1. Introduction to Business Law & Practice

Question 1

What are the key considerations when forming a business?

Answer 1

-Costs
-Risk
-Structure
-Formalities
-Privacy
-Finance
-Tax

Question 2

Outline the key characteristics of sole traders.

Answer 2

-No set up costs
-Unlimited personal liability (personal assets can be sold to meet business debts)
-No formal structure, a sole trader is not a separate legal entity
-No Companies House filing or procedural requirements
-Complete privacy
-Finance by personal capital injections

Question 3

Outline the key characteristics of partnerships.

Answer 3

-No set up costs
-Unlimited joint (contract) or joint and several liability (tort) for debts and obligations incurred whilst partners (personal assets can be sold)
-Not a separate legal entity
-No Companies House filing or procedural requirement
-Complete privacy
-Finance by individual partners taking out loans or injecting own cash

Question 4

Outline the key characteristics of LLPs (limited liability partnerships).

Answer 4

-Costs involved including legal fees
-All partners have limited liability to the amount agreed to pay under the terms of the partnership agreement
-Separate legal personality (hybrid of a partnership and company)
-Registered at Companies House
-Required to file annual accounts and other info
-Can borrow in its own name

Question 5

Outline the key characteristics of companies.

Answer 5

-Costs involving including legal fees
-Liability of the shareholders is limited to the amount unpaid on their shares
-Separate legal entity
-Registered at Companies House
-Required to file annual accounts and lots of other information
-Many lenders prefer to lend to companies due to more regulation and disclosure, can also issue shares

Question 6

Outline the tax treatment of sole traders.

Answer 6

Any profits made are taxed as the individual’s income for income tax purposes and any gains made on one-off transactions will be charged to the individual as CGT.

Question 7

Outline the tax treatment of partnerships.

Answer 7

Partnerships are tax transparent which means that HMRC look through the partnership to the profits and gains of the partners. They are taxed on their individual shares of the profits and chargeable gains as either income tax or CGT.

Question 8

Outline the tax treatment of LLPs.

Answer 8

Treated like a partnership for tax purposes-partners are taxed as individuals and taxed on their share of the LLP’s profits and gains.

Question 9

Outline the tax treatment of companies.

Answer 9

Companies pay corporation tax on their taxable total profits (TTP) which are made up of the company’s income profits and capital gains.
The TTP is taxed at a flat rate for the current tax year and it is the company itself which is liable to pay.

Question 10

What is meant by double taxation of profits in the context of companies?

Answer 10

The company pays corporation tax on its profits before the payment of dividends to its shareholders. The individual shareholders who receive the dividends will then pay income tax on the amount of the dividend.

Question 11

What type of company makes up the majority of companies in England and Wales?

Answer 11

Private limited companies

Question 12

What is a private company as defined by CA 2006?

Answer 12

S4(1) CA 2006-‘a private company is any company that is not a public company’.

Question 13

Outline the three types of private companies.

Answer 13

-Private companies limited by shares (most common)
-Private companies limited by guarantee (no share capital)
-Unlimited companies (rare)

Question 14

What is a public company as defined by CA 2006?

Answer 14

S4(2) CA 2006-‘a public company is a company whose certificate of incorporation states that it is a public company’.

Question 15

What can a private company do to raise greater funds?

Answer 15

The shareholders may convert the company into a Plc (public limited company). This will enable the company to offer shares to the public at large.

Question 16

What is a listed company?

Answer 16

A public company that has listed its shares on a recognized stock exchange such as the LSE. A company must be a public company before it applies to have its shares listed on a stock exchange.

Question 17

What are the two key differences between private and public companies?

Answer 17

-Offering shares to the public
-Written resolutions

Question 18

Outline how offering shares to the public is different for private and public companies.

Answer 18

-Private companies are generally prohibited from offering shares to the public (s755(1) CA 2006)
-Private companies may decide to raise more finance by re-registering as a public company and apply to be listed on the LSE

Question 19

Can private companies pass shareholder resolutions as written resolutions?

Answer 19

Yes, as per s288 CA 2006, except for resolutions to remove a director or remove an auditor.

Question 20

Can public companies pass shareholder resolutions as written resolutions?

Answer 20

No!

Question 21

What must the name of private companies and public companies end with?

Answer 21

-Private companies end with Limited/Ltd (s59(1) CA 2006)
-Public companies must end with Public Limited Company/Plc (s58(1) CA 2006)

Question 22

What is the minimum number of shareholders for private and public companies?

Answer 22

1 shareholder (ss7(1) and 8(1) CA 2006)

Question 23

What is the minimum number of directors for private and public companies?

Answer 23

Private companies-1 director (s154(1) CA 2006)
Public companies-2 directors (s154(2) CA 2006)

Question 24

Do private and public companies require a company secretary?

Answer 24

Private companies-no (s270(1) CA 2006)
Public companies-yes (s271 CA 2006)

Question 25

Do private and public companies require an annual GM (General Meeting)?

Answer 25

Private companies-no, but can do so if it wishes
Public companies-yes (s336 CA 2006)

Question 26

What is the minimum share capital to be issued for private and public companies?

Answer 26

Private companies-must have at least one share, could be incorporated with one share of 1p (s8(1)(b) CA 2006)
Public companies-minimum of £50,000 (s763(1)(a)(b) CA 2006)

Question 27

What certificates are required before the commencement for trading for private and public companies?

Answer 27

-Private companies require a Certificate of Incorporation (s15(4) CA 2006), can commence business as soon as it is incorporated
-Public companies require a Certificate of Incorporation too (s15(4) CA 2006), but cannot commence business until a trading certificate is issued by the Registrar showing that the company’s allotted share capital is not less than the minimum (s761(1)(2), unless they are re-registering a private company as a Plc

Question 28

What are the two key principles of company law which make a company an attractive business medium for investors?

Answer 28

-Separate legal personality, s16 CA 2006 sets out that a company becomes a legal person from the date of incorporation (date of issue of certificate of incorporation)
-Limited liability, shareholders liability for the company’s debts is limited

Question 29

Define the concept of separate legal personality in the context of a company, including the relevant landmark case.

Answer 29

A company is an entity that is distinct from its owners as per the case of Salomon v Salomon (1897).

Question 30

What are the consequences of a separate legal personality in the context of a company?

Answer 30

The company:
-owns it own property
-enters into its own contracts
-sues and is sued on its own liabilities
-can separate out different elements of a business

Question 31

Define the concept of limited liability in the context of a company.

Answer 31

This refers to the liability of the shareholders for the company’s debts. Their liability is limited to the amount they paid (or agreed to pay) for their shares.

Question 32

What is the liability of shareholders in the event the company becomes insolvent?

Answer 32

They will be liable to lose the money that they have invested in the company by subscribing for its shares, but that is the extent of their liability.

Question 33

What does S74 Insolvency Act 1986 state in relation to limited liability?

Answer 33

Shareholders of a limited company are not liable to a liquidator in the event of a company’s insolvency.

Question 34

What are the three fundamental concepts to form a simple contract?

Answer 34

-Agreement (offer and acceptance)
-Intention to create legal relations
-Consideration

Question 35

What is the limitation period for a contract by deed?

Answer 35

12 years

Question 36

What are the key requirements of a deed?

Answer 36

-Must make it clear on its face that it is a deed
-Must be delivered
-Signed by two authorized signatories (must be directors or company secretary), if its common seal is used
-or signed by a single director in the presence of a witness