Business Law and Practice - ALL Flashcards
Which 2 business structures are unincorporated and which 3 are incorporated?
Unincorporated* Sole Trader* General PartnershipIncorporated* Limited Partnership* Limited Liability Partnership* Limited Company
What is required for formation of each of the 5 business structures?
- Sole Trader: No formalities, owner simply operates the business* General Partnership: No formalities, can be formed by verbal/written agreement or by conduct* Limited Partnership: File relevant documents at Companies House and receive a Certificate of Registration* Limited Liability Partnership: File relevant documents at Companies House and receive a Certificate of Registration* Limited Company: File relevant documents at Companies House and receive a Certificate of Registration
What is the liability of owners of each of the 5 business structures?
- Sole Trader: Unlimited personal liability for the obligations of the business* General Partnership: Unlimited personal liability for the obligations of the partnership, jointly and severally* Limited Partnership: General Partner has unlimited personal liability, Limited Partners have liability limited to their capital contribution* Limited Liability Partnership: Partners generally not personally liable beyond their investment* Limited Company: Shareholders generally not personally liable beyond their investment
How are each of the 5 business structures managed?
- Sole Trader: Managed and run directly by the sole trader* General Partnership: Managed and run by the partners but a managing partner may be appointed* Limited Partnership: General Partner manages the partnership and Limited Partners do not manage, otherwise their liability will become unlimited* Limited Liability Partnership: Managed and run by the partners but a managing partner may be appointed* Limited Company: Managed by a board of directors
How can each of the 5 business structures be transfered?
- Sole Trader: Sole trader can sell the business at will* General Partnership: Partners cannot transfer ownership without unanimous consent* Limited Partnership: Partners cannot transfer ownership without unanimous consent* Limited Liability Partnership: Partners cannot transfer ownership without unanimous consent* Limited Company: Shareholders generally may transfer ownership
How is tax paid for each of the 5 business structures?
- Sole Trader: Sole trader pays income tax* General Partnership: Partner pays income tax* Limited Partnership: Partner pays income tax* Limited Liability Partnership: Partner pays income tax* Limited Company: Company pays corporation tax
What are the administration requirements of each of the 5 business structures?
- Sole Trader: No legal requirement to keep records or publish accounts * General Partnership: No legal requirement to keep records or publish accounts * Limited Partnership: Must file records, but not always accounts at Companies House* Limited Liability Partnership: Must file records and accounts at Companies House* Limited Company: Must file records and accounts at Companies House
How do each of the 5 business structures raise finance?
- Sole Trader: Cannot create floating charge* General Partnership: Cannot create floating charge* Limited Partnership: Cannot create floating charge* Limited Liability Partnership: Can create floating charge* Limited Company: Can create floating charge
What is the disadvantage to forming a company or LLP?
Tighter regulation and filing requirements:* register with Companies House* comply with various filing requirements (including accounts and annual confirmation statement). These additional requirements mean additional expense, asthe company/LLP may need to hire a company secretary and accountant, and a loss of privacy as accounts are public.
What is the major advantage of forming a company or LLP?
Limited liability.Shareholders in a company and Partners in an LLP are will not required to make any additional contribution to the company’s debts in the event of insolvency provided their contributions are paid up (subject to certain exceptions involving wrongdoing)
What is the ‘veil of incorporation’?
Incorporation makes a company a separate legal entity and the company itself becomes responsible for any debts to creditors.
What does ‘joint and several’ liability of a partnership mean?
A creditor can pursue all or any of the partners for the outstanding debt.
What are the advantages and disadvantages of the sole trader business structure?
Advantages: * Lack of formality* Low adminsitration costs (e.g. may have to register for VAT)* Can start trading immediately * Takes all profitsDisadvantages* Responsible for all debts* Scale is limited (can hire employees but personally liable)* Can only grant fixed charges, not floating charges to raise finance
Is an LLP subject to corporation tax?
No, partners pay income tax on their share.
What is a floating charge?
A charge over present and future assets that are to be retained in the business (e.g. inventory).
Can the same person own and run a company?
There is a separation between ownership (shareholders) andmanagement (directors), but it is possible for the same individual to hold both positions, particularly in small family-run businesses.
What law applies to Partnerships?
Partnership Act 1890It contains provisions that deal with management e.g. partners’ power to bind the firm and partners’ liability.Note, partners are largely free to dictate how the business should be run in a separate partnership agreement.
What law applies to Companies?
Companies Act 2006
What is a partnership and how is it formed?
A business medium available only for two or more persons. There are three requirements for a partnership to exist: * two or more persons must* carry on a business in common* with the intention to make a profit.Note, there are no formalities required for formation beyond establishing the three requirements.
What is the purpose of the Partnership Act 1890?
It governs the contract partners and the relationship between them.It largely operates as a fallback for anything not in the partnership contract.The only provisions of the Act that cannot be altered are:* when a partnership is considered to exist* The relationship between the partners and any 3rd party contracting with them
What does the term “person” mean under the Partnership Act 1890?
Not limited to natural persons but also includes other business entities e.g. a company. Example: a human can form a partnership with a company
Is a separate entity created when a partnership is created?
No, a partnership is like a marriage i.e. there is nothing more than the contractual relationship between the parties.
What does “business in common” mean under the Partnership Act 1890?
Two separate ideas: * ‘business’ (buying or selling goods or providing services for a fee e.g. operating clothing shop/law firm)* ‘in common’ (the idea that the people conducting the business are operating it together, i.e. they each have a right to make decisions about the business, share in its gains etc.)
Can a partnership exist if the goal is not to make a profit?
The parties’ aims in coming together must include the goal of making a profit. If profit is not a goal, there is no partnership (note, intention is the important thing, the fact the business never actually makes a profit does not prevent it from being a partnership) Parties do not need to intend to form a partnership (i.e. use the word ‘partnership), only an intention to carry on together a business for profit.
If two people join together to build a boat to sail together, have they created a partnership?
No, they are not buying or selling goods or services, there is no business.If they sell the boat to cover costs, there is still no partnership as there is no intention to create a profit. If they decide to sell it at a profit, they have a partnership even if they did not intend to create one.
