Company Law and Commercial Mortgages

View PDF | Print View
by: James Copper
Total views: 29
Word Count: 721
Date: Sat, 11 Dec 2010 Time: 12:11 PM
0 comments

There are many considerations that you must be aware of before embarking on a commercial mortgage. Not least perhaps is being able to recognise the different types of borrower and the legal framework under which they operate. It is also necessary to have a good understanding of the basic principles of company law associated to property. The different types of borrower will include a sole trader, a partnership, a limited liability partnership and a limited company.

Sole Trader
A sole trader is often referred to as being self-employed. There are issued guidelines in place as to what constitutes as self employment - laid down by HM Revenue and Customs. The guidance points include:

- Independent control over where and when the individual works.
- Capital and investment risk including the bearing of any losses made.
- The ability to employ others to work beneath you.
- The providing of all necessary equipment.

Any sole trader who takes out a mortgage in order to buy a commercial property does so on a personal basis. This ultimately makes the sole trader personally liable for the debt. The lender will assess the prospective borrower in the same way as any residential mortgage application - an assessment will be made on the basis of the security offered and of the borrower's financial position including affordability.

Partnership
There are two broad categories of partnership; a trading partnership and a non trading partnership. In its simplest form however, a partnership is defined as a group of sole traders who carry on a business in common with a view to make a profit. This definition was first outlined in the Partnership Act of 1890. In most cases a partnership will be formed following a formal written partnership agreement, although it can also be formed based on a verbal agreement or can even be implied. Where there is no agreement in place, it is assumed that all partners have an equal share in the profits and assets of the partnership.

As previously mentioned, the two types of partnerships are:

- A trading partnership - This is limited to 20 partners and will include such trades as carpenters, builders, plumbers and so on. A trading partnership has an implied authority to borrow and offer security.

- A non-trading partnership - This type of partnership has no upper limit to the number of partners. This will include firms of accountants, solicitors and other such professionals. Certain partners in a non-trading partnership may be paid a salary instead of a share in the partnership - In turn they will have no liability for any debts incurred on behalf of the partnership. Unlike a trading partnership, there is no implied power to borrow however the partners can arrange this power through the partnership agreement.

The main points to outline with a partnership are that the assets are owned jointly by the partners (unless stated otherwise in the partnership agreement) who will also be jointly and severally liable for any debts of the partnership.

Limited Liability Partnership
A limited liability partnership is one in which the liability of each partner is limited to the capital that he or she introduced into the business - similar to shareholders within a limited company. This type of partnership was first established in 2000 with the arrival of the Limited Liability Partnerships Act 2000. The outline sets out that this type of partnership will be a separate legal entity which will be registered with the Registrar of companies.

Limited Company
The basis of forming a limited company is through an issue of shares. Aside from any initial investment, shareholders have no further liability beyond their initial investment. The company is viewed as a separate legal entity with a distinct divide from its directors. A limited company has the ability to borrow providing that such powers are stipulated in its memorandum of association.

In many cases, a mortgage lender may not be prepared to offer commercial finance without a guarantee from the directors - this could also be the same in the case of a limited liability partnership. In many cases a guarantee will be required in the form of the individual's residential property.

About the Author

James Copper is a writer for http://www.commercialfinancespecialists.co.uk where there is information on how to find the best business loans