Company, partnership or limited liability partnership? Choice of legal status 351an absolute veto over any transfer of shares. If this is the case, then the shareholders will
be locked into the company. No matter how much they dislike the way the company is
run they cannot, short of there being a fraud on the minority or unfair prejudice, sell their
shares.
Potential shareholders who are worried about this happening might do well to insist
that they will not buy the shares unless the articles do allow them to be freely transferred.
Whether or not the controllers of the company would agree to such an article might well
depend on how badly they wanted the shareholder’s investment.
Business property
Company property belongs to the company and not to the shareholders, just as LLP prop-
erty belongs to the LLP. An important consequence of this can be that a company or an LLP
can give its assets as security by way of a floating charge and yet remain free to deal with
the assets as it sees fit. We saw in the previous chapter that a floating charge will be created
if a creditor takes the company’s assets as security for a loan, while leaving the company
free to deal with the assets.
Partnership property cannot belong to the partnership because a partnership has no
separate legal existence of its own. Despite its name, partnership property belongs to all the
partners jointly. A partnership is not allowed to offer a floating charge over partnership
property. The partners can, of course, offer a mortgage, but this would restrict the use of the
property over which the charge is granted.
Borrowing power
If sole traders want to borrow money from a commercial lender then they will need to pro-
vide security for the loan. There are several ways in which they might do this, but generally
they will either need to find a guarantor, who agrees to repay the loan if the trader defaults,
or they will need to mortgage their property. Banks tend to demand very solid security for
any money advanced.
Partners are in the same position as sole traders, except that since there are more of them
they might well find it easier to find guarantors, or might have more property to mortgage.
Creditors who are to be repaid out of partnership profits should make it very clear that they
do not intend that this should make them partners.
Members of companies or LLPs can raise money in the same way as partners or sole
traders, but companies and LLPs also have additional options.
First, companies (but not LLPs) can sell shares to people who wish to invest in the com-
pany but who have no desire to manage it. Shares in a private limited company cannot be
offered to the general public but, subject to the articles of association, they can be offered to
individuals. An investor who is convinced that the company will be a commercial success
might be more than willing to pay for shares. Some small companies achieve spectacular
success and eventually change into plcs with enormous assets. If an investor had con-
tributed capital into a company such as Body Shop International plc when it was first
formed as a private company for, say, 10 per cent of the shares, this would have been an
outstandingly good bargain. The converse, of course, is that very many small companies go
to the wall, in which case the shares become worthless.
Second, companies and LLPs can raise capital by granting floating charges over their
assets. This means that the company or LLP gives its assets as security for a loan while