a company, the business pays corporation

taxes and its stakeholders pay income taxes on dividends earned from the business

(double taxation --- usually get allowances to offset this a bit).