Business Flashcards
- KEY ADVANTAGES AND DISADVANTAGES OF THE VARIOUS BUSINESS MEDIUMS
- Liability for debts
- Formation
- Taxation
- Borrowing
- Running the business
- Liability for debts
-Sole proprietor, General Partner unlimited personal liability
-Shareholders and LLP members not personally liable - Formation
-Only companies and LLPs need companies house filing - Taxation
-Sole proprietor/partnership/LLP - all treated personal income so income tax
-Only companies subject corporation tax
-Dividends taxable as income - Borrowing
-Only companies and LLPs grant floating charges over assets - charge over present and future assets that are to be retained in the business (for example, inventory) - goal to borrow money - Running the business
-Sole prop run business as see fit
-Partners (GP, LLP) equal votes in business decisions
-Companies run by directors; shareholders no management rights
- GENERAL PARTNERSHIPS
Formed
1. 2+ persons
2. Business in common
3. Intention to profit
-No formalities
-Sharing of profits is prima facie evidence there is partnership unless debt repayment/ employment/ annuity
-No limit on number
-Every partner is agent, bind in contract
-Actual authority - expressly (partnership agreement, vote) and impliedly (failure to object - enter certain contracts in past w/o objection = to enter in future)
-Apparent authority - bound by act done by partner - obj, reasonable third party
-If no authority then not bound on contract but partner will be
-Unlimited liability for debts
-New partner admitted to existing partnership not personally liable if incurred before
-Outgoing (if leave) remains liable on all obligations before retirement
AND after unless
actual notice to existing creditors AND
publication notice to London Gazette
-If hold themselves out as partner, even if no actually partner, then may be held liable
-Partnership property:money/property contributed, earned, purchased
-Personal creditor of individual partner no right to attach partnership to satisfy debt
-Partners share profits and losses equally
-May assign right to receive distributions - from partnership w/o consent of other partners
-Right to inspect partnership books and records
-Not entitled to be paid for work done unless agreed otherwise
-Unless agreed otherwise, each has equal vote in decision making
-Approved by majority vote unless below requiring unanimous consent
1. Admission of new partner
2. Change in nature of biz
3. Alteration of agreement
-Fiduciaries of each other so duty to disclose info, cannot compete with firm business
-Account to firm for benefit/profit from transaction
-May be dissolved via expiration of term, accomplishment goal, notice, death/bankruptcy, court order
-Authority to bind after dissolution for winding up
-Priority: debts to outside creditors, loans by partners, return partner contributions
- LLP
-Partners not personally liable beyond agreed contributions
-Taxed and run like GP
-Reg companies house w/ name, address, members, person significant control (PSC)
-Change name via notice
-Must have 2 members
-If LLP without 2 members for more than 6 months, then jointly and severally liable with LLP for debts after initial 6 months
-New members may be added with unanimous consent of existing members + reg CH 14 days (2 designated members to complete)
-Cease also via CH 14 days
-Reg of PSC if more than 25% surplus assets, more than 25% rights to vote
- NATURE AND FORMATION OF COMPANIES
SQE focus on private limited companies, but
-Unlimited companies = liable for all debts
-Companies limited by guarnatee - amounts they guarantee
-Public limited companies - min 50k nominal share capital
-Promoters bring company into existence and personally liable for contracts
-Novation: remain liable after company formed unless agreement among company/third party/ promoter to substitute
-Shelf company: reg but never traded
-Incorporate company by memorandum of association, app fro registration - CH
-MoA - signed agreement to become members
-Proposed name, address, details of biz, limited shares/ guarantee, statement of capital and initial shareholdings, proposed officers.directors, PSC, statement compliance CA 2006, fee
-CH issue certificate of incorporation
-Constitution = AoA + resolutions/ agreements
-Model articles for any object and business, amended to restrict objects
-Director can breach and injunction can be obtained to prohibit + damages
-MA as contract between company and shareholders
