Business Law & Practice Flashcards
List the 5 main business mediums?
1) Sole traders.
2) General Partnerships.
3) Limited Liability Partnerships.
4) Private Limited Companies.
5) Public Limited Companies.
Define what is meant by separate legal personality?
The people who own and run the company are separate from the company itself.
N.B. If someone wishes to sue a company, the defendant will be the company itself, rather than the individuals who own and run it.
Following Prest v Petrodel, in what situations may the corporate veil (looking behind the company and interposing liability on the individuals who own/run it) be pierced?
When a person under an existing legal obligation or liability is subject to an existing legal restriction which he deliberately evades by interposing a company under his control.
Define what is meant by limited liability?
The business owner or owners are only responsible for business debts up to the value of their financial investment in the business.
N.B. This means shareholders in Private/Public Companies have limited liability on the amount paid on their shares (good for innovation/growth).
Which of the 5 business mediums have separate legal personality?
- Limited Liability Partnerships.
- Private Limited Companies.
- Public Limited Companies.
What is the liability for Sole Traders and General Partnerships?
Unlimited (owners are solely or partners are jointly liable).
Who and how many owners are required in each of the 5 business mediums?
1) Sole traders - 1.
2) General Partnerships - Minimum of 2.
3) Limited Liability Partnerships - Minimum of 2 members.
4) Private Limited Companies - Minimum of 1 shareholder (up to 50).
5) Public Limited Companies - Minimum of 2 shareholders (no maximum).
Who and how many managers are required in each of the 5 business mediums?
- Sole Traders.
- Partners.
- Limited Liability Partnerships - must be 2 assigned ‘designated members’.
- Private Limited Companies - minimum 1 Director.
- Public Limited Companies - minimum 2 Directors.
Which of the 5 business mediums requires a qualified Company Secretary?
Public Limited Companies.
How are decisions made in each of the 5 business mediums?
1) Sole traders - on his own.
2) General Partnerships - majority decision of Partners (under Act).
3) Limited Liability Partnerships - majority decision of members.
4) Private Limited Companies - majority decision of directors at Board Meeting.
5) Public Limited Companies - majority decision of directors.
What decisions in General Partnerships require unanimous agreement?
- Changing the name of your agreement.
- Changing the nature of your business.
- Introducing a new partner to your business.
Which of the 5 business mediums have their accounts prepared and audited?
- Limited Liability Partnerships
- Private Limited Companies
- Public Limited Companies (accounts must be audited by a registered auditor, filed at CH and disclosed to shareholders).
- N.B. Auditing of Limited Liability Partnerships and Private Limited Companies accounts generally depends on thresholds e.g. turnover, assets.
How can each of the 5 business mediums be terminated?
- Sole traders - owner can terminate at any time.
- General Partnerships - Partners can dissolve by agreement.
- Limited Liability Partnerships - formal CH winding up process.
- Private Limited Companies - formal CH winding up process.
- Public Limited Companies - formal CH winding up process.
What type of security can each of the 5 business mediums grant?
- Sole traders - personal assets at risk; can grant fixed security.
- General Partnerships - fixed.
- Limited Liability Partnerships - fixed and floating.
- Private Limited Companies - fixed and floating.
- Public Limited Companies - fixed and floating.
What incorporation formalities are required for Limited Liability Partnerships and Private Limited Companies?
Registration with Companies House;
- Fee
- Memorandum of association
- IN01 form
- AoA only if model articles are adopted.
What is the extra incorporation formality requirement for Public Limited Companies?
£50,000 minimum allotted share capital (to facilitate stock exchange trading).
What type of tax do each of the 5 business mediums pay?
- Sole traders - income (file own tax).
- General Partnerships - income tax.
- Limited Liability Partnerships - income tax on profits of LLP.
- Private/Public Limited Companies - corporation tax.
What Constitution governs the 5 business mediums?
- Sole traders (N/A).
- General Partnerships - Partnership Agreement or 1890 Partnership Act in absence of one.
- Limited Liability Partnerships - LLP agreement.
- Private/Public Limited Companies - AoA.
What information is required on an IN01 form?
- Company name
- Registered office
- Directors details
- Shareholders details
- Statement of capital outlining number of shares, rights attached to them, total share capital.
What are Articles of Association?
The company’s rulebook, covering issues such as board meeting notice periods, director appointments, and restrictions on shareholder registration.
What is meant by a memorandum of association?
Streamlined under CA2006 and now includes a statement of intent from subscribers to form a company and take at least one share each.
It must be signed by the subscribers.
What do Model Articles of Association provide?
A standard set of rules for companies, applicable by default unless bespoke articles are submitted.
N.B. Useful for people who want to set up a company but lack knowledge on what to include in the Company’s Articles.
What 3 options are available to those starting a company when it comes to submitting the company’s proposed articles?
1) Adopt the Model Articles in their entirety. If chosen, no need to file a copy of the Model Articles, just tick box on IN01 form to indicate that Model Articles will apply.
