Business Flashcards
;When is a partnership formed? What act governs the relationship, how do they pay tax and what is the liability?
- When two or more people are carrying on a business with the view of a profit.
- The Partnership Act 1980 implies a partnership agreement that can be amended expressly
- The partners pay tax as self-employed individuals
- The partners have unlimited liability
- Partnerships, subject to separate partnership agreement, are entitled to equal participation in management and equal proft
- Quick and cost effective as no formalities to open
- Partnership can employ others
- Partnership will dissolve on death or bankruptcy of any partners
- Partnership is owned collectively by partners so cannot transfer without an agreement between the partners
- The partners individual interests cannot be transferred as this would dissolve the partnership
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
What are limited partnerships when are they used and what are the conditions?
- Rarely used, usually for only some venture capitalists or investment fund
- Must have atleast one general partner with unlimited liability
- Can have a general partner whose liability is limited to his initial capital contribution but must satisfy the conditions:
(a) must not control or manage the LP
(b) must not have power to make binding decisions on behalf of the LP
(c) cannot take out capital contribution for as long as the LP is in business - Like LLPs, must register with the Registrar of Companies prior to trading
What can a company be limited by, what liability does a shareholder have, when does a company have a separate legal personality and when can the corporate veil be pierced?
- Shares or guarantees but we only look at shares - must be limited by shares to be PLC. Guarantee - this is usually no profits where they guarantee the debts up to a certain amount e.g £1mil
- Shareholder’s liability only amount paid for shares or amount agreed to pay for shares
- Separate personality when incorporated (allowed to use company to manage risk and limit liabilities) - Solaman v A Solaman
- Can only pierce the corporate veil when have an individual as an existing legal obligation and it uses its company to evade its obligation of frustrate enforcement. Can only deprive individual (by piercing the veil) of the benefit it would have gained from using the company’s separate legal personality.
When can a member be held to be liable beyond the cost of their shares?
1. piercing corporate veil;
2. statutory offences; or
3. the court imposing a liability in tort
How are companies run?
- Shareholders provide the money and make big decisions affecting (importnat ones) and make decisions at general meetings
- Directors run the company and make the decisions at board meetings
- Can be both but must have different hats on
- Company Act 2006 calls shareholders members
How can a company be a public limited company? Advantages? Disadvantages?
Must satisfy the conditions in CA2006:
1. State it is a PLC in its constitution
2. Use PLC in its name (or public limited co), or the welsh equivalent
3. Minimum allotted share capital of £50k (authorised minimum)
4. each alloted share must be paid up:
(a) at least a 1/4 of its nominal value; and
(b) ALL of its premium
* Cannot start a company as a PLC, only when reaches certain size, reputation etc
What are the other requirements:
1. Can have 1 member like ltd co but this is rare
2. Minimum of 2 directors (unlike ltd which can have 1)
3. Must have a company secretary
4. There is a requirement to have AGM (annual general meeting) - this is not a requirement of a ltd company
5. CANNOT pass written resolutions (unlike ltd company)
6. Cannot commence business until have a receipt of certificate from the Registrar stating the nominal value of the company’s allotted share capital is not less than the authorised minimum being £50k
Advantages and disadvantages:
* Can sell shares to the public and raise money quickly
* Can join a stock market (London Stock Exchange Main Market or Alternative Investment Market [AIM]
* Private Co can only sell to connected individuals or certain others such as specialist investors who know the risks
* PLCs are more regulated to protect the public
MUST BE LIMITED BY SHARES TO BE A PUBLIC COMPANY
PLCs can be listed or unlisted, CA 2006 does not distinguish between the two
What are LLPs, benefits etc
- Partnerships with limited liability
- Implied agreement - Limited Liability Partnership Regulations 2001 but the LLP is formed under the Limited Liability Partnership Act 2000
- Taxed as partnership, must register with HMRC as self employed
- To become one must be atleast 2 or more members carrying on a lawful business with the view of a profit
- Must file series of documents with the Registrar of Companies, and pay the required fee. Eventually once registered the Registrar will issue a cdertificate of incorporation and they will come into existence on that day
- Can pay for more expensive same day registration
Internationally, companies have a higher status!