-Shareholder may enter agreements - binding + enforceable
-Company amend articles by special resolution
*Shareholders may vote to entrench certain articles
-To amend, 75% approval required
-Cannot provision to prevent amendment
-If no reasonable person consider for company benefit then can challenge
-Amendment adversely affects minority shareholders not sufficient grounds
Veil of incorporation - protect members against personal liability for company obligations NOT lifted to reach assets of member unless to carry out fraud or avoid existing obligations
- COMPANIES-DIRECTORS AND OFFICERS
-Directors are officers of company and responsible for management
-Private company must have 1
-Public company must have 2
-Min 16yrs age
-Initial directors recorded in reg
-Model articles - either directors or shareholders can appoint new directors
-Company notify Registrar of Companies within 14 days of new director appointments and any changes
-‘de jure’ directors - normal
-‘de factor’ - act and claim as director but not appointed
-‘shadow’ - influence but not claim nor appointed
-Executive - day to day, employees
-Non-executive - consultants, supervisory
-Nominee - represent interests of particular stakeholder, usually shareholder
-Must act in best interests of company
-Model articles give power to exercise all powers of company except specified otherwise:
-Appointment/removal director/auditor
-Directors required by model articles to exercise powers collectively as board
-If req approval of shareholders
-Certain decisions reserved for shareholders
-Directors agents of company - may bind company in contract/tort liability
-Actual authority granted by board resolution
-Apparent authority through past dealings
-Companies execute by affix seal or signature of
2 directors
OR director + secretary
OR single director in presence witness who attests
-Common law fiduciary duty to act in good faith, best interest of company as a whole
-Any provision exempt for breach of duty/ negligence/ breach of trust void
-Company may purchase insurance to protect against liability
-Company may indemnify except criminal or regulatory fines
-Former director may not exploit property/information/opportunities
-Enlightened shareholder value: consider interests of all stakeholders
-If insolvent, directors to consider interests of creditors
-Higher care, skill, diligence of reasonably diligent person with general knowledge, skill, experience expected (obj) and actually has (subj)
-Independent judgment
-Avoid conflict of interests: transaction, situation, matter authorisation, interest, third party benefit, cannot obtain loan unless transaction board approved
-Directors may call meeting with reasonable notice
-Notice need not be in writing but indicate date, time, location
AND given to each director
-Can be via telephone or electronic
-Model articles quorum: at least 2 directors
-Approval of resolution requires majority vote
-Directors pass written resolutions w/o meeting if all directors approve (unianimous approval)
-Service contracts - cannot be counted as quorum
-Shareholders power to remove directors by simple majority vote
-Cannot be overriden but modified articles can give weighted voting to director who is also shareholder (Bushell v Faith)
-if violate service contract, company liable for breach
-Notice to remove director must be given at least 28 days before meeting; director must be given notice, right to respond writing + orally at meeting
-Public company: directors initially appointed must retire first annual meeting, then reappointment by shareholders
-Disqualify if misconduct
-Public companies must have company secretary
-Qualification req 3yrs experience, member of reg accounting/secretarial body, barrister or solicitor
-All companies must prepare accounts
-Large companies hire auditor if annual turnover greater £10m and 50 employees
- COMPANIES-MEMBERS
-Shareholders members of company, financial backing
-Company may pay dividends to shareholders, paid from profits available for purpose (profits less losses)
-Preference shares - right to be paid stated preference before dividends paid to common shareholders
-Cumulative preferred shares accumulate and carried forward if not paid
-Directors decide profits available and recommend dividend
-Approval by shareholders require majority votes (ordinary resolution)
-Shareholders may approve smaller dividend than recommended
-If unlawful, shareholder reason to know unlawful is liable to repay