What is a limited partnership?
Basic limited partnerships are governed by the Limited Partnerships Act 1907.It involves 2 types of partner (at least one of each):* General partner (responsibility for running the business and unlimited liability)* Limited partner (invests capital but has no active role in running the business, liability limited to capital invested)A limited partnership must be registered at Companies House before it can start trading. Generally only used for certain types of venture capital funds where investors are protected as limited partners and the general partner invests their money in companies/property
Are any formalities required in the formation of a partnership?
No, as soon as the three elements are satisfied, a partnership exists, and it can start trading immediately.No requirement of a written partnership agreement (in practice, many have them) and nothing need be filed with Companies House.
When it is unclear whether a partnership exists or not, what do the court look at?
The circumstancesIf a party receives a share of the profits of a business, that generally is treated as prima face evidence that a partnership exists.This presumption does not apply if the receipt is: * repayment of debt* remuneration (payment) of an employee or an agent (e.g. shop owner paying employee commission of 10% of the profits); * an annuity to a survivor of a partner on account of a partner’s share of the profits or to a person who has sold the goodwill of the business. An agreement to share losses might be some proof of an intention to form a partnership, it is not prima facie evidence (but a lack of such an agreement does not prevent the formation of a partnership)
When might it be particularly important to determine whether a partnership exists or not?
When creditors are looking to be paid. People may try to argue that they are not in a partnership to avoid personal liability for debts.Note, sometimes people think they are in a partnership but in fact are not due to a required element being missing.
Which 2 common circumstances do not create a partnership under the Partnership Act 1890?
- The mere fact that two or more people jointly own property, even if they agree to share profits from the property (e.g. A and B buy a flat together and sell it 2 years later at a profit. There is no business). * Sharing of gross returns
Does a contribution have to be made for a partner to form a partnership?
No. Note, in practice, partners often do make a contribution of money or property which become assets of the business.
What is the maximum number of partners that can be in a partnership?
There is no legal limit
Does a partnership have separate legal personality from the partners?
No. Partners in a partnership have unlimited personal liability for the debts of the partnership.
Who are the minimum 3 players in a question involving a partner’s authority to bind the firm?
- 2 partners in the partnership* Third party interacting with them to do businessWhen considering a partnership question, always first consider whether the question is asking about the internal relationship of the partners or the relationship between the partnership and a third party.
When will the act of a partner bind the partnership?
When the partner has: * actual authority (express or implied)* ostensible/apparent authorityEvery partner in a partner is an agent of the partnership and the other partners. An agent can bind a principle (i.e. the partnership) when it acts with authority.| Rules in the Partnership Act 1890 are based on the principles of Agency
Will every act of a partner bind a partnership?
No, only acts where the partner acted with authority are binding
What is actual authority of a partner?
A firm will be bound by any act:* Done in a way showing an intention to bind the firm,* By any person actually authorised by the firm to undertake the act.Express * Partnership agreements will often give certain partners specific powers and responsibilities (grant of actual authority) e.g. purchasing power up to a limit.* Partners could vote to give a particular partner actual authority to do a specific kind of act. Implied* Courts also recognise implied actual authority if the partners have allowed a partner without express actual authority to regularly do an act.
When do issues of actual authority typically arise?
When a partner does something the others don’t approve of and they are trying to recover money from that partner or claiming a breach of the partnership agreement.
What is apparent or ostensible authority?
The act of a partner carrying on in the usual way business of the kind carried on by the firm will bind the firm and the other partners unless:* The partner had no authority to act, and * The person with whom the partner was dealing either: 1. knew the partner had no authority to act, or 2. did not know or believe the person they were dealing with was a partner.Test for business of firm is objective: * would a reasonable third party think a business of this kind would usually do this act, and * what authority would a reasonable third party expect a partner in such a firm to have?Test for exceptions to the rule are subjective.
Why do creditors often rely on ostensible/apparent authority of a partner?
They have no access to the partnership agreement or minutes of a partnership meeting
If a partner tells a third party that they do not have authority to buy something but that it is such a good deal and the others wouldn’t mind, is the partnership bound?
No only the partner buying the good would be bound.
If a seller thinks a partner is a sole trader when selling a good to them, is the partnership bound?
No only the partner buying the good would be bound.
What 5 acts can third parties expect a partner with ostensible authority to be able to do?
In the ordinary course of the partnership’s business: * Make admissions or representations concerning affairs of the partnership * Buy and sell firm goods* Receive debt payments due to the firm* Hire employees* Borrow money and grant certain types of security (trading partnerships only)If a contract is outside the scope of partnership business, the partnership generally will not be bound unless the partner has actual authority.
Is notice given to a partner by a third party considered valid notice to the partnership?
Yes, if a third party gives notice (e.g. a notice by a tenant to continue a lease) to a partner who habitually acts in the partnership business the notice will be considered to be notice to the partnership (except in cases in which the third party and partner have joined to commit a fraud on the firm).
Who is bound by a contract formed by a partner that did not have authority?
Only that partner will be personally liable to the third party (technically, not on the contract but instead for breach of a warranty of authority, on the basis of the principles of agency). By purporting to enter into the contract on behalf of the partnership, the partner warrants (i.e. promises), that they have the authority to do so.
If a partner enters into a contract with ostensible/apparent authority and a partnership is bound, do the other partners have any remedies?
If the partner had no actual authority, the others can pursue that partner for breach of contract (i.e. the partnership agreement) and usually the remedy is damages for the loss suffered as a result of the breach.Note, if a profit is made as a result of the breach, partners will very rarely take action
Is a partnership liable for torts committed by a partner?
- Where any partner acting in the ordinary course of the business (or with the authority of the other partners) of the partnership commits a tort, the partnership is liable to the same extent as the partner, and the partners’ liability is joint and several.* Note, if the partnership business was totally unrelated to the tort, the other partners would not be liable. Example: if a partner makes a misrepresentation to or otherwise defrauds a third party while conducting partnership business, all partners would be liable.
