BUSINESS LAW

Question 1

A client is considering an appropriate business structure through which to run a building project. They will be the major investor in the project and therefore have a particular concern regarding liability should the project fail.

Which of the following best describes their potential liability to any creditors should the project fail and the business become insolvent as a result if a private company limited by shares is used as the business structure?

a) They will not be liable because of limited liability.

b) They will be liable only to the extent of any amount unpaid on their shares.

c) They will be liable to the extent of their shareholding.

d) They will be liable to the extent contractually agreed when their shares were issued.

e) They will be liable to the extent as set out in the company’s articles of association.

Answer 1

b) They will be liable only to the extent of any amount unpaid on their shares

Question 2

An entrepreneur is considering an appropriate business structure for a proposed enterprise. The business plan for the enterprise shows estimated profits of £50,000 for Year 1. The entrepreneur, who will be both a shareholder and director of the company, has suggested that a private limited company be used as the business structure.

Assuming that a private company is used, which of the following best describes how the profits can be taken out of the company?

a) Profits can be paid out as dividends after corporation tax has been paid.

b) Profits can be paid out as dividends, following an initial dividend to each director of £1,000.

c) Profits can be paid out as dividends with the relevant amount of dividends reducing the company’s corporation tax liability.

d) Profits can be paid out as dividends with any profits not paid out then being subject to corporation tax.

e) Profits can be paid out as dividends after corporation tax has been paid, with the first £1,000 payable to each shareholder being exempt from corporation tax.

Answer 2

a) Profits can be paid out as dividends after corporation tax has been paid.

Question 3

A client is a partner in a general partnership which runs a chain of restaurants. The latest forecasts show a high risk that the business may become insolvent and the client is concerned about their potential liability should this occur.

Which of the following best describes the potential liability of the client should the partnership become insolvent?

a) The client could be liable to the extent of their original investment in the partnership.

b) The client could be equally liable for all the debts of the partnership.

c) The client could be jointly and severally liable for all the debts of the partnership.

d) The client could be jointly liable for all the debts of the partnership.

e) The client could be liable for the debts of the partnership to the extent agreed in the partnership agreement as to loss-sharing.

Answer 3

c) The client could be jointly and severally liable for all the debts of the partnership.

Question 4

A contractor has been approached to carry out building works at the offices of a limited liability partnership. A formal contract is to be entered into in respect of the works.

From the contractor’s perspective, which of the following best describes with whom the contractor will be entering into a contract?

a) The contract will be with each of the members of the LLP.

b) The contract will be with all the partners, each of whom will be jointly and severally liable.

c) The contract will be with all the partners.

d) The contract will be with the LLP as an entity.

e) The contract will be with the partners delegated by the LLP as having authority to bind it.

Answer 4

d) The contract will be with the LLP as an entity.

Question 5

Two clients intend to run a business together. They are seeking advice from a solicitor as to which business structure they should operate through. Both would like to run the business as informally as possible and one; in particular, is keen to ensure that the internal affairs of the business are not made public.

With reference to their requirements, which of the following would be the best advice for the solicitor to give as to the most suitable business structure for the clients?

a) Sole trader.

b) Partnership.

c) Limited liability partnership.

d) Private limited company.

e) Public limited company.

Answer 5

b) Partnership.

Question 6

A man is planning to open a new hotel business which he is confident will do well. Initially, he will run the business on his own, but the man is keen to be able to offer his friends the opportunity to invest once the business is established. He hopes that his friends will be able to make a good return on their investment and share in the business’s growth.

With reference to his requirements, which of the following would be the best advice for a solicitor to give as to the most suitable business structure for the man to start to run his business through?

a) Sole trader.

b) Partnership.

c) Limited liability partnership.

d) Private limited company.

e) Public limited company.

Answer 6

d) Private limited company.

Question 7

A woman runs her hairdressing business as a sole trader. A friend of hers has recently advised that she should incorporate her business and run it through a private limited company.

If the woman follows her friend’s advice, which one of the following best describes the benefits of her running her business through a private limited company?

a) The woman will no longer be personally liable to pay tax.

b) The woman will be obliged to comply with less formalities if she runs her business through a company.

c) The woman’s liability for the company’s debts will be limited to what she has agreed to invest in the company.

d) A company will be able to borrow from banks which would not be possible for the woman as a sole trader.

e) The woman will be able to offer shares in the company to the public.