Shareholders who believe director breached may apply court to bring derivative claim
-Right to inspect directors’ service contracts, kept in office at least 1 year after director leaves
-Right to inspect register of members if proper purpose, company 5d to comply request
- COMPANIES-JOINT DECISION MAKING
-Public companies hold annual shareholders meting
-Private companies not req
-General meetings when req
-Shareholders holding 5% paid-up voting capital can demand meeting
-If shareholders request meeting, directors must call within 21 days, held within 28 days
-Notice of general shareholder meting in to al l shareholders and directors, PR deceased shareholders, trustee in bankruptcy
-Writing or electronically
-Include company name, time/date/place meeting, general nature of business, statement to appoint proxy, full text of special resolution
-Notice 14 clear days in advance of meeting PLUS 2 days delivery if notice not hand delivered (therefore meeting date minus 15 for hand delivery, minus 17 for posted delivery)
-Notice of annual meeting public company 21 days notice
-Shorter notice if agreed by majority shareholders who hold 90% shares (95% non-traded public companies)
-Model articles quorum is at least 2 shareholders, unless company has only one
-Shareholders who holds another shareholder proxy not satisfy two-shareholder requirement may attend by proxy
Approval of resolutions
-Ordinary: at least majority of members
-Special: require 75% or more members at meeting
-Normal method show of hands, 1 vote per shareholder
-Poll vote (1 vote per share) requested by 5+ shareholders OR shareholder at least 10% voting rights OR 10% paid-up capital
-Written resolutions can pass ordinary/special resolutions BUT cannot be used to dismiss director/auditor
-Shareholder hold at least 5% total voting rights can require directors to circulate written
-Written circulated to all members eligible to vote
-Written inform shareholders how signify agreement + if unamended articles used, resolution lapse after 28 from and incl. day of circulation
-Percentage of votes to pass written resolution same as GM (majority for ordinary; 75%+ for special) but all shareholders entitled to vote, 1 vote/share
Procedure for both director and shareholder approval:
1-Approval start with board meeting, resolution approving matter
2-Board pass resolution, call general shareholder meeting OR circulate written resolution
3-Shareholders vote to pass and resolution passed
4-Sometimes NFA req, sometimes another board resolution to facilitate decision (enter contract)
Ordinary resolution matters
1-Appointment/removal director
2-Adoption annual accounts and reports of directors
3-Approval declaration of dividends
4-Approval director decision allot shares
5-Approval substantial property transactions (SPT)
6-SPT involving director personal interest more than £100k or more than £5k, contract exceed 10%
7-Ratification director breach duty
8-Enter service contract with director more than 2 years
9-Make loan to director
10-Director payment for loss of office
Special resolution matters:
1 Buy back company shares
2 Change AoA
3 Change company name
Copy of changes within 14d
- COMPANIES RAISING FINANCE
-Equity (ownership interests, shares)
OR Debt (loans, debt securities bonds)
-Subscribers: persons signed company MoA and agreed to purchase certain number of shares
Allot shares:
-Directors power to allot additional shares if company only one class of shares and no restriction remove power in articles
-Seek permission from existing shareholders through ordinary resolution
Procedure:
1 Directors determine price and number of shares to allot, resolve allot shares
2 Shares issued in exchange cash, directors may accept property for shares
3 Under model articles, full value shares paid to company on allotment
4 If shares nominal or par value, money received on account value added to company share capital
5 Amount beyond nominal value known as premium, recorded separately in account
-If issue additional shares for cash, shares first offered to existing shareholders to maintain proportional share of ownership and voting strength - pre-emption right
-Shares offered same terms as open market
-Existing shareholders 14d to accept
-Pre-emption right not apply to shares issued for non-cash consideration
-Pre-emption disapplied by special resolution
If sell shares to third party, not allocation by company
-Right to transfer governed by articles
