1 - Introduction to BLP

Question 1

What are the costs, risks, structure, formalities, privacy and finance considerations when operating as a sole trader?

Answer 1

No set up costs –the sole trader can start trading straight away

Unlimited personal liability – the sole trader’s personal assets such as their home and cars are potentially liable to be sold to meet the debts of the business.

No formal structure - the individual can choose how they wish to run their business.

A sole trader is not a separate legal entity.

No Companies House filing or procedural requirements for running the business.

Complete privacy – no need for publicly filed accounts etc.

Personal capital injection of cash by the sole trader personally. Contracts are formed between the individual themselves and third parties, so an individual can take out a personal loan.

Question 2

What are the costs, risks, structure, formalities, privacy and finance considerations when operating as a Partnership?

Answer 2

No set up costs – there are no formalities, the partnership can start trading straight away. Partnerships can be formed without any formal agreement or even intention.

Partners have unlimited joint (in contract) or joint and several (in tort) liability for the debts and obligations of the partnership incurred while they are partners. This means that their personal assets such as their houses may need to be sold to meet the debts of the business.

A partnership is not a separate legal entity.

There are no Companies House filing or procedural requirements for running the business.

Complete privacy. There is no requirement for publicly filed accounts etc.

Contracts are formed between third parties and the partners in the partnership as individuals. Individual partners can take out personal loans or inject their own cash into the partnership.

Question 3

What are the costs, risks, structure, formalities, privacy and finance considerations when operating as a Limited Liability Partnership?

Answer 3

Costs involved in incorporating an LLP including legal fees.

All partners in an LLP have limited liability. Their liability to third parties is limited to the amount that they have agreed to pay under the terms of their partnership agreement.

LLP has a separate legal personality. LLPs are in effect a hybrid between a traditional partnership and a company. The organisational structure of an LLP is very flexible and should be decided between the partners in a formal written Members’ Agreement.

LLPs are registered at Companies House in the same way as companies.

LLPs are required to file annual accounts and other information.

As it is a separate legal entity an LLP can borrow in its own name. It can also create floating charges, which are a particular type of security favoured by banks on lending.

Question 4

What are the costs, risks, structure, formalities, privacy and finance considerations when operating as a Private/Unlisted Public Company?

Answer 4

Costs involved in incorporating a company including legal fees.

The liability of the shareholders (the owners of the company) is limited to the amount unpaid on their shares (if any).

A company is a separate legal entity – companies are distinct from their owners.

Requirement to be registered at Companies House. Various filings and disclosures that must be made by all companies at Companies House. These formal procedural requirements can be onerous, especially for small private companies.

Many lenders will prefer to lend to companies rather than to a sole trader or partnership because a company is subject to a higher degree of regulation and disclosure. In addition, companies can give more forms of security for borrowing than individuals or partnerships. Significantly, companies can issue shares.

Question 5

What are the tax benefits/disadvantages of operating as a sole trader?

Answer 5

The business is not a separate entity.

Therefore, any profits that the sole trader makes are taxed as the individual’s income for income tax purposes and any gains made on one-off transactions will be charged to the individuals as capital gains tax.

Question 6

What are the tax benefits/disadvantages of operating as a Partnership?

Answer 6

The business is not a separate entity.

Partnerships are described as tax transparent, meaning that HMRC looks through the partnership to the profits and gains of the partners. Partners are taxed on their individual shares of the profits and chargeable gains as either income tax or capital gains tax.

Question 7

What are the tax benefits/disadvantages of operating as an LLP?

Answer 7

Treated like a Partnership for tax purposes.

LLPs are a hybrid entity: they have features in common with both private companies and partnerships.

Whilst they are treated like a company for liability and company law purposes, they are treated like a partnership for tax purposes, so:

Partners are taxed as individuals, and
they are taxed on their share of the LLP’s profits and gains

Question 8

What are the tax benefits/disadvantages of operating as a Company?