- Good if need to raise capital: members can provide capital or LLP can borrow in its own right
- Members are automatically entitled to equal participation and profit share, subject to there being an LLP agreement
- Costly and takes time to establish, ongoing disclosure and filing requirements
- LLP can employ others
- Stat procedure needed to open and close
- LLP will be unaffected the the bankruptcy or death of a partner
- LLP is an asset of the LLP, CANNOT be freely transferred and only the LLP can do this (separate legal personality)
- Members can transfer their interest but must consider restrictions in LLP agreement
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
- can get a floating charge over all its assets (companies can too)
What to consider for which business medium to use?
- If want to limit personal risk then LLP or business more appropriate
- If want to carry on business cost effectively and quickly then sole p or partnerships
- If the only risk is professional negligence claim, such as a lawyer, and have PI insurance then risk is not such an issue (this is why so many law firms can be a partnership)
Sole traders: continuity, transferability, business relief for inheritance tax and pension relief?
- Sole proprietorship ends on death or bankruptcy
- The business is an asset of the owner so can transfer freely
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
Private company limited by shares: ownership/management, funding, continuity, transferability, tax, profits, business relief for inheritance tax and pension relief
- unlike LLPs, members have NO auto right to participate in management or for dividends. Anything to the contrary must be stated in the articles of association or a shareholder’s agreement
- Costly and time consuming to establish, ongoing disclosure and filing requirements
- Members are automatically entitled to be directions subject to alternative agreement (think, AoA or SH agreement)
- Can employ others
- Unaffected by death of member or bankruptcy
- Cannot transfer as separate legal personality, company owns itself so must transfer itself
- Can transfer shares subject to restrictions in the articles
- Members can give capital for shares, company can borrow money in its own right or can raise money through selling shares but not to the public
- Co pays corp tax on profit, members taxed personally on dividends subject to dividend allowance
- Co pays corp tax on chargeable gains, members pay CGT if sell shares
- BRIH: 100% on value of business (but cannot be on stock exchange)and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
4. Can get pension relief on PRIVATE and companypension contributions (subjkect to annual and lifetime allowance)
What are the legislative offences which mean members or directors can be asked to contribute to the assets of a company in liquidation?
Only apply when wound up! Brought by liquidator or administrator
Fraudulent trading
director will be liable for fraudulent trading if, in the course of the company being wound
up, it appears that the company’s business has been carried on with:
(a)** intent to defraud** creditors of the company or creditors of any other person; or
(b) for any fraudulent purpose.
Need intend to defraud which is hard so usually use wrongful trading.
Wrongful trading:
Co gone into insolvent liquidation and a director of the company knew or ought to have known there was no reasonable prospect of avoiding liquidation.
However, a Court will not make an order if it can be shown that the director took every step with the view of minimising the loss to the companies creditors
Transactions defraud creditors
Can happen in 2 ways:
1. Person makes a gift to another person for no consideration; or
2. Transaction for consideration of significantly less value.
Need to do with intent to put assets beyond the reach of a person making or may make a claim or to prejudice their interests in making a claim.
- discretion of court
- hard to show intent so usually last resort
- no time limit so usually used as last resort
How can liability in tort be imposed on members or officers of a company for activities carried out by or through the company?
Duty of care - parent companies
In the case of Chandler v Cape a parent company, through its conduct, assumed a duty of care for the health and safety of the employees of its subsiduary company. It breached this duty of care and therefore was liable for damages.
Negligent misstatement - officers of co
Members, directors and employees can be held personally liable for negligent mistatement made against a claimant who transacted with the company if the following conditions are met:
- There was a reasonable reliance on the claimant on an assumption of personal responsibility by the employee, director etc
- The extent of the personal responsibility created a special relationship between the claimant and the employee, director etc
What do you need to know about board meetings?