-Model articles for private companies - absolute power to refuse to allow transfer shares
-Model articles give directors power to decide how much money borrow
Several types of loans
-Unsecured loan: promise (contract) to repay
-Secured loan - promise with right of lender to take collateral (property) if loan not repaid
Mortgage - secured loan over high value assets where title to asset securing loan transferred to lender (mortgagee) and mortgagee given right to take possession of asset in event of default
Fixed charge - loan secured by interest in asset company hold for long time which allow charge holder to sell asset if company defaults
Floating - loan secured by interest in group of assets that change regularly (inventory) which crystallises in assets on hand if company differs on secured loan
-Charges and mortgages must be reg at CH within 21d of their creation
-Charges take priority in date order of creation
*Fixed charge priority over floating
-Debt security doc evidence loan to company and which traded - not secured
-Company pays corporation tax on profits
-Shareholders no taxable income from company profits until company distribute to shareholders through dividends
- COMPANIES-RECORDKEEPING, FILING, AND DISCLOSURE
-CA2006 registers for members, directors, secretaries, charges against company assets, PSC
-Minutes from general shareholder meetings kept 10yrs
-Copies director serviece contracts kept at least 1 year beyond term contract
-Submit annual confirmation statement to CS to ensure updated, criminal offence if fail to file within 14d company review
-Private companies sent copies accounts to CH no later 9 months after accounting period
-Public companies 6 months
-Directors must approve acc
-Medium and large companies (more than 50 employees, turnover £10m+) file annual director report, annual strategic report
Business letterhead:
Company: reg name, part of UK, reg no, office, every director
Partnership: reg name, member, address
Sole trader: biz name, real name, address
- INSOLVENCY
Insolvency - unable pay debts
3 options
1 Negotiate with creditor
2 Individual voluntary arrangement (IVA)
3 Bankruptcy
Debtor not draft own IVA but instruct practitioner
-Statement of affairs
-Apply court for interim order
-Prepare report advising proposal, call meeting of creditors
Approval of creditors owed at least 75% unsecured debt
-Binding on all ordinary unsecured creditors
-Preferential creditors, secured creditors
-Practitioner supervise
-Fail to comply, creditor petition for debtor bankruptcy
Bankruptcy - judicial process assets of bankrupt debtor passed to third party, liquidate, use money to pay off debts
Following app, debtor creditors stop chasing debtor
Debtor discharged from most debts after 1 year
-Apply online bankruptcy order
-Unsecured creditors owed at least £5k can submit petition
-App prove debtor insolvent
-If liquidated debt £5k+, creditor make statutory demand where if debt not paid within 3 weeks, debtor deemed insolvent
-If future liability £5k+, creditor serve statutory demand and if no reasonable prospect pay then deemed insolvent
-Debtor property auto vest in trustee
-Bankrupt keep day-to-day things, tools for job, salary
-May not apply credit for amount, company director, partner, trade another name
Creditors order:
-Cost of bankruptcy
-Preferential debt (employee wages, money owed to HMRC, NI)
-Ordinary unsecured creditors
-Postponed creditors
-If own dishonesty/negligence/recklessness, court bankruptcy up to 15 years
-Partner in GP:
-At will, then dissolve and assets over to trustee
-Specified term, then continue and remaining partners purchase bankrupt interest
-If LLP, cannot manage
Insolvency options for company or LLP:
1-Receivership: agreement when company defaults
2-Restructuring plan: restructure debts w/ court sanction if approved by those owed at least 75% unsecured debt
3-Administration: run/reorganise/sell company as going concern
4-Company voluntary arrangement (CVA): similar to IVA, restructure company where directors make written proposal to creditors, nominate insolvency practitioner to supervise; 75%+ value unsecured creditors must agree
5-Moratorium: court order halt creditor actionsto enforce rights
6-Liquidation: sell assets to pay debt then cease to exist
Voluntary liquidation:
-Members (MVL)
-Creditors (CVL) - directors start then creditors takeover, directors personally liable, pass special resolution
Compulsory liquidation:
