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Business > Business and organisational characteristics > Flashcards

Business and organisational characteristics Flashcards

1
Q

What is the division of power for sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Sole trader - Owner is manager
Partnership - Partners are owners and managers
LLP - Members are owners and managers
Private Limited Company and Public Limited Company - Company is a legal entity separate from the owners (shareholders) and people who run on daily basis (directors)

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2
Q

How do sole trader, partnership, LLP, Private Limited Company and Public Limited Company raise finance?

A

Private and debt:
Sole trader
Partnership
LLP
Private Limited Company

Owners must invest a specified minimum but can raise money from members of the public:
Public Limited Company

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3
Q

What does investor own in sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Assets of the business
Sole trader, Partnership and LLP

Shares in the company
Private Limited Company and Public Limited Company

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4
Q

What is minimum membership for sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Sole trader - one
Partnership - two or more
LLP - two or more
Private Limited Company - one or more
Public Limited Company - one minimum but two in practice

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5
Q

How are business decisions made for sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Sole trader - Free to make own decisions
Partnership and LLP - Generally have equal votes with other partners
Private Limited Company and Public Limited Company - Usually run by one or more directors who don’t have to be shareholders and shareholders have no direct management rights

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6
Q

What is liability in sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Sole trader - Unlimited liability, personally responsible for all business debts
Partnership - Unlimited liability for partnership debts
LLP - Limited partners limited to amount they initially invest in the business
Private Limited Company and Public Limited Company - Limited subject to exceptions

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7
Q

What is publicity in sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Private
Sole trader and Partnership

Statutory disclosure obligations
LLP, Private Limited Company and Public Limited Company.

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8
Q

How are sole trader, partnership, LLP, Private Limited Company and Public Limited Company taxed?

A

Sole trader - Profits belong to owner taxed as income tax
Partnership - Profits belong to partners and taxed as income tax
LLP - Member’s share is subject to income tax
Private Limited Company and Public Limited Company - Profits belong to company subject to corporation tax

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9
Q

What is the basis of establishment in sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Sole trader - None
Partnership - Contract
LLP - Statutory
Private Limited Company and Public Limited Company - Statutory via registering certain documents with the Registrar of Companies

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10
Q

What is the formalities of formation in sole trader, partnership, LLP, Private Limited Company and Public Limited Company?

A

Sole trader - None
Partnership - No formalities (two or more persons carry on a business with a view of making a profit)
LLP - Registration with the Registrar of Companies
Private Limited Company and Public Limited Company - Incorporation

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11
Q

What is procedure to form a partnership?

A

Formed if:
1. Two or more persons (where persons are natural persons or other business entities such as a company);
2. Carry on a business in common;
3. With the intention to make a profit.

No formalities required, if these three elements are met there is a partnership.

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12
Q

Examples of evidence is/isn’t a partnership?

A

o Sharing profits is prima facie evidence that there is a partnership unless the receipt of profits is: repayment of a debt; payment for employment or an annuity to a partner’s survivor.
o An agreement to share losses is some evidence that the parties are partners but is not prima facie evidence.
o Jointly owning property itself is not evidence that a partnership was formed.
o Sharing of gross returns is not evidence that a partnership was formed.

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13
Q

Maximum number of partners in a partnership?

A

No limit on number of partners a partnership can have.

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14
Q

Is a financial contribution required to become partners?

A

No

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15
Q

When can partners bind the partnership in contract?

A

Partners are agents of the partnership and can bind the partnership in contract when acting with actual or apparent authority.

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16
Q

How does actual authority occur?

A
  • Expressly in any partnership agreement;
  • Expressly from a vote of the partners; or
  • Impliedly from the partners’ failure to object to past actions (ie a partner allowed to enter certain contracts in the past without objection may assume they have authority to enter similar contracts in the future).
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17
Q

What does a partner have apparent authority to do?

A

To carry on in the usual way business of the kind carried on by the partnership (so partnership bound by such an act) unless: the partner had no actual authority to act AND the third party knew the partner lacked actual authority/didn’t know they were dealing with a partner.

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18
Q

Under apparent authority what is the test for “usual way of the kind carried on by the partnership”?

A

Objective: would a reasonable third party think a business of this kind would usually do this act?

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19
Q

What happens if a partner does not have actual or apparent authority to enter a contract on behalf of the partnership?

A

The partnership will not be bound but the partner will be

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20
Q

Are partner’s paid?

A

Partners are not entitled to be paid for work done for the partnership (unless the partners agree otherwise).

Unless agreed otherwise partners share profits and losses equally (doesn’t matter whether one contributed more unless there is an agreement otherwise).