Answer 8

Treated like a Partnership for tax purposes.
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Companies pay corporation tax on their taxable total profits (‘TTP’) which are made up of the company’s income profits and its capital gains.
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The taxable total profit is taxed at a flat rate for the current tax year and it is the company itself that is liable to pay.
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Double taxation - Key consideration as a company will pay corporation tax on its profits. It may then pay dividends to a shareholder. The individual in receipt of these will then be taxed to income tax.

Question 9

What is a private company limited by shares?

Answer 9

A private company limited by shares is a legal entity which is separate and distinct from its members. It is owned by its members who hold shares in the company.

Question 10

What is a public company?

Answer 10

A ‘public company is a company…whose certificate of incorporation states that it is a public company’.

To raise greater funds by offering shares to the public at large, a private company’s shareholders may decide to convert the company into a public limited company (Plc). Public companies limited by shares can offer their shares to the public.

Question 11

How do listed companies offer its shares to the public?

Answer 11

After converting to Plc status, a company may seek a listing of its shares on a registered stock exchange, such as the LSE.

Note - It is the shares that are listed rather than the company. Not all public companies apply to have their shares listed.

E.g., ABC Plc (unlisted) / ABC (listed)

Question 12

What rules govern a private subsidary whose parent company is listed?

Answer 12

Listed companies often operate their businesses through subsidiaries which are private companies. Although such private companies are not listed themselves, they will be affected by the rules which govern their listed holding companies.

Question 13

What is the difference between the regulation of private and public companies?

Answer 13

Both private and public companies are governed by the Companies Act 2006 (CA 2006), but public companies, especially listed ones, face more regulation.

• Listed companies have more shareholders who have limited access to the board, requiring additional regulation to ensure director accountability.
• Private companies benefit from lighter regulation and reforms under CA 2006 aimed to make it easier to set up and run.

Question 14

What are the rules behind public and private companies offering their shares to the public?

Answer 14

• Private: Prohibited from offering their shares to the public at large. This applies to shares or debt securities (e.g., bonds).
• Public: If the company re-registers as a public company it will then be able to apply for a listing (eg via a flotation on the London Stock Exchange), in order to access a much wider investor base. A listed public company also has greater access to the international debt capital markets for the issuing of debt securities.

Question 15

How does the written resolution procedure apply to public and private companies?

Answer 15

• Private companies can pass shareholder resolutions through the written resolution procedure (s 288 CA 2006), avoiding the need for a general meeting.
  Exceptions: cannot use it to remove a director or remove an auditor.
  No longer requires unanimous consent of shareholders to pass decisions, saving time and costs.
• Public companies cannot use the written resolution procedure to pass shareholder resolutions.

Question 16

What are the key differences between private and public companies?

(name, shareholders, directors, company secretary, annual GM, minimum share capital, certificates required, issuing of shares, written resolutions).

Answer 16

Name ending -
Public: Must end with Plc/ Public Limited Company
Private: Must end with Ltd

Minimum number of shareholders -
Public: 1
Private: 1

Minimum number of directors -
Public: 2
Private: 1

Company Secretary -
Public: Required
Private: Not required

Annual General Meeting -
Public: Required
Private: Not required, but can do so if wishes.

Minimum Share Capital to be issued -
Public: Minimum of £50,000
Private: Must have at least 1 share. Could be incorporated with one share of 1p.

Certificates required before commencement of trading -
Public: Certificate of incorporation before trading. Cannot commence business until a trading certificate is issued by Registrar showing that the company’s allotted share capital is not less than the minimum unless they are re-registering a private company as a Plc.
Private: Certificate of incorporation before trading. Can commence business as soon as incorporated.

CA 2006 allows offer of shares to the public -
Public: Permitted
Private: Prohibited

Use of Written Resolutions:
Public: Not permitted
Private: Permitted, passed when the required majority of eligible members have signified their agreement to it.

Question 17

Which business model has a separate legal personality and what are the consequences of this?

Answer 17

A company has a separate legal personality from that of its owners (i.e., shareholders) as well as from its directors, creditors, and employees, from the date of incorporation.