-Liquidator collect assets, sell them to pay off debts
-Debts paid order
1 Expenses winding up
2 Preferential debts -wages, holiday pay in last 4 months
3 Debts by floating charges
4 Unsecured debts
5 Shareholders
-Preference when debtor does sth intentionally puts creditor better position
-Trustee power to claw back preference paid 6 months onset of insolvency (2yr if connected person)
-Compulsory insolvency: date presentation petition
-CVL: date enter liquiadtion
-Administration: date file Notice of Intention appoint admin
Transaction at undervalue: transaction which property would have otherwise been part of bankruptcy estate given as gift or sold less than market value within 2yr company or 5yr individual bankruptcy
-Company defence if entered good faith, purpose carrying on business, reasonable grounds
-Grant of security interest not transaction at undervalue
Fraudulent trading: director carries biz with intent to defraud creditors
-Directors may be liable , criminal offence
Wrongful trading: director carry biz no reasonable prospect company avoid insolvency/ failed to adequate steps to minimise losses
-Court may order director contribute company assets
- INCOME TAX
-Levied against individual income, no definition but thought money received recurring basis
-Only individuals not companies
-PR of deceased may pay
-Tax year 6 April to 5 April
-Self-assessment if significant income
3 categories income:
-Non-savings, savings, dividend
-Foreign income tax if spend 183 days or more in uk
-Exempt from tax:
-Interest from national savings certificates
-Interest from individual savings
-Winnings or premium bonds, betting/gaming
-Social security benefits
-Child benefit
Sole trader/partner in partnership - taxpayer calculate trading income to include non-savings income
-Reg with HMRC within 3 months
-Trading income = gross income - expenses
-Expense if incurred wholly and exclusively for business purposes; if mix personal then only business deductible
-Buy capital asset - expenditure different to revenue expenses
-Annual investment allowance (AIA) for costs of plant and machinery (tools, machines, computers NOT cars, land, buildings)
-100k for 12-month period
-If cost capital exceed AIA then Writing down allowance - fixed percentage deduct cost of assets 18% most or 6% life long asset each year
-If partner in partnership then include non-savings income in share of partnership’s trading profit
-Partnership not pay income tax but partner nominated to file partnership tax return to HMRC
overlap profit: if basic period not align with tax year, some profits taxed twice in first 2 years of operation
basic period: accounting period for biz
overlap relief: change period to align tax year or cease business
Tax liability
-Add all income (3 categories: non-savings income, savings income, dividends income)
-Subtract allowances
-Multiply income in each category by tax
-Then net income calculated by subtract interest on loans
ALLOWANCE
Personal allowance: £12,570
-Tapered by £1 for every £2 if income above £100k
Marriage allowance
-Can transfer to spouse
-£1,260
-3 conditions
1 Married or civil partnership
2 transfer spouse income less than PA
3 recipient basic rate taxpayer
-Recipient spouse get credit against tax owed at 20% amount transferred
e.g. H and W married couple, basic rate
H income £10k ; W income £25k
H transfer £1260 personal allowance to W, leaving £11,310 H personal allowance
-W credit of £252 (£1260 x 20%), offset any tax owed
-If no tax owed, not refundable
Non-savings income tax band:
Basic rate 20% up to £37,700
High rate 40% from £37,701 to £125,140
Additional rate 45% over £125,140
Savings income:
PSA basic rate £1k, higher rate £500, additional rate n/a
Dividend income (unlikely need memorise)
Basic 8.75%, higher rate 33.75%, additional rate 39.35%
-Dividend allowance £1k
Loss relief:
-Only sole trader/partner entitled to claim
-4 alternatives: against taxpayer total income, losses may be carried forward, set off unusued trading losses against salary or dividend payments, can be deducted from trading profits in tax year of cessation - carried back to preceding tax years
-General anti-abuse rule (GAAR) deter taxpayers from entering schemes that abuse tax system and promoters
-HMRC can make just and reasonable tax adjustment
- CAPITAL GAINS TAX
-Profit realised when individual/partnership/company dispose capital asset
-Profit difference between sale price of asset disposed and cost of acquiring asset