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21
Q

What is the typical provision for voting rights for partners?

A

Each partner has an equal vote in decision making (unless agreement otherwise).

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22
Q

Most partnership management decisions can be approved by majority vote, except the following three which requires unanimous consent:

A
  1. Admission of a new partner;
  2. Change in the nature of the partnership business; and
  3. An alteration of the partnership agreement.
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23
Q

As partners are fiduciaries of each other what duty and limit do they have?

A
  • Duty to disclose information relevant to the firm;
  • Cannot compete with the firm’s business;
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24
Q

What must Partners account to the firm regarding transactions?

A

Any benefit or profit from any transaction concerning the partnership, its business or use of the partnership’s property

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25
Q

What does partnership property include?

A

Money or property contributed to the firm by a partner and money the partnership has earned and items purchased with partnership money.

26
Q

What right do partners and personal creditors have to use partnership property?

A
  • Partners don’t have a right to use partnership property for personal use;
  • Personal creditors for individual partner has no right to use partnership property to satisfy the individual (non-partnership) debt of the partner;
  • Partner can allow the partnership to use their property without intending for it to be partnership property it will remain their separate property that they may take when they leave.
27
Q

A partnership will be dissolved under the following 5 categories?

A
  • Expiration of the term or accomplishment of the goal stated in the partnership agreement;
  • A partner gives notice of intention to withdraw in a partnership at will;
  • Death or bankruptcy of any partner
  • Partnerships business becomes unlawful; or
  • By court order because a partner: becomes permanently incompetent to enter a contract, is guilty of conduct that would prejudicially affect the partnership ability to carry out business, or wilfully and persistently breaches the partnership agreement. By court order is the business can only be carried on at a loss.
28
Q

On dissolving a partnerships assets must be distributed in what order?

A
  1. Repay debts owed to outside creditors (creditors not partners)
  2. Repay loans made by the partners to the firm
  3. Return partners’ contributions.

If money remains the partnership has made a gain and it will be distributed to the partners. If money is insufficient to pay the above there is a loss and each partner must contribute their share of the loss.

29
Q

What liability do partners in partnership have?

A

Jointly liable so any liability incurred by partner might jointly include any other party, could include any “debts and obligations of the firm” and can sue all or any of the partners for any debt.

30
Q

When are new partners liable in a partnership?

A

Not personally liable for obligations of the partnership incurred before they were admitted

31
Q

When is outgoing partner liable in a partnership?

A

Remains liable on all obligations the partnership incurred before they retired from the firm. Will be liable for obligation incurred after they retire unless they give actual notice of retirement to existing creditors and publication notice in the London Gazette

32
Q

What are the consequences of holding themselves out as a partner?

A

When someone isn’t a partner but does this they may be held liable as if they were a partner to any third party who has given credit to the partnership on the strength of holding out

33
Q

What is procedure to form LLP?

A

Only formed by registration with Companies House, if not registered with be treated as a general partnership.

34
Q

What must registering an LLP at Companies House include?

A
  • Name of the LLP (must end with LLP or Limited Liability Partnership)
  • Location and address of registered office
  • Names and addresses of LLP’s members and who will serve as the designated members
  • Details of people with significant control over the LLP.
35
Q

How does an LLP change name?

A

LLP may change its name at any time via a notice of change to the Registrar of Companies which is then made effective on issuing of a certificate of the name change.

36
Q

What is a designated membership in an LLP?

A

Must have at least two and their main duty is submitting required filings to Companies House

36
Q

How many members are needed in an LLP and what is needed to add new members?

A

Must have at least two members. Requires unanimous consent of existing members to add new members.

37
Q

Who must be notified of changes in the LLPs membership or designated members and when?

A

Registrar of Companies at Companies House within 14 days of the change

37
Q

How does a person cease to be a member of an LLP?

A

By giving reasonable notice to the other members and giving notice to the Registrar at Companies House within 14 days.

38
Q

Under LLP required to keep a register of people with significant control, who does this include?

A
  • Those holding more than 25% of the surplus assets on a winding up
  • Those holding more than 25% of the rights to vote on matters which are to be decided by a vote of the LLP members
  • Those holding the right to appoint or remove the majority of those entitled to take part in management; or
  • Someone who can exercise significant influence or control over a trust or members of a firm not a legal person but meets any of the other specified conditions.
39
Q

What is the liability for partners in an LLP?

A

Are not personally liable for the debts of the firm beyond their agreed contributions.
LLP is a legal entity responsible for its own obligations.

40
Q

What is the procedure to incorporate a company?

A

A company doesn’t exist until it registers at Companies House. To become incorporated must file a memorandum of association along with an application for registration with the Registrar of Companies at Companies House.