Consequences: The company is responsible for its own debts and liabilities -
- The company owns its own property;
- The company enters into its own contracts and thus it follows that the benefits and liabilities under the contract belong to the company, not to the shareholders or directors;
- The company sues and is sued on its own liabilities, and
- The company can separate out different elements of a business.

Question 18

Who do the directors and shareholders of a company owe their duties to?

Answer 18

Directors, in general, owe their duties to the company, not to the shareholders - they manage the company.

Shareholders usually have rights against the company, rather than against the directors, if there is an issue, and third parties with whom the company does business contract with the company, even though they negotiate with the directors.

Question 19

What is limited liability?

Answer 19

• Limited liability means shareholders are only liable for the company’s debts up to the amount they paid (or agreed to pay) for their shares.
• Personal assets of shareholders are separate from company assets.
• Creditors can only claim against the company, not shareholders, even if the company becomes insolvent.
• If a company becomes insolvent the shareholders will be liable to lose the money that they have invested (or agreed to invest) in the company by subscribing for its shares, but that is the extent of their liability.

Question 20

What is the commercial significance and consequences of limited liability?

Answer 20

Commercial significance:

• Encourages passive investment: Shareholders can invest knowing personal assets are safe.
• Attracts entrepreneurs to use limited companies.
• Risk management: Separate companies in a group can isolate riskier business divisions without becoming vulnerable to the creditors in those companies.

Commercial awareness:

• Encourages investment and risk-taking.
• Note: Courts can pierce the corporate veil in the intersts of justice (e.g., if a company is a façade).
• A commercially strong counterparty can negate much of the advantage that limited liability confers (e.g., a bank) - usually by contractual means can require guarantees from shareholder(s) to override limited liability.
• Creditors should assess the financial viability of a company e.g., checking Companies House.

Question 21

What are the three key elements for formation of a contract?

Answer 21

• Agreement: Parties must have reached, or be deemed to have reached, an agreement. Agreement can be made in any manner, as long as parties communicate.
  Whether agreement is reached is assessed using an objective test of the parties’ intentions. Usual method of analysis is through offer and acceptance.
• Intention and Capacity: The parties must have intended, or be deemed to have intended, to create legal relations, and they must also be capable of making a contract.
• Consideration: According to the terms of the agreement, some advantage must move from each party to the other.

Question 22

What are the two types of terms of a contract?

Answer 22

• Express terms

Express statements made by the parties that they intend to be bound by. Presumed that all material terms which they intend to govern the contract are stated, either orally or in writing.

• Implied terms

Implied in fact: Reflects unexpressed intentions of the parties, considering trade customs, conduct, or the need for business efficacy (i.e., the contract would be unworkable without the term).
Implied in Law: Imposed by courts or statute, effective regardless of parties’ intentions. Parties may seek to contract out of such terms, incl an express term to that effect.

Question 23

How does a contract come to an end?

Answer 23

• Performance

Discharged by complete performance of the contract.
Partial performance generally does not discharge the contract unless accepted by the other party.

• Agreement

Discharged by mutual agreement, either through a new binding contract or by a term in the original contract.

• Breach

Usual remedy is compensatory damages (most breaches do not terminate the contract).
May result in discharge if the breach is treated as a repudiation, freeing the injured party from further obligations and allowing them to sue for damages.

• Frustration

Raised as a defense if an unexpected event makes performance impossible.

Includes cases where:
The object necessary for performance is destroyed.
Legal changes make performance illegal.
An event fundamental to the contract does not occur.

• Discharge by expiry

Occurs when the contract is completed according to its terms (e.g., by a specific date or event).

Question 24

What is the difference between a condition and warranty in a contract?

Answer 24

Condition: An important term ‘going to the root of the contract.’ Breach - Repudiate contract plus right to sue for damages.

Warranty: Less important term not going to the root of the contract. Breach - Only remedy is to sue for damages.

Question 25

Which remedies are available to contracting parties?