-Charged if UK resident, regardless where asset situated
-Property incl land, buildings, antiques, company shares
-Wasting chattels (moveable property) with life less than 50 years exempt from GCT - e.g. cars, boats, watches
-Non-wasting chattels (more than 50 years) are exempt if sold less than 6k
Exempted disposals
-Transfer of property upon death of property owner
-Transfer between spouses
-Transfer to charity
CGT due and payable on 31 January following year which gain made
-If residential property then within 30d completion
-If gift then use market value
-Determine proceeds would subtract disposition costs (legal, estate agent, valuation, advertising fees)
-Cost of acquisition - add cost
Reliefs:
-PRR - private resident relief: individual used as home - 100% relief;
-If occupied only 7 years out of 10, then the remaining 3 years would be owed
Situations where deemed occupied home:
-Period of absence up to 3 years
-Owner abroad by employment, period unlimited
-Working elsewhere max 4 years
-3 periods apply cumulatively
-Last 9 months ownership treated as period
-BADR - business asset disposal relief if sale/gift business assets
-All/part trading biz as sole trader or partnership 2 years before disposal
-Shares in trading company if at least 5% odrinary shares, officer/employee 2 years before disposal
-Assets owned/used by indv personal trading company/partnership in 2 years before disposal
-CG taxed at 10% with lifetime limit £1m
-Holdover relief: indv give away certain types of biz
-Donor and donee must agree, donor not pay CGT and donee pay both gain and deferred donor gain
-Calculate donor gain and subtract donee acquisition gain
-Qualifying assets:
-Assets for trade/profession by transferor/personal company
-Shares in unquote company
-Shares in transferor personal company
-Assets for agricultural property
-Incorporation relief when indv transfer biz or partnership as going concern
-Gain from transfer deferred by subtract gain from acquistion cost of company shares
-Gain taxed when transferor dispose of shares
-Qualifying unquoted trading company - Enterprise Investment Scheme - indvb defer payment up to 1yr prior gain made or 3 years after made
-Indv annual exemption 6k for 2023/24
-Gains within exempt and not chargeable
-Chargeable gains remaining and deduct
-If BADR available, deduct first and apply rate after
-Unused not carried forward
CGT rates
-20% at higher or additional rate
-BADR 10% rate
-10% if not exceed unused basic rate
-Higher rate on residential property is 18 and 28% respectively
-If losses on disposition, must be used to offset gains in same year
- CORPORATION TAX
-19% for profits below £50k
-25% profits above £250k
-Anything between 50k to 250k too complex for SQE Q
Timeline:
-If company profits not exceed £1.5M then must pay 9 months and a day after end of accounting year
-Returns submitted 12 months after end of financial accounting period
-If exceed £1.5m then quarterly instalments
Formula:
(Trade profit + other income + chargeable gains - charitable donations) x corp rate
Calculation trade profit:
Trade income - (cost of sales + capital allowances)
-Salaries allowable deduction
-Dividends not deductible
Tax relief if replacement of business asset or rollover relief - when dispose asset at profit and use to buy replacement asset
-Subtract gain from acquisition cost
If loss, options:
-Set loss against total profits
-Carry loss back to set against total profits
-Carry loss forward to set against total profits
Close company is
-5 or fewer shareholders
-Directors also shareholders
-If make loan and no interest or below official rate, forgone interest is taxable benefit if exceed £10k
-Loan to participator must pay HMRC amount to 33.75%
-9 months and one day after end of accounting period
-Payment refunded to company
-Payment 33.75% tax isn’t deductible as expense
- VAT
-Charged on supply of goods and services
-Standard 20%
-Supply of good/books/newspapers/water/construction 0%
-Reduced rate 5% fuel
-Biz must reg VAT if turnover exceed threshold (£85k) within 12-month period
-Historic test: biz must reg VAT within 30d, charge from following month
-Future test: notify HMRC before 30-d period ends and BAT charged from biz aware
-May deregister if fall below £83k
-Sale of land normally exempt but owner of commercial property may charge
-Provide tax invoice, tax number, point, value, rate charged
-Biz file return each quarter
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