- “Reasonable notice” must be given - need not be in writing. Depends for every company. MA.
2.Quorum is 2. Director not counted if proposed decision is concerned with an actual or proposed transaction with the company that the DIRECTOR IS INTERESTED IN. MA.
3.If the director has a personal interest in propose transaction, must declare the nature and extent to the board - this cannot be excluded as its the CA. Exceptions below:- cannot reasonably be argued as likely to give rise to a condlict
- other directors are aware
- concerns terms of a service contract that have been or are to be considered by the board
- Board resolutions passed by simple majority of those present. Chair gets a casting vote in the event of a tie.
- Can pass written resolutions rather than call board meeting (any method - no prescribed form) BUT MUST ALL VOTE UNANIMOUSLY
Rules on general meeting notice?
- Must be given to all members, directors and auditors if have them. Must be given in hard copy, electric form or website. Notice must set out:
1. Time and date
2. NAture of the nusiness to discuss
3. If a special res is propsoed, a copy of the proposed special res
4. State the SH’s right to appoint a proxy. - Minimum 14 days CLEAR notice must be given. Date deemed received does not count, date of meeting does not count. If notice sent by post or email deemed received date is 48 HOURS AFTER POSTED OR EMAILED. If handed to them then its just the same day.
- Quorum is 2 subject to articles - can’t be less than this. Shareholders not prevented from being counter if interested in matter. Only not counter if:
1. REsolution to buy back SH’s shares (could be voting in their own interests)
2. Ordinary resolution to ratify directors breach (where the director is also the SH)
How to pass an ordinary or special res? Who can demand a poll vote?
In a general meeting:
1. Ordinary res passed by over half of the votes at a general meeting
2. Special res - 75% of the votes at a general meeting
Poll vote can be demanded by:
(a) the chair of the meeting;
(b) the directors;
(c) two or more persons having the right to vote on the resolution; or
(d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution.
Requirements for GM to be held on short notice?
A majority of the number of company shareholders, who together hold 90% of voting shares must content. For public companies, must be 95%.
Requirements for a written resolution?
- Sent to every eligible member entitled to vote, as at the circulation date
- Include following info: how to signify agreement and the deadline for returning the t solution (lapse date)
- In absence of info to the contrary,
Lapse date is 28th day follow circulation regardless of method of circulation (unlike notice of GMs). Expires on midnight 28th day. Doesn’t matter what day they received
How can the shareholders demand a general meeting / written res
Written res:
- usually board res for GM or written res
- shareholders with 5% or more of voting power than require a written res to be circulated
- can be reduced by articles but not increased
- can request a statement on resolution up to a thousand words on the subject matter
- company must circulated the written red and statement in 21 days of request
- shareholders who requested must pay company’s expenses
GM:
- SH with 5% of PAID UP CAPITAL of voting rights can request GM. Request must state general nature of the meeting
- 21 days for directors to call the GM
- notice of GM must be 14 clear days minimum but must also be no more than 28 days if in response to SH’s request
- total is therefore 7 weeks from request
Companies responsibility to keep records and issue yearly accounts?
