1): Business Law: Starting a new business through the vehicle of a company, partnership, LLP or as a sole trader Flashcards
What is an incorporated business?
it is a business that exists as a separate legal entity from its owners and managers.
What is the liability for incorporated business owners?
their owners are not generally liable for business debts.
What is an unincorporated business?
these are businesses which are not separate legal entities.
What is the liability position in an unincorporated business?
the individuals who run the business have full personal liability for the debts of the business.
What are the main forms of unincorporated business mediums?
sole traders
partnerships
limited partnerships
What is a sole trader?
someone who runs an unincorporated business on their own (may have employees)
What is the liability of a sole trader?
personally liable for all debts of the business
unlimited liability
Can a sole trader have employees?
Yes, but the sole trader:
owns the business,
benefits from profits
and bears losses.
What is the definition of a partnership set out in the Partnership Act 1890?
partnership is formed when two or more people are carrying on a business in common with a view of profit.
What does the PA 1890 do?
provides default partnership agreement
Can partners disapply PA 1890 provisions?
Yes
but if they do not do this in their own partnership agreement, the PA 1890 applies
What is the liability position in a partnership?
not a separate legal entity
partnership itself does not own partnership assets, partners do
partners are personally liable for all debts
How do the partners share in profits and losses?
they will be divided between the partners
How are partnerships taxed?
partnership of solely individuals: taxed separately as self-employed individuals
if any of the partners are companies: liable for corporation tax on profits
Who owns the business in a partnership?
the partners
What is partnership requirement for a limited partnership?
there must be at least one general partner who has unlimited liability for partnership debts
also permitted to have a limited partner whose liability is limited to the amount they invested initially (subject to conditions).
What is the consequence of a limited partner breaching the conditions for their limited liability?
they lose protection of limited liability and will be treated as a general partner with unlimited liability.
What is the procedural requirement to start trading as a Limited partnership?
must be registered with Registrar of Companies before trading can start
What is a Limited Liability Partnership (LLP)?
has separate legal personality
owners are protected from liability for LLPs debts
more flexible and informal than companies
How can an LLP be formed (brief answer)?
by two or more members carrying on a lawful business with a view of profit
What are the brief steps for formation of an LLP (procedural)?
filing series of docs with Registrar of companies
paying applicable fee
more expensive same-day registration available
How does an LLP come into existence?
after registration:
Registrar will issue certificate of incorporation
LLP comes into existence on date of incorporation on certificate
What is the function of the Limited Liability Partnerships Regulations 2001?
provides default contract
What must individual members of the LLP do?
register with HMRC as self-employed
How are partners taxed in an LLP?
as a partnership not as a company.
Explain the characteristics of Companies
can be:
private or public
limited by shares or by guarantee
How is a company formed (brief)?
by registering docs with Registrar of companies in accordance with the Companies Act 2006
Can companies begin trading straight away?
not until formalities have been complied with
sole traders and partners can trade straight away
What is the main advantage of a company?
it has separate legal personality.
What is the liability position of the individuals who own shares in a company?
not usually liable for company’s debts
liability is limited to the amount shareholders paid or agreed to pay for their shares
Which case confirmed the concept of separate legal personality?
Salmon v A Salomon and Co Ltd
What did the concept of separate legal personality confirm?
as long as a company is validly incorporated:
it must be treated as an independent person with rights and liabilities
AND
using a company to manage risk and avoid liability for debts is acceptable
Who makes decisions in a company?
directors and shareholders
when can the corporate veil be ‘pierced’?
when a corporation is acting:
illegally
fraudulently
or for improper purpose
AND
wrongdoer has control of the company.
how do directors take decisions?
at board meetings
how do shareholders take decisions?
at general meetings
or in writing
What is a public company limited by shares (plc)? (Brief)
company that has complied with the requirements of the CA 2006 to be registered as a plc.
What are the 3 steps required for a company to be a public company?
the constitution must state that it is a public company.
the words public limited company, plc (or welsh equivalent) must be included at end of company’s name.
company’s owners must invest an ‘authorised minimum’ of 50,000 pounds
AND
each allotted share must be paid up to at least 1/4 of the nominal value plus the whole of any premium on it.
What is the main advantage for a plc?
they can raise money by offering shares to the public
private companies are prohibited from doing this.
How do private companies raise money?
they offer their shares to someone already connected with the company or targeted individuals
How is regulation different between private and public companies?
private companies are subject to less regulation as they do not offer shares to the public at large.
How to become a public company?