Answer 25

1. Unliquidated Damages:
   Aim to make good the claimant’s losses and put them in the position they would have been in had the breach not occurred.
   Subject to the rule in Hadley v Baxendale (remoteness) and duty to mitigate loss.
2. Liquidated Damages:
   Fixed or pre-determined sum agreed upon in the contract for breach. If intended as a punishment rather than a genuine pre-estimate of loss, it is considered a penalty and is unenforceable.
3. Equitable Remedies:
   Specific performance: Orders the breaching party to perform their contractual obligations.
   Injunctions: Orders the breaching party to cease certain actions or to do something specific.

Question 26

What are the key principles of the Principal/Agent relationship?

Answer 26

Actual Authority: Express or implied authority given to the agent. Principal is bound by acts within this authority.

Apparent (Ostensible) Authority: Agent acts beyond actual authority but within their apparent authority. Principal is bound by these acts.

Outside Authority: If agent acts beyond both actual and apparent authority, principal is not bound. Principal may ratify (approve) the agent’s acts.

Example: A company and its directors.

Question 27

What are Heads of Terms and Letters of Comfort?

Answer 27

1. Heads of Terms:
   Outlines the agreed intentions of parties before negotiating a formal contract. Acts as a framework for future negotiations. Typically non-binding except for certain clauses. Often carry moral force and are negotiated before legal involvement.
2. Letters of Comfort:
   Common in loan finance transactions. A parent company may provide reassurance to a bank about its subsidiary’s ability to make loan repayments. Can include representations about the subsidiary’s performance or a policy to ensure debt repayment.
   Legal obligation is often debated; whether a bank can sue the parent as a result of the subsidiary’s default depends on the specific facts of the case.

Question 28

What are the Battle of the Forms and Conditions Precedent?

Answer 28

1. Battle of the Forms:
   Occurs when parties exchange their own standard terms.
   Example: Buyer sends an order form with their terms, and supplier responds with their own terms.
   Result: Counter-offer is made by the supplier, not acceptance of the buyer’s offer.
   Typically, the terms of the last party to send their terms may prevail.
   Best practice: Parties should agree unequivocally on the applicable terms.
2. Conditions Precedent:
   Criteria or conditions that must be fulfilled before an agreement or parts of it take effect. Typically found at the start of an agreement.

Question 29

What is assignment/novation?

Answer 29

1. Assignment:
   Transfers only the benefit (rights) of the agreement.
   Obligations/liabilities remain with the original party.
   A bipartite agreement between assignor and assignee.
   Can occur without the consent or knowledge of the other party. Contracts may expressly state if assignment is permitted.
2. Novation:
   Transfers both the benefit (rights) and burden (obligations). The third party steps into the shoes of the original party.
   Requires a tripartite agreement involving the original parties and the third party. Consent of all parties is necessary.

Question 30

What does the Contracts (Rights of Third Parties) Act 1999 (the ‘Act’) provide, and how can contracts address third party rights?

Answer 30

Amends the doctrine of privity, allowing rights to be conferred on third parties who are not parties to the original contract.

Excluding Third Party Rights: Contracts can explicitly state that, except for express provisions, third party rights are excluded.

Question 31

What are the different forms of contract?

Answer 31

A simple contract/agreement under hand (ie an agreement which is not intended to take effect as a deed); and

A deed. Can be executed where:
Required by Law: For certain documents, such as those relating to land.
Longer Limitation Period: A deed provides a 12-year limitation period vs. 6 years for an agreement under hand.
No Valuable Consideration: A deed is binding even if no valuable consideration is given.

Question 32

How are Simple Contracts executed?

Answer 32

• Company: Signed by a director (authorised by board resolution) or according to the company’s articles.
• Individual: Signed by the individual without witnessing.
• Partnership: Executed by one or more partners.

Question 33

How are Deeds executed?

Answer 33

• Company: Signed by two authorised signatories (directors or company secretary), or Signed by a single director in the presence of a witness, or Use of common seal.
• Individual: Signed and have signature witnessed.
• Partnership: Executed by all partners or by partners with power of attorney to execute deeds on behalf of Partnership. Signatures should be witnessed.