What is the liability of incoming partners to a partnership?
- Not liable to creditors of the partnership for anything done before they become a partner. (unless they come to a contractual agreement otherwise.)* Consent of all existing partners is required to add a new partner.* Partners have no power to expel another partner unless that power has been expressly agreed to by the partners (e.g. in partnership agreement).
What is the liability of outgoing partners to a partnership?
Debts incurred before retirement * Partner remains liable for any debts or obligations incurred before they leave. * The retiring partner and the partnership can agree that the partner will not be liable to the partnership for these obligations (e.g. by executing a release or ‘hold harmless agreement’ indemnifing the retiring partner for liabilities) * This has no effect on the retiring partner’s direct liability to third parties unless the third party alsoagrees (a ‘novation’).Debts incurred after retirement* Third party creditors are entitled to treat all apparent partners of the old firm as still being partners of the firm until notice of the change has been received. * Actual notice should be given to existing creditors (e.g. by email/letter) and notice by way of an advertisement in the London Gazette is required for new customers.* If a partner retires and they were not known to a person dealing with the partnership to have been a partner, that retiring partner will not be liable for partnership debts contracted with that person after the date of their retirement.
If a partnership is insolvent and a creditor (for a debt entered into before a partner retired) pursues the retired parther who had a hold harmless agreement with the partnership, does the retired partner have to pay the creditor?
Yes, the hold harmless agreement is between the retired partner and the partnership only. It entitles them to make a claim for any money paid to a creditor against the existing partners. If the partnership is insolvent, the agreement will be useless as the partners will not be in a position to reimburse the retired partner.
What 3 things should be considered in a question involving liability of incoming/outgoing partners for debts?
- The date the debt was incurred * Who was in partnership at that time* Whether the creditor new or exisiting
What are the consequences of holding someone out as being a partner?
If a person holds themselves out as a partner (even though they are not) 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 the holding out. Note, they will not be entitled to any of the benefits of partnership e.g. share of profit by holding out.Same applies if a person knowingly allows another to hold the person out as a partner. The term ‘given credit’ is broader than just money being lent to a partnership.’Holding out’ can apply to retiring partners if they have not given proper notice to existing and new customers, and if they have failed to ensure that their name is removed from any notices websites, or stationery
If a partner went to a bank and asked for a loan, telling the bank their rich uncle was also a partner in the partnership, would the uncle be liable for the debt?
- If the uncle was absent and didn’t know this was happening, no.* If the uncle was absent and knew this was happening, yes* If the uncle was present at the meeting and said nothing, yes, because he knew what they were doing * If the uncle was asking the bank for the loan, yes
What is partnership property?
- Property originally brought into the partnership (e.g. capital contribution) or acquired for partnership purposes and in the course of the partnership business.* Unless a contrary intention appears, property bought with money belonging to the firm is partnership property, and property titled in the firm name is partnership property. * Partnership property may only be used for partnership purposes and is unavailable for a separate debt of an individual partner. * Note, property belonging to a partner individually used by the partnership remains that partner’s property after dissolution
How is it determined whether property is partnership property or property of the individual partner?
Intention of the parties* The mere fact that the property is used in the business is not enough evidence that it has become partnership property.* Property owned by one partner at the start of the partnership will be treated as partnership property only if it is expressly (e.g. partnership agreement) or impliedly agreed between the partners.* If unclear, courts look at:1. Whether the asset is listed on the partnership books as a partnership asset2. Who paid for maintenance 3. How the asset was used (e.g. partnership/personal purposes)
Can partnership property be used for personal use?
It must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.Example: a vehicle owned by the partnership can only be used for personal use with the permission of the other partners.
Can creditors of an individual partner (i.e. not of the partnership) use partnership property to satisfy a debt of that partner?
NoHowever, such creditors may ask a court to make an order charging the partner’s interest in the partnership which would entitle them to receive distributions that are due the partner (note, they do not become partner and can’t manage the partnership)
Can a partner dispose of partnership property at will?
No, the property belongs to the partnership and not to the individual partners.
What are the 7 rules relating to the financial entitlements of a partner in a partnership?
- Equal share of capital and profits (unless partnership agreement specifies otherwise)2. No right to distribution before dissolution (unless partnership agreement specifies otherwise)3. Right to share is assignable 4. Equal share of losses (unless partnership agreement specifies otherwise)5. Right to inspect partnership books6. Right to interest on loans to partnership (but not capital contribution)7. Not entitled to remuneration (unless partnership agreement specifies otherwise)8. Right to indemnity from partnership for payments/liabilities incurred in course of business or for preservation of partnership business/property
If partners in a partnership contribute unequal shares at the outset, is their share of the profits pro-rated?
No, profits will be split equally unless it is specified in the partnership agreement that they should be pro-rated (note, it would be rare for the partnership agreement not to specify the split)
If a partnership of 3 partners makes a profit of £30,000 in year one, how much is each partner entitled to?
None, unless all partners agree to distribute the profit or the partnership is dissolved. If they agree, each partner will get £10,000 unless the partnership agreement specifies otherwise. Note, the partners will still owe tax on the profit even if it is not distributed.
Can a partner assign their right to a share in the profits of a partnership?
Yes but the assignment does not: * entitle the assignee to participate in, or interfere with, management of the firm. * make the assignee liable for the firm’s obligations. This sometimes happens if a partner owes a personal debt to a third party.An assignee can only become a partner and gain these rights is with the unanimous consent of the partners (unless the partnershipagreement provides otherwise).
How are losses (capital or otherwise) shared by partners in a partnership?
Equally, unless the partnership agreement states otherwise. However, if profits are sharedunequally by virtue of a provision in the partnership agreement, on dissolution, any remaining losses will be paid by the partners in the same proportion.
What 2 rules apply to partnership books?
- The partnership is required to keep its books at its place of business (or principal place of business if there is more than one), and * each partner has a right to inspect and copy them as the partner sees fit.
Is a partner entitled to charge interest on a loan it makes to the partnership?
Yes, at a rate of 5% per annum.Note, they cannot charge interest on their capital contribution.