Companies can be registered as a public company on original incorporation, or they can register as a private company and then re-register as a public company.
sole traders and partnerships similarities
both require minimal formalities
what are the key differences of the disclosure requirements for different business mediums?
sole traders and partnerships: minimal disclosure requirements
Companies and LLPs: required to disclose info to the public
what are the key cost differences in starting up one of the various business mediums?
sole traders and partnerships: low or no initial start up costs
Companies and LLPs: administrative and legal costs
For a lender, which type of business medium seems more reliable?
Companies and LLPs can secure loans with floating charges, providing additional security for lenders
What are the steps for incorporating a new company?
complete for IN01 and submit to Companies house along with:
memorandum of association
possibly articles of association
applicable fee (more expensive same day service available)
how can applications for a new company be made?
online, post or enabled software
What can law and accountancy firms do to save time for their clients wanting to create a new company?
allow the client to use a shelf company
Who is the application for a new company addressed to?
Registrar of Companies
What happens upon successful incorporation of a company?
certificate of incorporation is issued
When does a company come into existence?
upon the certificate of incorporation being issued.
What are the requirements for a certificate of incorporation?
name and registered number of the company
date of incorporation
whether company is limited/unlimited
if limited, whether this is by share or guarantee
whether it is private or public
location of company’s registered office
How is a certificate of incorporation authenticated?
signed and officially sealed by Registrar
What is the tax requirement for companies?
companies must all be registered with HMRC for corporation tax:
companies formed using an online application are automatically registered for corporation tax
Companies formed using any other method must make a separate application to HMRC within 3 months of business starting
What is the information required on form IN01?
Company name
Registered office and Email address
First Directors and Shareholders
Company Secretary (optional)
Statement of capital
Persons with significant control
on what grounds will Companies House reject an application to register a company name?
where it believes that the name:
is intended to facilitate fraud
OR
is or contains computer code
OR
gives false impression that the company is connected to foreign govt or international organisation.
How long does a company have to change its name when directed to do so?
28 days
if not complied with, CH can choose a new name for the company.
what is the requirement for a company’s registered office?
must be an appropriate address where:
documents delivered there would be expected to come to the attention of a person acting on behalf of the company
what is required to change a company’s registered office?
Board resolution and form AD01 filed at CH.
What is kept at a company’s registered office?
board minutes
general meeting minutes
statutory books
What are the statutory books required by companies?
register of members
register of directors
register of director’s residential addresses
Note: Companies can elect to keep these records at CH instead.
What are the requirements for a director?
every company must have at least one director who:
is a natural person (human being)
AND
all directors must be 16 or over
do private companies have to have a company secretary?
No
How many shareholders are needed to incorporate a company?
normally 2 but 1 shareholder is also valid
no maximum number of allowed shareholders
What is included on the statement of capital?
number of shares and their total nominal value
names and addresses of all shareholders
prescribed particulars of the rights each share gives to shareholders
What does nominal value mean?
the amount originally paid for the shares
so 1 pound shares will be allotted for 1 pound and will always be called a 1 pound share
What will the directors do after incorporation (registration)?
hold the first board meeting
What are the elements of a company’s constitution?
memorandum
articles of association
certificate of incorporation
statement of capital
copies of relevant court orders affecting company’s constitution
shareholder resolutions affecting the company’s constitution
certain agreements involving shareholders
What are the requirements for a memorandum?
statement that the subscribers wish to form a company and agree to take at least 1 share each
must be signed by the subscribers
in the prescribed form
What are the model articles?
default standard articles for companies
What are the main MAs for private companies limited by shares?
Answer:
What happens if an applicant does not provide bespoke articles when incorporating a company?
MAs will apply by default.
What is MA14 and can it be disapplied?
prevents directors from voting if they have a personal interest in the matter
it can be disapplied.
When did the Companies Act 2006 come into force?
1 October 2009
What will companies incorporated before October 2009 likely have?
Table A articles from CA 1985
unless they have adopted the MAs
How can a company amend its articles?
shareholders can do this by special resolution.
needs a majority of at least 75% of shareholders
file a copy of amended articles to CH within 15 days of amended articles taking effect
file copy of special resolution to amend articles within 15 days of it being passed
What are the 3 options for those starting a company in relation to articles?
adopt MAs entirely
Adopt MAs with amendments
supply entirely bespoke articles and supply copy on form IN01
What is the definition of a person with significant control?
can be an individual or corporate body
must hold more than 25% of shares
OR
must hold more than 25% of voting rights
OR
must hold right to appoint or remove a majority of the board of directors
How does a public company begin trading?
obtain trading certificate by making application on Form SH50 to CH.
What is a shelf company?
A company that has already been set up until such a time a client needs a company quickly.
What are the post-incorporation steps?
board meeting held by directors
