Business CMA Considerations

Question 1

What should you keep in mind when recommending limited liability?

Answer 1

• ## directors or shareholders may be required to give personal guarantees for loans (if not secured)

Question 2

Advising business structures: what if someone does not want to manage?

Answer 2

1. LLC
   - can just be shareholder
   - more flexible if they want to manage initially but later want to step down (as director)
2. LLP
   - can be sleeping parter
   - changes will be difficult by changing PA (also need for unanimous decision)
3. Limited Partnership
   - only if investor needs limited liability
   - personal liability for managing partner

Question 3

What should you advise client on setting up LLP

Answer 3

1. need for 2 designed members
2. Advice on naming it
   - searches to ensure name not in use
   - consent if it suggests public or regulated function
3. Disclosing PSC

Question 4

What issues may client want to counteract when creating partnership? What can you advise?

Answer 4

1. Need for unanimous consent
   - PA to specify otherwise (maybe 70%)

2.. How profits will be distributed
- risk of greater liability for loss when winding up if general partnership

3. Each partners authority to bind
   - restrict this in PA
   - maybe designate areas each can act in
4. Amount of time each must contribute
   - provide for in PA
   - holiday, parental leave, sick days etc.
   - provide appropriate salaries
5. Prevent it being automatically dissolved
   - make sure not at will (time or purpose)
   - have retirement provisions
6. Deadlock on decision
   - appoint a chair
7. Want to be sleeping partner
   - provide for which decisions require their approval
8. Exclusion of partners
   - can provide for in PA

Question 5

Advising if investor should invest in shares or debt

Answer 5

1. Shares Pro
   - Voting rights (consider share)
   - Capital growth (risk)
   - Income growth (dividends)
2. Shares Cons
   - no guaranteed return and last in line in liquidation
   - restrictions on selling shares
   - dividend at discretion of directors
3. Loans Pros
   - lower risk return
   - interest payments
   - can take security
4. Loans Cons
   - no capital growth
   - may default

Question 6

Should business use debt vs equity finance?

Answer 6

1. Equity Pro
   - dividends only payable if profitable
   - no repayment of capital
2. Equity Cons
   - loose control
   - dividends not tax deductible
3. Debt Pros
   - no loss of control
   - interest is tax deductible
4. Debt Cons
   - may make company less attractive to future investors
   - if default can enter liquidation

Question 7

What to consider if partners have made agreements with each other orally?

Answer 7

Can still be binding partnership agreement
- difficulty in proving this

If they have been operating in a different way this could be a variation to the agreement

Question 8

What is the general structure for decisions made in any company?

Answer 8

1. Board Meeting
   - resolve to call general meeting or written resolution
2. General meeting / written resolution
3. Board Meeting to implement
   - ie. to agree that certain directors will enter the transaction
   - amend articles
   - filed resolution with CH

Question 9

What to look for in question regarding running of company or drafting board minuets?

Answer 9

1. Changes to quorum requirements (board or shareholder)
2. Changes to rules of conflict of interest
   - and effect on quorum
3. Is meeting urgent or something stopping it from happening
   - short notice meeting
   - written resolution
   - articles may allow directors to take decision without meeting