Is a partner entitled to remuneration for acting in the partnership business?
NoHowever, the partnership agreement may provide that certain partners who manage the business get paid a salary, as opposed to sleeping partners who are merely investors and take no active part in the day-to-day running of the business.
Does the partnership have to indemnify partners for anything?
Yes:* any payments made or liabilities incurred whilst acting in the course of the business of the partnership, or * anything done for the preservation of the business or property of thepartnership.Note, other indemnities may exist but they would need to be set out in the partnership agreement.
Who has the right to manage a partnership?
Regardless of contribution, every partner has an equal right (not an obligation) to take part in management of the partnership and the basic rule is one partner, one vote and a simply majority carries the decision subject to some exceptions (unless the partnership agreement provides otherwise).
Which 3 decisions of a partnership require a unanimous vote?
- Admission of a new partner2. Change in the nature of the partnership business3. Alteration of the partnership agreementOther management decisions are made by a simple majority vote unless the partnership agreement provides otherwise.
Can a majority of partners vote to expel another partner?
- No, unless there is an express agreement to do so has been agreed by all partners (e.g. in the partnership agreement)* Note, it would be difficult to get a partner to vote to expel themselves so the partnership agreement should cover situations when a partner’s behaviour justifies expulsion.
What are the 3 duties of partners in a partnership?
- Fiduciary duty2. Duty to disclose information3. Duty to account for secret profits
What is required from partners under their fiduciary duty?
They must act in good faith and exercise their powers for the benefit of the partnership as a whole. Specifically, the relationship of trust and confidence requires them to:* Render true accounts and provide full information to their fellow partners with regard to anything that might impact the partnership* Account for any profits they make using partnership property or in the name of the partnership* Refrain from competing with the partnership.
What is required of partners under the duty to disclose information?
Disclose information on all things affecting the partnership to any partner or their legal representatives.It is a broad duty: see it, say it, sort it.
What is required of partners under the duty to account for secret profits?
Account for secret profits* Account to the partnership for any profit or benefit * obtained without the consent of the other partners* from any transaction concerning the partnership, or from any use by the partner of the partnership property or the partnership name. This would include any business that came to the partner as a result of their involvement with the partnership (even if it does not interfere with their duties under the partnership)Account for profits of a competing business* If a partner, * without the consent of the other partners, * carries on any business in competition with that of the partnership, * they must account to the partnership for all profits they made in that business.
If a partner used the partnership delivery van to make money delivering packages for another business, what would the partner have to do?
Account for the profits made unless the other partners consent
A, B, and C are partners in an auto repair garage. B’s friend asks B to repair his motorbike. B tells the friend to bring the motorbike to the shop after hours and he will fix it personally. B fixes the motorbike and the friend pays B £500. Can B keep the £500?
No, B must account to the partnership for the £500 unless the partners consent otherwise.
A and B run a successful cake baking partnership. A customer asks B to run cake baking classes as a representative of the business. Can B keep the money paid for the classes?
No, B must account to the partnership for any profits even if it doesn’t interfere with her duties under the partnership agreement
In which 10 ways can a partnership be terminated?
Without court involvement* By expiration* By notice in partnership at will * Bankruptcy, death or charge* By illegalityBy court order* Lack of mental capacity (Mental Capacity Act 2005)* Permanent incapacity* Prejudicial conduct* Wilfil or Persistent breaches of partnership agreement * When business can be carried on only at a loss* Just and equitable basis
Can a partnership exist perpetually?
NoTechnically, if there is a change in the partners, this effectively brings the partnership to an end. Note, the business will often actually continue, but it technically is a new partnership as the membership has changed.
What are the 2 basic types of general partnerships under the Partnership Act 1890?
- Partnerships for a specific term or undertaking2. Partnerships at will
How does a partnership dissolve by expiration?
Subject to the partnership agreement:* If the partnership agreement is for a certain term, it is dissolved upon the expiry of the term. * If it was set up for a specific enterprise, it will be dissolved by the completion or termination of that enterprise. * Example: A partnership to sell drinks at a festival will end when the festival is over* Note: If a partner has paid a premium to another partner upon entering a partnership for a fixed term, and the partnership is dissolved early (except by death), a court may order repayment of the premium or such part the court thinks is just.
How does a partnership dissolve by notice?
Subject to the partnership agreement:* If a partnership was not set up for a fixed term, any partner can give notice to the other partners of their intention to dissolve the partnership. * Dissolution will take place on* the date set out in the notice or, if there is no such date, from the date of the communication of the notice.* If the partnership agreement is not in writing, the notice can be oral* Note, in order to protect other partners against threats of dissolution, the partnership agreement should set out a mechanism for partners to retire instead so the business can continue without them
How does a partnership dissolve by bankruptcy, death or charge?
Subject to the partnership agreement* Death or bankruptcy of any partner will dissolve the partnership. * If a partner charges their share of partnership property for a personal debt, the partnership may be dissolved by the other partners, at their option.
How does a partnership dissolve by illegality?
If an event occurs which makes it unlawful for the partnership business to be carried on or for the partners to carry it on in partnership, the partnership will be dissolved. This cannot be modified by the partnership agreement.Example: Failure by a partner in a law firm to renew a practising certificate would mean that the partnership would be illegal.
Will a partnership dissolve if a partner does not have mental capacity?
Yes, it will be dissolved under the Mental Capacity Act 2005
How is a partnership dissolved for permanent incapacity?
The other partner(s) may apply to a court for dissolution if a partner becomes permanently incapable of performing their part of the partnership contract.
How is a partnership dissolved for prejudicial conduct?
A partner may apply to a court for dissolution if a partner has been guilty of conduct that would prejudicially affect the carrying on of the business, with regard to the nature of the business.Example: partner sets up a business in competition with the partnership/partner obtains a criminal conviction
How is a partnership dissolved for wilful or persistent breach of the partnership agreement?
Partners may apply to a courtfor dissolution if: * a partner wilfully or persistently breaches the partnership agreement, or* otherwise conducts themselves in a way that means it is not reasonably practicable for the other partners to carry on in partnership with them (e.g. wilful or persistent breaches of trust and confidence)
Why is a partnership dissolved if it can be carried on only at a loss?