Answer 7

c) The woman’s liability for the company’s debts will be limited to what she has agreed to invest in the company

Question 8

A group of friends have an idea for a business they would like to run together. They have been advised that they could run their business through a partnership, a limited liability partnership or a company.

Which one of the following correctly describes the implications of running a business as either a partnership, a limited liability partnership or a company?

a) A partnership, a limited liability partnership and a company will all be required to register their formation.

b) A partnership, a limited liability partnership and a company will all be liable to pay tax on any profits they make.

c) A partnership, a limited liability partnership and a company will all have a legal personality separate to their owners.

d) A partnership, a limited liability partnership and a company can all raise finance from external sources in the future.

e) A partnership, a limited liability partnership and a company all need to be owned by two persons or more.

Answer 8

d) A partnership, a limited liability partnership and a company can all raise finance from external sources in the future.

Question 9

A client would like to set up her own music business, which she will run as a sole trader. Whilst she would like to work alone, the client needs to raise funds to start and run the business.

Which of the following best describes an option available to the client to raise funds for her new business?

a) The client could issue shares in her business.

b) The client could borrow money from a third party.

c) The client could act as a guarantor on a loan by her bank to a third party.

d) The client could issue bonds in order to raise funds.

e) The client could take a loan from a bank in return for a floating charge over all her assets.

Answer 9

b) The client could borrow money from a third party.

Question 10

A client runs a named business as a sole trader. He has spoken to a friend and is concerned that he may not be complying with all legal formalities when operating his business.

Which one of the following best describes the legal consequences for the client of operating his business as a sole trader?

a) The name of the client’s business must comply with the Companies Act 2006.

b) The client must have a certificate of incorporation in order to be able to trade.

c) The client needs to have a minimum level of capital in order to trade.

d) The client cannot employ any staff.

e) The consultancy business will be the contracting party with its clients.

Answer 10

a) The name of the client’s business must comply with the Companies Act 2006

Question 11

Two friends are the only directors and shareholders of a private limited company. There is a contract for the company to supply timber to a customer on a monthly basis. One of the friends signed the contract for and on behalf of the company. Unfortunately, the company has failed to supply the timber and the customer is threatening to sue for breach of contract.

Which of the following correctly explains who is liable to the customer for any breach of contract claim?

a) The friend who signed the contract on behalf of the company.

b) The two friends as the shareholders of the company.

c) The two friends as the directors of the company.

d) The two friends as the shareholders and the directors of the company.

e) The company and not the directors or shareholders.

Answer 11

e) The company and not the directors or shareholders.

Question 12

An in-house solicitor is acting for her company on the proposed purchase of a shareholding in a joint venture company that is being incorporated with two other external parties. The CEO of the in-house solicitor’s company wants to ensure that they have the majority shareholding. The second party knows the in-house solicitor well and requests that she represents it in the transaction too. The third party will instruct its own lawyers.

Can the in-house solicitor act for the second company without being in breach of the SRA Code of Conduct for Solicitors?

a) No, because the second party is not the in-house solicitors’ client.

b) No, because this would be an ‘own interest’ conflict.

c) No, because there is a significant risk of a conflict of interest arising.

d) Yes, because she can rely on the exceptions to any conflict of interest set out in the SRA Code of Conduct for Solicitors.

e) Yes, if the second party provides the in-house solicitor with a financial incentive for the service.

Answer 12

c) No, because there is a significant risk of a conflict of interest arising.

Question 13

Two women intend to incorporate a private limited company with unamended Model Articles. They have been advised that the company will have both a memorandum and articles of association and are concerned to know whether there will be any restrictions in these documents on the type of activities the company can undertake.

Which of the following correctly explains the requirements of the Companies Act 2006 in respect of the company’s objects?

a) The company must include an objects clause in its memorandum.

b) The company must have an objects clause.

c) The company can only have one object.

d) The company’s object clause will state what it cannot do.

e) The company’s objects will be unrestricted unless restricted.

Answer 13

e) The company’s objects will be unrestricted unless restricted.

