Due to ever increasing commercial requirements people formed companies and in order to regulate them, new laws came into existence. Even prior to the advent of Islam dealings in the form of companies existed among the Arab community and during the dawn of Islam, companies were categorized as companies of consent, proprietorship, companies based on contracts, capital companies and partnerships.
Article 4 of Law No 15 of 1960 defines the joint liability company as a company incorporated by and among two or more persons under a specific name, to perform activities of commercial nature, where the parties are jointly liable for the company’s liabilities. On the other hand, a limited Liability company is a company consisting of a maximum of thirty members and a minimum of two, each liable to only his share in the capital (If the spouse is a partner then the minimum number of partners shall be three). If the quorum is not filled within a period of one month from the date of commencement of business the company shall be treated as liquidated and the existing partner would be expected to settle all dues ensued therein from his personal assets.
Both in a Joint Liability Company and Limited Liability Company the Articles of Incorporation plays a pivotal role in the determination of the rights and liabilities of the partners. The Articles of Incorporation override any other agreement signed on or before its incorporation. The main advantage of the Articles of Association is that the rights of all the parties would be protected equally and impartially. The AOI of the Joint liability Company shall be drafted in the official deed and encompasses information including, the name of the company (or trade name), headquarters of the company, partner’s name (of which one of them shall definitely be a Kuwaiti citizen), manager’s name (who may also act as the signatory but need not be partner), objective, capital, equity contribution, profit/loss computation., term and such other information as is required. The AOI of the Limited Liability Company shall include, the company name (with the phrase ‘limited liability Company’), location details, partner’s name, capital contribution and precise description about each partner’s share, conditions for waiver of rights, names of managing partner and board of directors, objective, term, profit/loss allocation., term etc.
Major differences between Limited Liability Company and Joint Liability Company
Limited Liability Company is more popular among local business men and is often referred as WLL Company. Most of the requisites of a joint liability company are applicable to limited liability Company, as well. However, there are certain areas of disparity which makes it a better choice when compared to the joint liability Company. The Limited Liability Company is a hybrid business entity that combines the characteristics of a partnership and a corporation. It allows the members to actively participate in the management and control but provides limited liability. The purpose of the W.L.L Company is to limit one’s exposure to an investment or “risk”. In theory, the exposure is limited to the investment or involvement.
The WLL Company is not allowed to enter into areas like banking, insurance or other investment sector. The name of the limited Liability company shall be in accordance to the nature of business it conducts and the name of the partners can also be used along. One of the partners of both the WLL and Joint Liability Company must be a Kuwaiti citizen holding a share equivalent to or more than 51%.
The debts, obligations of a limited liability company whether arising through contracts or otherwise are debts of the company and the partners/managers are not personally liable for any such debt or obligation. The liability of a partner in the limited Liability company is limited to the shares which he holds and hence the Company would not be liable to settle his personal debts.
However, in a joint liability company if the company is bankrupt all the partners become bankrupt and would be requested to settle the company’s dues from their personal assets, in proportion to the share allocation. The partner shall be responsible for any and all liabilities incurred during the continuance of company’s business and he will not be released from his liability if it arises during the period while he was partner of the company. Nevertheless, the (personal) creditors of the ‘partner in debt’ may settle their dues from partner’s profit share though it is prohibited to claim their right from the capital of the company, irrespective of whether it is the said partner’s share. The law requires that the name of the Joint Liability Company should be compatible with the existing structure of the company. If the foreign partner agrees to use his name in the company’s title then he shall be deemed liable to any third party who conducts business with the company, relying on his (company) name or goodwill. The Share contribution may be in the form of assets, landed property, money or talent. However, it is mandatory that the profit/loss distribution should be included in the Articles of Association, in such a way as to avoid any kind of confusion on a later stage. It is also to be noted that if the AOA favors one of the partners relieving him from all liabilities or if it denies profit to a partner then the company can be dissolved, at the request of the partner, who bears the entire burden of loss. In such an event the loss shall be calculated based on the profit allocation of each party. It is also provided that the objective of the parties should be clear in the Articles of Association which means that the parties shall enter into agreement on good faith and mutual understanding so as to avoid any false claim.
In a joint liability company the partner may not assign his right to any other person without the consent of all the partners of the company or through majority vote unless there is such a provision in the Articles of Association. However, in a WLL company each partner can transfer his rights to his legal heirs, provided the number of heirs shall not exceed the prescribed limit.
To summarize this topic, it can be said that though the WLL Company claims many advantages over the Joint Liability Company, the latter is treated as more trustworthy and reliable seeing that the goodwill of the parties play a vital role in its incorporation.