Because a partnership can only exist if it is carried on with a view of profit.
How is a partnership dissolved for a just and equitable basis?
Court may dissolve a partnership if circumstances have arisen which mean it is just andequitable for the partnership to be dissolved e.g. deadlock situations
What are the 2 effects of dissolution of a partnership?
- Authority, rights and obligations of each partner will continue in order to wind up the partnership and complete unfinished transactions2. Debts will be paid and any remaining partnership property will be distributed
In what order is partnership property distributed upon dissolution?
- Debts are paid first from profits, then capital.* If assets and capital are insufficient to pay debts, partners will be personally liable for shortfall* If debts are cleared, loans made by partners to the partnership will be repaid first* If loans are repaid, contributions will be returned to partners* Any remaining assets will then be divided among partners according to the partnership agreement or in the same proportion as profits
How is a partnership taxed?
Governed by the Income Tax Act 2007. Each year, each individual partner must include in their personal income their share of the profit made by the partnership, whether or not the profit was distributed to the partner (e.g. £120,000 profit, £90,000 distributed, tax owed on share of £120,000). The income will be taxed at the appropriate rate for that partner.
What is an LLP?
A Limited Liability Partnership is essentially a hybrid between a limited company and a general partnership* Members have the benefit of limited liability * Members are still able to constitute their business as a partnership with its associated organisational flexibility LLPs are governed by the Limited Liability Partnerships Act 2000 and associated legislation.Often used by large professional partnerships e.g. solicitors and accountants
What are the 4 requirements to form an LLP?
- Two or more persons * carrying on a business in common* with an intention to make a profit* registration at Companies House for incorporation (with a unique name and company number)Note, an LLP cannot trade until it has received a certificate of incorporation| Formed under provisions of the Limited Liability Partnerships Act 2000
Is a partnership agreement required for an LLP?
No, in the absence of acontractual agreement between the members, LLPs are governed by the provisions of the LLPA. Note, most LLPs will have a partnership agreement in practice.
What is a PSC of an LLP?
A member who: * directly or indirectly has the right to more than 25% (i.e. 25% is insufficient) of the surplus assets on a winding up or * directly or indirectly has more than 25% of the voting rights or * directly or indirectly holds the right to appoint or remove the majority of management* Otherwise has the right to exercise, or actually exercises, significant influence or control over a trust, or the members of a firm that is not a legal person but meets any of the other specified conditions in relation to the LLP.LLPs must keep a register of PSCs.
Which 2 types of documents are required to be submitted to the registrar of Companies House in order to form an LLP?
- A statement that there are at least 2 persons who wish to associate to carry on a business for profit2. Incorporation documentsNote a partnership agreement is not required
What 4 pieces of information are required in the incorporation documents?
- Name of the LLP (must end in LLP or Limited Liability Partnership)* Details of the LLP’s registered office location and address* Names and addresses of the members of the LLP (an LLP is required to have at least two designated members)* Details of people with significant control.Note: An LLP may change its name at any time by delivering a notice of the change to the Registrar of Companies. The change is effective when the Registrar issues a certificate of the name change
What is a registered office address?
The address to which official notices may be sent. This is usually the business address of the LLP or the address of the LLP’s solicitor (often the case)
At what point does an LLP come into existance
When the registrar of Companies House issues a certificate of incorporation being satisfied that the documentation for incorporation has been properly submitted.
Does an LLP have separate legal personality?
Yes. This means that: * members have limited liability* it owns property in its own right* contracts are entered into in the name of the LLP* it can sue and be sued in its own name. * it has perpetual succession (i.e. exists independently of any changes to the member and, therefore, does not cease to exist if a member dies or is made bankrupt, or the like).
How many members are required to form an LLP?
At least two, who are named in the incorporation documents. * Note, if an LLP carries on business without having at least two members for more than six months, the person who carried on the business will be jointly and severally liable with the LLP for the debts of the LLP incurred after the initial six months and while the LLP has only one member.
A, B, and C open an accountancy firm as an LLP. After a year, A and B leave, but C continues to operate the firm as an LLP while looking for new partners. Five months after A and B left, the coffee machine broke, and C caused the LLP to purchase a new one on credit. Eight months after A and B left the LLP, C caused the firm to purchase a photocopier on credit for use in the office. Nine months after A and B left the firm, D and E agreed to join the LLP. Immediately after D and E became members, the LLP purchased new laptops for them on credit. Is C personally liable for any of the purchases?
- C is not personally liable for the cost of the coffee machine because the LLP it had not been operating with only one member for more than six months. * C is personally liable (jointly and severally with the LLP) for the cost of the photocopier because the LLP had been operating with only one member for more than six months when the machine was purchased.* C is not personally liable for the cost of the computers, because when they were purchased, the LLP once again had more than one member.
Can new members be added to an LLP after incorporation?
Yes,new members may be added by unanimous consent of all the current members (unless an LLP agreement provides otherwise). The LLP must notify the Registrar of Companies of changes in membership or in the identity of the designated members within 14 days of the change. Failure to comply with these requirements is an offence.
What is a designated member of an LLP?
General role is to perform the administrative and filing duties of the LLP, including to: * Appoint (and remove) auditors* Submit annual confirmation statements* Sign and file accounts* Comply with statutory filing requirements e.g. filing registration documents and notifying Companies House of changes to the members of the LLP and charges entered into by the LLPNote, If an LLP does not designate any members (there must be at least 2), the law will treat all the members as designated members.
Who has authority to bind an LLP?
Every member of an LLP isan agent of the LLP. Members:* owe a duty of care to the LLP* may bind the LLP in contract* can make the LLP liable in tort if they act with actual or apparent authority. Note, an LLP is not bound by anything done by a member if: * the member has no authority to act and* the person they are dealing with knows that the member has no authority, or does not know or believe that they are a member of the LLP.
What is the key difference between general partnerships and LLPs in terms of actual and ostensible/apparent authority?