41
Q

Why should a company wait to act until incorporated?

A

If a contract is entered into in a company’s name, before that company is legally registered under section 51 CA 2006 – the person(s) setting up the company will be personally liable pre-incorporation. Safer to wait until the company has been incorporated (doesn’t take too long) or use a shelf company.

42
Q

What is a memorandum of association?

A

An authenticated/signed agreement of persons wishing to become members of a company on its formation.

43
Q

What must application for company registration include?

A
  • Proposed name of the company – can’t be the same as another company or be offensive, must end in limited/Ltd/Public Limited Company/Plc, can’t suggest a connection to government or local authority unless this approved.
  • Registered office location
  • Details about the company’s business
  • Whether the company will be limited by shares or guarantee
  • Statement of capital and initial shareholdings
    o Total number of shares
    o Aggregate nominal value of the shares
    o If shares are to be divided into classes a description of each class
    o Amount that will be paid up by the shareholders and amounts left unpaid for shares
  • Statement of proposed officers/directors
  • Details of persons with significant control (generally more than 25% voting power)
  • Statement of compliance with Companies Act 2006
  • Articles of association (or will be incorporated with model articles)
  • The relevant fee

If documents are in order a Certificate of Incorporation will be issued. Company comes into existence on date specified on certificate.

44
Q

What is a company’s constitution under Companies Act 2006?

A

A company’s articles of association plus resolutions or agreements adopted by members.

45
Q

What do articles of association prescribe?

A

The internal workings of the company

46
Q

When will the model articles be applied?

A

If bespoke articles not submitted with the application to form company will be applied as every company requires articles.

47
Q

Why would model articles be amended?

A

Model Articles allow companies to pursue any object and to carry on business of any kind. Articles may be amended to restrict its objects.

48
Q

What happens if directors breach articles?

A

If a company’s objectives are restricted and the directors don’t adhere to this, they breach their duty to the company.

An injunction can be obtained to prohibit prospective breaches and damages can be sought from the directors.

49
Q

Articles are a contract between who?

A

The company and the shareholders and the shareholders with each other

50
Q

When do shareholders have the right to enforce article provisions?

A

Only relating to their membership rights.

51
Q

What are shareholders agreements?

A

Agreements apart from the articles

52
Q

Who do shareholders agreements bind?

A

Generally binding and enforceable by all who sign them

53
Q

What is the purpose of shareholders agreements?

A

Typically is used to protect the position of certain shareholders, e.g. if the shareholders are also directors, the shareholders agreement may include a clause whereby unanimous consent of the shareholders is required to remove a director

54
Q

What is a certificate of incorporation?

A

If the Registrar is satisfied with the registration documents, the certificate of incorporation will be issued which provides the company number.
Once the certificate of incorporation has been issued, it is conclusive evidence of company’s incorporation.

55
Q

How are articles amended?

A

By Special Resolution (so need Board Meeting to call General Meeting (or WR) then Board Meeting to follow up afterwards)

56
Q

What are common amends to Model Articles (if was a shelf company so needs amending once incorporated or wish to tailor later)?

A
  • Board meeting quorum - The standard number is 2, but can increase. If small company often all want to be there for big decisions.
  • Chair’s casting vote - If two directors and only one is chair means they could always overrule, common for this to be removed from articles in this case. Might mean deadlock.
  • Director’s power to count in quorum and vote - This can be problematic in small company as might mean lack of quorum for certain decisions, can be removed.
  • Restrictions on borrowing - Nothing in Companies Act restricting borrowing so some shareholders might want a restriction on this unless get shareholder approval.
  • Transfer of shares – potential restrictions - MA don’t include restrictions besides option for directors to refuse to register. Could have restrictions such as existing shareholders being offered the shares before anyone else.
57
Q

Purpose of entrenching certain articles?

A

Mean to amend the company must comply with additional conditions that go beyond the normal 75% approval required. A provision that purports to prevent amendment of a company’s articles will be ineffective.

58
Q

How are articles entrenched?

A

Shareholders vote

59
Q

What happens if the shareholders make an alteration to articles that no reasonable person would consider is for the benefit of the company?

A

A shareholder who didn’t vote in favour can challenge it in court.

That an amendment adversely affects minority shareholders is not sufficient grounds for objection if the alteration is made in good faith in the interests of the company.

60
Q

What liability does a company have?

A

Incorporation protects members against personal liability for obligations of the company and will not be lifted unless the company is being used to carry out a fraud or to avoid existing obligations (such as a business owner transferring assets to company to attempt to keep out of the hands of a creditor).

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