Question 14

A solicitor represents a limited company which has signed a retainer in the form of a client care letter and has been a client for six months. The company is refusing to pay the solicitor’s latest bill of costs and has not provided a reason why. The bill is now overdue.

Can the solicitor terminate the retainer and therefore cease to act in these circumstances?

a) Yes, and the solicitor can terminate the retainer immediately.

b) Yes, but the solicitor cannot terminate the retainer unless the client agrees to this.

c) No, as a client is never under an obligation to pay fees that they do not agree with.

d) No, as only a client can terminate a retainer.

e) Yes, if this is deemed to be fair and reasonable to do so and the solicitor has provided reasonable notice.

Answer 14

e) Yes, if this is deemed to be fair and reasonable to do so and the solicitor has provided reasonable notice.

Question 15

A client has decided to incorporate a new company. The client and her husband will be the only shareholders and directors of the company. The company will enter into contracts with manufacturers to distribute their products for them.

If the company is in breach of its obligations under the distribution contracts, which one of the following correctly identifies who the manufacturers should bring an action against?

a) The client and her husband as the company’s shareholders.

b) The client and her husband as the company’s directors.

c) The employee(s) of the company who was responsible for the breach.

d) The company.

e) The company, the client and her husband.

Answer 15

d) The company.

Question 16

A man and a woman are incorporating a new private limited company. They are both keen to start trading as soon as possible so the man has entered into a contract with a supplier, on behalf of the company, to buy stock. The company will be incorporated next week.

Which of the following correctly describes the contractual arrangements and/or relationships in respect of the purchase of the stock by the man?

a) The man is acting as an agent for the company to purchase the stock.

b) The man cannot enter into the contract with the supplier before the company is incorporated.

c) The man will be personally liable to pay for the stock.

d) Following incorporation, the contract to purchase the stock must be novated to the company.

e) The contract with the supplier to purchase the stock will be void.

Answer 16

c) The man will be personally liable to pay for the stock

Question 17

A man wants to start a landscaping business. He has been advised to run the business through a private limited company and wants to be the only shareholder and director. The man has decided to incorporate the new company himself without the assistance of a solicitor.

Which of the following correctly describes the requirements of incorporation of the new company?

a) The man must find another person to own or run the company with him.

b) The man must include an objects clause in the articles of association.

c) The man must file articles of association with the Registrar of Companies.

d) The man must agree the accounting reference date of the company with the Registrar of Companies.

e) The man must set out the rights that attach to the shares taken on incorporation.

Answer 17

e) The man must set out the rights that attach to the shares taken on incorporation

Question 18

A private company limited by shares intends to re-register as a public company. To ensure that all directors and employees comply with regulations applicable to public companies, and it can notify third parties, it requests advice as to when its status will change.

Which of the following best describes the point at which the company’s status will change from private to public?

a) On the issue of a certificate of re-registration by the Registrar of Companies.

b) On the passing of a special resolution by at least 75% of the shareholders in value.

c) Twenty-eight days from the passing of a special resolution by at least 75% of the shareholders in value.

d) When the Registrar of Companies is satisfied that a special resolution has been validly passed and all required documentation has been submitted.

e) On the date on which the special resolution and other required documentation is posted or emailed to the Registrar of Companies.

Answer 18

a) On the issue of a certificate of re-registration by the Registrar of Companies.

Question 19

A single member private company limited by shares intends to re-register as a public company. To ensure compliance with regulatory requirements, it requests advice on the requirements as to members and officers.

Which of the following best describes the regulatory requirements as to members and officers for a public company?

a) A minimum of one member and two directors.

b) A minimum of one member, two directors and a company secretary.

c) A minimum of two members, two directors and a company secretary.

d) A minimum of one member, one director and a company secretary.

e) A minimum of two members and one director.

Answer 19

b) A minimum of one member, two directors and a company secretary.

Question 20

A private company is planning to re-register as a public company and is seeking advice as to share capital requirements in order that it can commence trading.

Which of the following best describes the requirements?

a) The nominal value of the company’s allotted share capital must be at least £50,000.

b) The nominal value of the company’s allotted share capital must be at least £12,500.

c) The nominal value of the company’s allotted share capital must be at least £200,000.

d) The company must have allotted at least 25% of a nominal share capital of £50,000.

e) The company must have a nominal share capital of £50,000.