The LLP will be bound by acts of actual or ostensible/apparent authority, not the individual members.
How does a member of an LLP cease to be a member?
- Giving reasonable notice to the other members and * Giving notice to the Registrar at Companies House within 14 days. Note, the former member is regarded (in relation to any person dealing with the LLP) as still being a member unless that person has been notified or notice has been sent to the Registrar of Companies.
ABC LLP has four members who all share profits equally and have an equal say in running the LLP. Which members are PSCs?
None would constitute PSCs (because each has exactly a 25% interest rather than morethan a 25% interest). Note: if ABC LLP had three members with the same rights, all the members would be PSCs as they would satisfy either of the first two conditions.
How is capital and profit split between members of an LLP?
Equally if there is no provision to the contrary in the LLP agreement.
Are members of an LLP entitled to remuneration?
No but the LLP agreement may provide for a salary to be paid to certain members
Does an LLP have to indemnify members for anything?
Yes members are entitled to be reimbursed by the LLP in respect of:* payments made and personal liabilities incurred by the member in the conduct of the business of the LLP* anything done for the preservation of the business or property of the LLP
Do members of an LLP have a right to access and inspect books and records of the LLP?
Yes
Who manages an LLP?
- In the absence of an agreement otherwise, every member may take part in the management of the LLP* A majority of members can decide any ‘ordinary’ matters connected with the business of the LLP* Note, unanimous consent is required for any change in the nature of the business.
Do members of an LLP have a duty to account?
Yes:* if a member carries on any business in competition with the LLP without the consent of the LLP, they must account for all profits made by that business. * for any personal benefit they derived without the consent of the LLP from any transaction concerning the LLP, or from their use of the property of the LLP, name, or business connection.
Who is liable for acts of members of an LLP?
The LLP is liable to the same extent as the member who committed the act.Generally, the members of an LLP are not liable for the wrongful acts or omissions of other members committed in the course of the business of the LLP or with the LLP’s authority.
Which documents are LLPs required to file and make public?
Among other things:* Annual accounts* Annual confirmation statement (i.e. a statement confirming or updating information on file with Companies House)* Details of the appointment and removal of members* Details of any changes to the details of the members (e.g. changes in a member’s name or address) * Details of any changes to the registered name or registered office of the LLP
Are members liable for the debts of LLPs?
No the only liability of a member of an LLP is their capitalcontribution. If this is paid up and the LLP agreement does not provide for any further contribution, the member would owe nothing on winding up.
Is there personal liability for a member of an LLP?
Yes.* The rules regarding wrongful and fraudulent trading in the Insolvency Act 1986 apply to members (i.e. it is possible for individuals who acted wrongfully or fraudulently to be held personally liable for the debts of the LLP in the event of insolvency).* Clawback provisions also apply i.e. if a member withdraws property (e.g. share of profits, salary, repayment of or payment of interest on a loan to the LP, or any other withdrawal of property) within the period of two years before the LLP goes into insolvent liquidation, and it is proved that at the time of the withdrawal they knew or had reasonable ground for believing that the LP was unable to pay its debts, or would become unable to pay its debts as a result of the withdrawal, the court may order the member to contribute to the assets of the LLP.
How can an LLP cease to exist?
- Voluntary striking off and dissolution2. Insolvency
What can happen to an LLP in the event of insolvency?
LLP can be:* liquidated (voluntarily or compulsorily)* put into administration * subject of a voluntary arrangement (a composition with its creditors)* A fixed charge receiver or an administrative receiver (i.e. a receiver or manager of the whole, or substantially the whole, of an LLP’s property) may be appointed by certain secured creditors of the LP.* LLP may enter into a moratorium.
In which circumstances may an LLP be struck off?
Subject to certain limitations:By a majority of members applying to the Registrar of Companies and giving notice as required:* If they decide it is no longer needed (e.g. if there is only one member left)* If the LLP is dormant and nontradingBy the Registrar directly if the Registrar:* has reason to believe it is not carrying on business, e.g. because filing requirements have not been complied with or documents sent to the registered office are returned.
Are there any circumstances in which it is not possible to strike off an LLP?
- The LLP has traded or otherwise carried on business in the last three months* The LLP has changed its name in the last three months* The LLP is the subject of any insolvency proceeding.
What are the notice requirements for striking off an LLP?
Members making the application are required to notify: * other members* creditors* any employees* trustee of any pension fund On receipt of an application to strike off, the Registrar of Companies will: * publish notice of the proposed striking off in the London Gazette. This is to allow any interested parties the opportunity to object. * strike off the LLP three months after the date of the notice and the LP will be dissolved.
Who is required to pay tax for an LLP?
- Members of an LLP are taxed individually for income tax and on their share of the gains made on disposal of assets. * For inheritance tax purposes, the members of an LLP are treated the same as partners in a general partnership.* An LLP does not pay corporation tax.
Is stamp duty land tax owed on property transferred to the LLP?
No stamp duty land tax is owed if property is transferred to the LP within one year of the LP’s incorporation if:* Transferred by a person: 1. who is/was a partner in a partnership comprised of the members of the LLP or 2. who holds the property as a bare trustee for a partner in such a partnership; and * The proportional ownership of the property in the LLP remains the same as the proportional ownership of the property in the partnership.
What are the rules regarding the name of private and public companies
- Private: Must end in Limited or Ltd or the Welsh equivalent* Public: Must end in Public Limited Company or Plc or Welsh equivalent
What are the rules regarding registration of private and public companies
- Private: Any company limited by shares registered at Companies House that is not a Plc* Public: Must be registered as a Public Limited Company
What are the rules regarding the liability of owners of private and public companies
- Private: Limited liability* Public: Limited liability
What are the rules regarding directors of private and public companies
- Private: Minimum of one* Public: Minimum of two
What are the rules regarding company secretaries of private and public companies
- Private: Not required* Public: Required and must be suitably qualified
What are the rules regarding the sale of shares of private and public companies
- Private: Sold privately* Public: Can be sold to public and on the stock exchange if a listing is obtained
What are the rules regarding the minimum shareholding of private and public companies
- Private: No statutory requirement* Public: Minimum nominal value of £50,000
What are the rules regarding trading of private and public companies
- Private: No minimum or maximum requirement* Public: Requires a trading certificate to commence trading
What are the rules regarding accounts and audit of private and public companies
- Private: Accounts must be filed within 9 months of the accounting reference date. Certain small companies are exempt from audit* Public: Accounts must be filed within 6 months of the accounting reference date and must be audited.