Records
Companies must keep board minutes for every board meeting and minutes of every GM, record of written resolutions at registered office or SAIL. Can elect to keep these at central register at CH. must keep for 10 years
Accounts
- directors responsibility to ensure accounts produced for each financial year and are a true and fair view of the state of affairs of the company
- directors must prepare a directors report to accompany accounts unless:
(A) micro-entity: balance sheet of no more than 316k, turnover of no more than 632k and no more than 10 employees in one financial year; or
(B) small company: balance sheet 5.1 mil, turnover 10.2 mil and 50 employees in one financial year. - directors circulate accounts, directors report and auditors report (if have one) to every SH, debenture holder and anyone entitled to receive notice of GMs
- Ltd cos publish accounts 9 months after accounting reference period, a PLCs 6 months after
- newly incorporated companies can do it 3 months after account ref period ended
- confirmation statement due 14 days from anniversary of incorporation date
Who needs an auditor, who hires them, what if they resign
- small companies exempt
- dormant companies can file an abbreviated accounts and are exempt from audit
- auditor must be sufficiently qualified (certified or chartered accountant) and independent
- first directors usually appoint auditor first but then an ordinary res by SH appoints after
- ordinary res to dismiss auditor and need SPECIAL NOTICE (later on this is described)
- auditor can resign in writing
- regardless of reasons for auditor leaving it must send company written statement of reasons
Why have a SH agreement
- SH can only take action against company for matters directly related to their rights as a member e.g voting rights
- under SH agreement can take action for any breach against other signatories
- SH agreements cannot restrict the ways in which SH can vote in board meetings if they are also a director (can’t be in breach of directors duties)
Common SH clauses:
- Bushell v Faith clauses: weighted voting rights when voting if director should be removed from office of that director is also a SH
- non compete clauses
- restrictions of transferring shares
When is a company a subsidiary and a holding a holding ?
- One company holds the MAJORITY (i.e over 50%) of voting rights in another
- Other company is a member with the right to appoint and remove majority of its board
- Other company is a member and controls alone (pursuant to member agreement drafted) the right to control the majority of voting rights
- Company is a subsidiary of a company that is a subsidiary of another
- Wholly owned subsidiary of it has no members accept that of another company
What is a promoter?
- Promoter: set up the company and liable for contracts (e.g business premises) pre cert of corp (even if for business benefit), business idea, produce the corporation docs and become first member. Sometimes a solicitor sets up the company but they won’t be considered a promoter! Contracting party can waive personal liability of the promoter but very very unusual. More academic.
- Best to draft contract and sign on incorporation, for business premises agree a novation or assignment, so the promoter is liable until the company is incorporated and then the contract will be discharged and replace with identical one. OR can purchase a shelf company.
- Promoter owe duty of good faith, duties of disclosure and not making a secret profit
What to include on memo of association and application for incorp
- Memorandum of association used to be the external rule book and Articles of association used by internal rule book. Now with the CA 2006 memo is dormant, simply as the first subscribers names on it and sent along with the application form (IN01) to Registrar of Companies to register the limited company. Application must:
o State the proposed name
o If limited by shares or guarantees (shares usually for profit, guarantees for profit)
o Will the company be private or public, most start as private but can start as public
o Issue statement of shareholding or capital
o State proposed officers, directors and secretaries
o Statement of initial significant control
o Statement of intended address (must be in UK), can give notice to the Registrar for a change in registered address. This notice must be filed in 14 days of the change taking place!
o Statement of type of company and intended principle business activities
o Copy of proposed articles of association in single documents in numbered paragraph. Unless choosing Model Articles with no amendments, then no copy. Or if amendments just need to submit amended. If bespoke, issue the bespoke - Must sign the statement of compliance!
- Fee is attached and form submitted with the application
- Sometimes members will have a shareholders agreement (only bind those who sign!) Confidential and DOES NOT NEED TO BE FILED AT CH!
Limitations on company names?
- Limitations on companies name:
o Cannot be offensive or constitute a criminal offence
o Must have public limited co or ‘plc’ (or the Welsh equivalents)
o Must have limited or ‘ltd (or the Welsh equivalents)
o Charities by guarantee may not need limited
o Can’t have same name as other company
o Can’t have name that connects you with a government body or public authority unless approved by the secretary of state e.g “England, chartered, royal, national”
o Approval is required for sensitive or restricted words “board, charity, fund, insurance, trust”
o If name chosen specifically to make someone think its an existing business the personal responsible could be liable for the tort of passing off to the existing company (but they will need to prove their loss!)