Answer 20

a) The nominal value of the company’s allotted share capital must be at least £50,000.

Question 21

A person is investing in shares being issued by a public company. The nominal value of each share is £1. The price at which each share is being issued is £5.

Which of the following, based on regulatory requirements, is the minimum amount for each share which the investor must pay on allotment to them of the shares?

a) £2.

b) £4.25.

c) £1.25.

d) £5.

e) £1.50.

Answer 21

b) £4.25.

Question 22

A director of a private limited company, with unamended Model Articles, is seeking advice. She would like to know whether the board of directors can convert the company from a private limited company to a public limited company.

Which of the following correctly describes the requirements which must be met for the company to re-register as a public limited company?

a) The company’s shares must be listed on a stock exchange.

b) The company must have a nominal allotted share capital of at least £500,000 at the time of re-registration .

c) The company must have a minimum of two shareholders.

d) The company must have a company secretary.

e) All shareholders of the company will need to consent to the re-registration as a public company.

Answer 22

d) The company must have a company secretary.

Question 23

An entrepreneur is considering an appropriate business structure for a proposed enterprise. Among the factors being considered are compliance, administration and transparency requirements around the business’s finances.

Which of the following statements best describes the requirements of an LLP in respect of its finances?

a) An LLP may elect to file accounts and must include a statement as to this election in its LLP agreement.

b) An LLP does not have to file accounts if it meets the equivalent criteria for a small company.

c) An LLP, being a partnership, does not have to file accounts.

d) An LLP is required to file accounts in the event that its number of members fall to one and remains so for at least six months.

e) An LLP is required to file accounts, signed off by designated members, with Companies House.

Answer 23

e) An LLP is required to file accounts, signed off by designated members, with Companies House.

Question 24

A client is considering an appropriate structure through which to set up a restaurant business. They will be the major investor and, given the volatility of the hospitality sector, have a particular concern regarding their potential liability should the business fail.

Which of the following best describes their potential liability to any creditors should the business become insolvent if an LLP is used as the business structure?

a) It will be limited to the amount provided for in the LLP agreement.

b) It will be limited to £1.

c) It will be limited to an amount equivalent to their initial investment.

d) It will be unlimited.

e) It will be unlimited, joint and several with the other members of the LLP.

Answer 24

a) It will be limited to the amount provided for in the LLP agreement

Question 25

BXP LLP was formed with three members in 2019. Each made a capital contribution of £50,000 into the LLP. Two new members joined in 2021, each also making a capital contribution of £50,000. There is an LLP agreement which contains a provision that on any winding up each member will receive back their capital contribution and any remaining assets will be shared equally between them.

Based on this provision, which of the following best describes the position as to classification of persons with significant control (PSCs) within BXP LLP after the two new members joined?

a) All members are PSCs.

b) None of the members are PSCs.

c) The three original members are PSCs.

d) The two new members are PSCs.

e) All members will be treated as PSCs in the event of a winding up.

Answer 25

b) None of the members are PSCs

Question 26

Two women want to run a named business in partnership. They have come to see a solicitor for advice on the requirements of operating the partnership. The solicitor has advised that will be a partnership under the Partnership Act 1890.

Which one of the following best describes the legal consequences for the women of operating their new business as a partnership?

a) The women must file incorporation documents with the Registrar of Companies.

b) The women must enter into a partnership agreement.

c) The women must register the business name of the partnership.

d) The women must prepare and maintain internal statutory registers.

e) The women will each be liable to pay tax on their share of the profits made by the partnership.

Answer 26

e) The women will each be liable to pay tax on their share of the profits made by the partnership.

Question 27

Two women wish to operate a profitable business together in partnership. The women have received conflicting advice from their solicitors as to when the partnership will begin and have come to you for a second opinion. The women have made it clear that they wish to operate a simple, general partnership and do not intend to set up a limited liability partnership.

Which of the following is the best advice for you to give the women as to when their partnership will be legally formed?

a) The partnership will not be legally formed until both agree that it has.

b) The partnership will be legally formed once the requirements of s1 of the Partnership Act 1890 are satisfied.

c) The partnership will not be legally formed until each of the women has signed a written partnership agreement.

d) The partnership will be legally formed on the date of incorporation on the certificate issued by the Registrar.

e) The partnership will not be legally formed until each of the women has registered for tax purposes with HMRC.