What are the different types of registered company?
- Limited Company1. Limited by Shares (Private Company/Public Company)2. Limited by Guarantee* Unlimited Company
What are unlimited companies?
- The members are personally liable for all the debts of the company* It has a legal personality separate from its members* It is not obliged to publish its accounts and so enjoys a higher degree of confidentiality than a limited company.* This form of company is rare.
What are the limited companies and what are the 2 most common types?
Liability of owners (called members) in a limited company is restricted. Limited by Guarantee* Requires its members to pay a fixed, guaranteed amount (usually £1) in the event of the company being wound up. * Usually used for not-for-profit organisations, such as charities (no need for large capital contributions for business to run)* No shareholders but the company must have at least one member (or guarantor).Limited by Shares* Members (also called shareholders) do not have personal liability for obligations of the company beyond the amount they agreed to pay for their shares. * If fully paid up, the shareholder has no personal liability to pay any more upon insolvency. * Classified either as private limited companies or public limited companies
Why are companies limited by guarantee not used as trading companies?
Creditors are usually unlikely to provide credit when there may be little chance of recovering the money if the company does not pay.
What is the main difference between a private limited company and a public limited company?
A private limited company is not permitted to issue its shares to the public, they are allowed to be sold only by private agreement.
What is a promotor?
- The person who takes the necessary steps to form a company i.e. arranges for investors and registration (note, no statutory definition).* Promotor owes fiduciary duties (e.g. duty of good faith, must account for profits, declare personal interests), creates the Memorandum of Association and may enter pre-incorporation contracts. * Note, professional advisors e.g. solicitors and accountants are not considered promoters simply because they give advice.
What is a Memorandum of Association?
- A statement authenticated/signed by persons wishing to become members of a company. * It indicates that the subscribers (signers) wish to form the company and agree to become members of the company. * It must be delivered to the Registrar of Companies along with the application for registration.
What are pre-incorporation contracts?
- Contractual arrangements entered into by promotors before a company exists to enable the company to operate once it is registered and a certificate of incorporation is issued. * Because the company is not yet in existence, it cannot be a party to such contracts. Therefore, both common law and the Companies Act 2006 provide that a promoter will be personally liable on pre-incorporation contracts* This liability does not disappear once the company is formed-the promoter remains personally liable even after the company is formed unless different arrangements are made to protect the promotor
What 4 things can a promotor do to protect itself?
- Prepare the contract in draft and do not execute it until the company has been incorporated* Enter a novation agreement after the company is incorporated (i.e. a contract between the the promoter, the company, and the third party under which the parties agree to substitute the company for the promoter, releasing the promoter from personal liability)* After the company is incorporated, enter into a contract with it assigning the benefit of the pre-incorporation contract to the company in exchange for the company’s agreement to indemnify the promoter for any liability to the other contracting party* Use a shelf company to enter the contract
What is a shelf company?
Standard form companies that are pre-incorporated, but have never traded, often set up by solicitors, that the promoter can simply purchase and take over by changing basic details like the members.
What documents must be filed in order to form a company?
- Memorandum of Association2. IN01 (i.e. application for registration)Note, the relevant fee must accompany the documents
What are the 10 requirements of an application for registration of a company?
- Proposed name * Location of the registered office * Details of the company’s business activity and SIC (Standard Industrial Classification) code;* Whether the company will be limited by shares or guarantee* Whether the company is private or public* Details of subscribers* A statement of capital and initial shareholdings* A statement of the proposed officers (directors who may, but need not be members of the company), including their residential address, and the company secetary if applicable* Details of persons with significant control * A statement of compliance with the terms of the Companies Act 2006
What 5 rules apply to the company name?
- Not be the same as, or essentially the same as, the name of an already incorporated company* End in Limited or Ltd or Public Limited Company or Plc (or the Welsh equivalent if registered in Wales), as applicable (Company limited by guarantee is exempt from this rule)* Cannot be a name that is deemed offensive* Approval is required if any connection to Government or local authority is suggested* Approval is required for a name that contains any sensitive words, such as Auditor, Chartered, Law Commission, or Medical Centre.
Can a company change its name?
Yes by special resolution of the members or as provided in the articles. The company must forward a copy of the resolution (or a statement that the change was per the articles) to the Registrar of Companies, give the Registrar notice of the change, and pay a fee.
What is the statement of capital and initial shareholdings that is required in the application for registration?
If the company is limited by shares, the IN01 must include:* Total number of shares to be taken by the subscribers of the Memorandum of Association* The aggregate nominal value of those shares * If the shares are to be divided into classes with varying rights, a description of those classes and rights * The amount that will be paid up by shareholders and any amount left unpaid for the shares.
What is the aggregate nominal value of shares?
- The aggregate amount of the least amount for which each share is to be sold, which often is stated as £1 per share in private companies.* This has nothing to do with what the shares are actually sold for, although it can be more realistic * If the directors approve a sale for less than the stated value, they can be liable for breach of duty
What is a certificate of incorporation?
- A certificate issued by the Registrar once they have inspected the registration documents and are satisfied they are in order* It contains the company’s unique registration number. * It is essentially the birth certificate of the company, and it is from the date stated on this certificate that the company becomes a legal entity and can legally commence trading with the protection of limited liability.
When can a company legally commence trading?
From the date on the certificate of incorporation.
What is a company number used for?
Identifying the company. It should be used on any documentation or contracts relevant to the company in future as other details e.g. name, directors etc. may change over time.
What is the constitution of a company?
