7.1 Business and Organisational Characteristics Flashcards
What is the distinction between unincorporated businesses (sole traders and partnerships) and incorporated businesses (companies and LLPs)?
An incorporated business has its own legal identity or separate personality. It needs to be registered with Companies House.
The business is an artificial ‘person’ created by law and is legally distinct from those who own and run the business.
You have entered into a contract with a private limited company which has one director and shareholder. Who should you consider legal action against?
The limited company only. As a separate (artificial) legal person, it owes the contractual obligations to you.
What are the requirements for setting up as a sole trader?
No specific formalities or legal processes are required.
Self-employed people do need to register with HMRC and some sole traders may be required to register for VAT>
How do sole traders pay tax?
They pay income tax on their trading profits and capital gains tax on their capital gains.
What are the requirements for setting up a partnership?
A partnership exists when two or more people carry on a business in common with a view of profit.
No specific formalities are required to set up the business. A partnership can arise through oral agreement or through conduct.
However, it is often desirable to have a formal partnership agreement setting out the terms of the partnership. This is due to default provisions under the PA that will apply in the absence of an express or implied agreement to the contrary.
Many of the default provisions under the PA can have undesirable consequences.
How do partners pay tax under a partnership?
Individual partners pay income tax on their share of the trading profits and capital gains tax on their share of the capital gains for the partnership.
Partners need to register with HMRC and partnerships may be required to register for VAT. However, the additional costs of forming a company are avoided.
What are the requirements for setting up a company?
A company is the creation of a legal process and documents must be filed at Companies House in order for the company to be ‘born’. One company cannot exist without the involvement of Companies House.
There are onerous ongoing formality, decision-making, filing and disclosure requirements, which can add to administrative burden and legal expense over time. Most documents kept at Companies House become public.
How do companies pay tax?
Companies pay corporation tax on both their income profits and their capital gains.
What are the requirements for setting up a limited liability partnership (LLP)?
A limited liability partnership is formed under the Limited Liability Partnerships Act 2000 (LLPA). It is a type of incorporated business and is formed by sending form LLIN01 to Companies House.
How do limited liability partnerships (LLPs) pay tax?
LLP members pay income tax on their share of the trading profits and capital gains tax on their share of the capital gains for the partnership.
Business structure summary:
What are the formalities required for creation?
Sole trader - No formalities
Partnership - No, although partnership agreement is recommended
Limited company - Formalities required
LLP - Formalities required
Business structure summary:
Which structure has separate legal personality?
Limited company
LLP
Business structure summary:
Which structure has limited liability?
Limited company
LLP
Business structure summary:
Which structure will incur personal liability for debts?
Sole trader
Partnership
Business structure summary:
How are finances determined?
Sole trader - Can grant fixed charges only
Partnership - Can grant fixed charges only
Limited company - Can grant fixed and floating charges
LLP - Can grant fixed and floating charges
Business structure summary:
Which structure gives a board structure (separation of powers)?
Limited company
Business structure summary:
Which structure results in stricter formalities / more onerous administration / greater expense / publicity
Limited company
LLP
Business structure summary:
How is status determined?
Sole trader - Less prestigious
Partnership - Less prestigious
Limited company - More prestigious
LLP - More prestigious, although less recognised internationally
Business structure summary:
Which structure allows for transferable shares?
Limited company only
What is a memorandum of association?
Snapshot of the company and its promoter(s) at the time the company is formed - does not form part of the company’s constitution. A legal statement signed by all initial shareholders or guarantors agreeing to form the company.
What are the articles of association?
The company’s constitution - internal rules governing how the company will operate. A company may choose to use unamended Model Articles, amend the Model Articles or draft bespoke articles
What are the Model Articles (MAs)?
Default articles of association provided by the Companies Act. Divided into five parts:
→ Interpretation and limited liability of shareholders
→ Directors (powers, decision-making and appointments)
→ Shares and distribution of dividends
→ Decision-making by shareholders
→ Administrative arrangements
What is Form INO1?
Form INO1 - the application form to register a company.
Includes:
- [Name] The company’s name;
- [Registered address] The company’s registered address;
- [Statement of intended business activity] The company’s statement of intended business activity;
- [Register of persons] The register of persons having significant control (PSC);
- [Statement of proposed officers]
- [Statement of capital]
- [Statement of compliance]
What is the effect of company registration?
If documents are in order, Registrar at Companies’ House will issue the company with a certificate of incorporation (birth certificate) which is proof of registration.