Answer 27

b) The partnership will be legally formed once the requirements of s1 of the Partnership Act 1890 are satisfied

Question 28

A man intends to start a new business. He has met with his solicitor to discuss the most suitable business structure to operate through. He understands that a limited liability partnership formed under the Limited Liability Partnerships Act 2000 may be an option; however, he does not understand the potential benefits and drawbacks of this structure for him.

Which of the following correctly explains the nature of limited liability partnerships as a business structure for the man?

a) As one member acting alone, the man can form a limited liability partnership, if he has a view to making a profit.

b) A limited liability partnership, like a general partnership, will not have a legal entity separate to the man.

c) A limited liability partnership, like a general partnership, does not need to be registered by the man with the Registrar of Companies.

d) As a member of a limited liability partnership, the man will be taxed in the same way as a partner in a general partnership.

e) A limited liability partnership can only be used by the man if he intends to operate a professional firm.

Answer 28

d) As a member of a limited liability partnership, the man will be taxed in the same way as a partner in a general partnership.

Question 29

A private company limited by shares has profits available for the purpose of a year-end dividend following its first year of trading. The company has Model Articles. The chairman has suggested that a 6% dividend be paid on each share.

Which of the following statements best describes the process required before the dividend can be paid to shareholders?

a) A dividend must be approved by an ordinary resolution of the shareholders.

b) A dividend must be declared by the board and then approved by an ordinary resolution of the shareholders.

c) A dividend must be declared by an ordinary resolution of the shareholders, following a recommendation by the board.

d) A dividend must be declared by an ordinary resolution of the shareholders, following a recommendation by the chairman.

e) A dividend must be declared by a special resolution of the shareholders, following a recommendation by the board.

Answer 29

c) A dividend must be declared by an ordinary resolution of the shareholders, following a recommendation by the board.

Question 30

A company has 30,000 £1 shares of which 20,000 are ordinary shares and 10,000 are 5% £1 preference shares. The company declares a dividend of £4,500.

What will the preferred and ordinary shareholders receive by way of dividend?

a) The preferred shareholders will receive £225 and the ordinary shareholders will receive £4,275.

b) The preferred shareholders will receive £2,000 and the ordinary shareholders will receive £2,500.

c) The preferred shareholders will receive £500 and the remaining £4,000 will be distributed pro rata to both preferred and ordinary shareholders.

d) The preferred shareholders will receive £500 and the ordinary shareholders will receive £4,000.

e) The preferred shareholders will receive £1,500 and the ordinary shareholders will receive £3,000.

Answer 30

d) The preferred shareholders will receive £500 and the ordinary shareholders will receive £4,000

Question 31

At the end of its first financial year, a private company limited by shares has realised profits of £30,000 and declares a dividend of £10,000. At the end of its second financial year, it records realised losses of £15,000.

Which of the following best describes the ability of the company to declare a dividend following its second financial year?

a) It may declare a dividend of up to £20,000, being the remaining realised profits from its first financial year.

b) It may declare a dividend of £15,000.

c) It may not declare a dividend because it does not have realised profits.

d) It may declare a further dividend of £10,000.

e) It may declare a dividend of £5,000.

Answer 31

e) It may declare a dividend of £5,000

Question 32

The board of a private company limited by shares has recommended a 4% dividend on its ordinary shares, which are the only type of shares in issue. A shareholder meeting has been called to consider the declaration of a dividend. The company has Model Articles.

Which of the following best describes the potential outcomes of that meeting?

a) The shareholders may approve or reject the recommendation, or declare a dividend smaller than the recommended dividend.

b) The shareholders may approve or reject the recommendation.

c) The shareholders may approve or reject the recommendation or declare a dividend greater or smaller than the recommended dividend.

d) The shareholders may approve or reject the recommendation or declare a dividend greater than the recommended dividend.

e) The shareholders may approve the recommendation or declare a dividend greater or smaller than the recommended dividend.

Answer 32

a) The shareholders may approve or reject the recommendation, or declare a dividend smaller than the recommended dividend.