- Its articles of association plus any resolutions or agreements adopted by the members to amend its articles of association. * All companies must have articles which regulate the internal affairs of the company and create a contract between the company and the members.* The Secretary of State has prescribed model sets of articles for the various types of companies. The model articles apply automatically if a company has not drafted and submitted amended/bespoke articles to Companies House.
Do articles of association need to be submitted with an application to register a company?
No, if they are not submitted, the model articles will apply.
What are variations to the model articles called?
Special articles* They must be filed at Companies House and are available to the public. * Special articles govern and should always be checked. * Most provisions of the model articles can be changed but they can’t be changed in a way that violates the Companies Act.
What are the 7 main provisions covered by Articles of Association?
- Directors’ meetings and decision making* Appointment and removal of directors* Share capital (including issuing, allotting, and transferring shares)* Rights attached to shares, including voting and dividends* Shareholder meetings (including, for example, notice and quorum requirements).* Power to borrow * Powers and duties of directors
What are the objects of a company?
The articles of association can restrict the objectives of the company (e.g. “The object of this Company is to operate restaurants”).Restricted Objects* Directors have a duty to adhere to restrictions in the articles. * If they do not, they breach their duty and may be subject to an injunction or an equitable action by the company for any damage caused. * However, the company action that was beyond the scope of what was authorised is nevertheless valid.Unrestricted Objects* If there are no restrictions, the company is free to carry on commercial activity of any kind. * The model articles do not include any restriction so most newly formed companies are unrestricted.
What is the legal effect of Articles of Association?
- The articles form a contract between the company and each of the shareholders, and the shareholders with each other. * Articles bind all shareholders whether or not they sign them* The right of shareholders to enforce provisions of the articles relates to their membership rights only (e.g. to enforce dividend or voting rights against the company). A shareholder is unable to enforce the articles acting in any other capacity, e.g. as a director of the company.Example: A director (who is also a member) has a dispute with the company in its capacity as director. Articles require all disputes to to be arbitrated before court. As the dispute was in the director’s capacity as director, they can go straight to court.
Articles of Association state that an individual (who was also a member) would always be employed as a solicitor for the company. Is this provision enforceable?
No. The member in this question would be attempting to enforce a personal employment right, rather than his rights as a member of the company.
What is a Shareholders’ Agreement?
Shareholders may wish to enter into a contract to regulate their affairs in addition to the articles known as a shareholders’ agreement. This is a private contractual agreement which binds only those members who sign it. Note, despite the name, other parties may enter this agreement e.g. directors or the company itself. Example:* They may agree that the company’s constitution cannot be changed without unanimous consent (Articles are not permitted to contain this provision, under the Companies Act a special resolution is required and this rule can’t be amended)* They may agree none of them will compete with the company* They may agree not to vote to remove one or more parties to the agreement as a director of the company.
Can third parties obtain the benefit of Articles of Association?
No. Articles of Association arespecifically excluded from the provisions of the Contracts (Rights of Third Parties) Act 1999.This Act enables third parties to obtain the benefit of contracts to which they are not a party and enforce the terms of such a contract, provided they are specifically identified in the contract.
Can Articles of Association be amended?
- Yes by special resolution (more than 75% of the members) if not entrenched. Entrenched articles may be amended by following the prescribed process in the articles. * Alterations must be in the best interests of the company (can be set aside by court if not).* Note, an alteration cannot require a shareholder to increase their liability to the company i.e. force a shareholder to subscribe for more shares
What does entrenchment of articles mean?
Entrenched articles require a more onerous process for alteration than those required for a special resolution (e.g. approval by all members). * Provision for entrenchment may be made in the company’s articles on formation or by a special resolution of the members* The company must give notice to the Registrar that its articles include such a restriction.* The articles may be revised if a special resolution of the members is passed so entrenched articles cannot be drafted to attempt to prevent amendment.
Can an alteration to the Articles of Association be challenged by shareholders?
- Generally, the shareholders make this determination.* If the shareholders make an alteration that no reasonable person would consider to be for the benefit of the company, a shareholder who did not vote in favour of the alteration can challenge it by making an application to court. * If the court agrees, it can set the alteration aside. * In making its determination, the court will need to decide whether the alteration was bona fide (i.e. genuinely/legitimately and in good faith) made in the best interests of the company as a whole.* An alternation adversely affecting minority shareholders is not sufficient grounds for objection if it is made in good faith in the interests of the company
Can alterations adversely affecting minority interests be made to Articles of Association?
The fact 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. Note, an alteration cannot be in the interests of the company as a whole if it discriminates against some members rather than others, so the courts will consider whether the benefit derived from the alteration is one that any individual hypothetical member could enjoy.
A company alters its articles to require the compulsory purchase of the shares of any member carrying out a competing business with the company. Could the court set this alteration aside?
No, the alteration is bona fide in the best interests of the company as a whole.
A company alters its articles to enable a compulsory purchase of the shares of minority shareholders who were refusing to inject further capital into the company. Could the court set this alteration aside?
Yes. This alteration was for the benefit of the majority shareholders rather than the company as a whole, because it would have been possible for the majority shareholders to remove the minority and then refuse to provide the capital.
What are the 6 things a company can do because of separate legal personality?
- Own property in its own name* Enter into contracts in its own name* Can borrow money and grant security in its own name* Is taxed separately from its members* Can sue (and be sued) in its own name* Has perpetual succession.
In which 3 situations might the shareholders and directors of a company be held personally liable for the debts of a company?
- Forming a company for fraudulent purposes/to avoid an existing obligation e.g. a non-solicitation clause2. Fraudulent and wrongful trading3. PLC trading without a Trading Certificate
What is fraudulent and wrongful trading?
If a director causes the company to trade while knowing the company is insolvent, the director may be charged with the civil offence of wrongful trading or the criminal offence of fraudulent trading and incur personal fines and other penalties
What happens if a public company trades without a Trading Certificate?
Directors of the PLC can be held personally liable for any losses arising as a result.
What is the purpose of group consolidated accounts?
To recognise the common link between groups of companies. Note, even where group accounts are required, the subsidiary companies are not liable for the debts of the other subsidiaries or parent company, nor is the parent company liable for the debts of the subsidiaries.