Question 33

A husband and wife have incorporated a new private limited company with unamended Model Articles. They each took one ordinary subscriber share and they now, along with their daughter, would like to invest £20,000 each, in cash, in return for ordinary shares so that the company can begin to trade.

Which of the following correctly explains the shareholder resolutions which should be passed to comply with the company’s articles and the Companies Act 2006 in order to issue the new shares as soon as possible?

a) Two ordinary resolutions and one special resolution.

b) One ordinary resolution and one special resolution.

c) One special resolution.

d) Two special resolutions.

e) No shareholder resolutions are required.

Answer 33

c) One special resolution.

Question 34

A man has agreed to invest £10,000 in a private limited company (with unamended Model Articles) in return for 5,000 ordinary shares. Whilst he hopes the shares will increase in value over time, he has said to the company that he will only invest if he is confident that he will receives a dividend each year. It is not intended that he will enter into a shareholders’ agreement.

Which one of the following best describes the man’s entitlement to receive a dividend in respect of his investment in the company in return for shares?

a) The directors can pay the man a dividend providing the company has made a trading profit that year.

b) The man is guaranteed to receive a dividend provided that the company makes a profit.

c) It is the directors who recommend whether to pay a dividend to the man.

d) The company’s shareholders can decide to declare a dividend in excess of any amount recommended by the directors.

e) The man is entitled to receive a dividend in preference to the holders of other classes of shares.

Answer 34

c) It is the directors who recommend whether to pay a dividend to the man.

Question 35

Your firm has recently been instructed by a client that needs to issue further shares. The client is a private limited company (incorporated in 2017 with unamended Model Articles) and currently has three shareholders, all of whom hold ordinary shares. The directors would like to issue and allot a further 100 ordinary shares for cash.

Which of the following best describes who needs to authorise the allotment of the new shares in order to comply with the requirements of the Companies Act 2006?

a) The directors do not need any authority to allot the shares and may allot them to whomever they wish.

b) The directors must be given the authority to allot by ordinary resolution, but may allot the shares to whomever they wish.

c) The directors must be given the authority to allot by ordinary resolution and must pass a special resolution to disapply statutory pre-emption rights.

d) The directors do not need any authority to allot the shares but must offer the shares to the existing three shareholders first.

e) The shareholders must give the directors the authority to allot by ordinary resolution and they must be offered the shares first.

Answer 35

d) The directors do not need any authority to allot the shares but must offer the shares to the existing three shareholders first.

Question 36

A solicitor is concerned that she does not fully understand the constitutional restrictions on private limited companies which wish to issue shares. She is advising a company which was incorporated in 2003 has been asked to confirm whether there are any restrictions on the number of shares that the company can issue.

Which of the following best describes the scope and/or nature of any restrictions on the number of shares this company can issue?

a) The number of shares the company can issue is unlimited under the Companies Act 2006.

b) There will be a restriction on the authorised share capital of the company in the company’s constitution.

c) Any restriction on the authorised share capital of the company will be deemed to be a provision of the company’s articles of association.

d) Any restriction on the number of shares the company can issue can only be removed by it adopting new articles of association.

e) The directors of the company do not need to have regard to any restrictions on the number of shares the company can issue.

Answer 36

c) Any restriction on the authorised share capital of the company will be deemed to be a provision of the company’s articles of association.

Question 37

A newly appointed director of a company would like you to explain the effect of pre-emption rights. The company is a private limited company with unamended Model Articles and four shareholders. None of the shareholders have entered into a shareholders’ agreement

Which of the following best explains the nature and/or scope of pre-emption rights on the issue of and transfer of shares in the company?

a) The existing shareholders will always have a right of first refusal when the company issues new shares.

b) The existing shareholders will always have a right of first refusal when one of them wishes to transfer their shares to a third party.

c) The existing shareholders can waive any right of first refusal on an issue of new shares by passing a special resolution.

d) The company’s articles will contain a provision removing the statutory pre-emption rights on the issue of shares.

e) The company’s articles will contain provisions removing the statutory pre-emption provisions on the transfer of shares.

Answer 37

c) The existing shareholders can waive any right of first refusal on an issue of new shares by passing a special resolution.