2) Adopt the Model Articles with some amendments.
3) Supply entirely bespoke articles.
What Articles will Companies incorporated prior to and after 2009 onwards (when CA came into force)?
- Companies incorporated from 2009 onwards will usually have Model Articles or amended form as their articles.
- Companies incorporated before 2009 will still be governed by the Act.
- Companies may still have Table A Articles if they have not modernised.
How can a Company’s Articles of Association be amended?
By shareholders passing a special resolution, requiring a 75% majority.
Any amendments to the Articles must be filed within 15 days at Companies House, along with special resolution.
When is a person deemed to hold significant control in a Company?
If the person;
- Holds > 25% of the shares in the Company, or
- Holds > 25% of the voting rights in the Company, or
- Holds the right to remove or appoint a majority of the Board of directors of the company.
N.B. Applicant must tick relevant box on IN01 form.
What are the thresholds for a person with significant control?
- > 25% but not more than 50% of the Company’s shares/voting rights (can block special resolutions on their own, and may be able to block ordinary resolutions if they have exactly 50% of shares).
- > 50% but < 75% of the Company’s shares/voting rights (can block and pass ordinary resolutions, but cannot pass special resolutions on their own if < 75%).
- 75% or more (can also pass special resolutions on their own).
How can a private company convert to a public company?
By passing a special resolution, changing its name to include ‘plc’ and altering its articles to suit a public company structure.
At the time of the resolution, the company must meet the share capital requirements necessary for public companies.
What does Companies House issue when requirements are met to convert to a public company?
A certificate of incorporation to confirm the company’s status as a public company and the revised articles and name change take effect on issue of the certificate.
What are shelf companies?
A company that has already been set up to be used as and when a client needs a company forming quickly e.g. midway through a transaction.
What post-incorporation steps are required following incorporation or conversion of a shelf company?
Need to get the company in a position to start operating; likely to have a Board meeting to decide on the following;
- Appointment of a Chairperson who will have casting vote in event of a tie.
- Opening a bank account.
- Use of a Company seal (optional) to execute official documents.
- Changing the Company name.
- Appointment of an auditor (if required).
- Setting the accounting reference date.
- Review and approve service contracts for directors, including any exceeding 2 years that require shareholder approval.
When does a partnership begin?
PA1890 (s1); when 2 or more persons are carrying on a business in common with a view of profit.
N.B. Can arise without formality and without partners knowing.
What are Partnerships governed by?
The PA 1890; however partners will often agree specific terms to override the provisions of the outdated Statute.
Does any agreement between the parties need to be written?
No; oral agreement just as valid, as is an agreement implied by conduct, in circumstances where a partner has acted in a certain way over a period of time and the other partners have not objected.
What is important when solicitors are instructed to draft a partnership agreement?
They ensure that it fully reflects the client’s wishes and needs; impossible to do without knowing which terms will be implied into the contract by default.
List some clauses solicitors should consider including in a partnership agreement for a client?
- Name.
- Place and nature of business.
- Commencement and duration.
- Work input.
- Roles.
- Decision-making.
- Financial input.
- Shares in income and capital profits and losses.
- Drawings and salaries.
- Ownership of assets.
- Expulsion.
- Dissolution.
- Goodwill.
- Distribution of proceeds of sale.
- Restraint of trade.
- Dispute resolution.
Are there any restrictions on the name of a partnership?
Must not;
– Include ‘limited’, ‘Ltd’, ‘LLP’ etc.
– Be offensive.
– Be the same as an existing trademark.
– Contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, without permission.
What should be set out under ‘work input’ in a partnership agreement?
Each partner’s working hours, or state that each must work full-time in the business, as under PA 1890, partners may take part in the management of the business, but are not required to do so.
N.B. Common clause = a partner must devote the whole of their time and attention to the business.
Also include holiday entitlement, sickness and maternity and paternity provisions as there is no default position on these matters in PA 1890.
What should be set out under ‘roles’ in a partnership agreement?
Full scope of their duties and responsibilities, with restrictions on what partners are allowed to do.
N.B. If a partner breaches a restriction setting out the scope of their authority, will be in breach of the partnership agreement and could be a reason for expulsion.
How are decisions made under PA 1890?
By majority.
What are the 3 exceptions to the default position under PA 1890 that all decisions must be made by majority?
1) Changing the nature of the business.
2) Introducing a new partner.
3) Changing the terms of the partnership agreement.
All can only be made unanimously.
What may partners decide to set out under ‘decision-making’ in a partnership agreement?
More types of decision which can only be taken by unanimous agreement but weigh up possibility of deadlocks.
What should be set out under ‘financial input’ in a partnership agreement?
The amount of the partners’ initial capital contributions and whether they will be obliged to contribute more capital in the future.
How are shares in income and capital profits and losses divided under PA 1890?
Equally.
N.B. Any clause in partnership agreement setting out that the partners share capital in unequal proportions will vary the default position.
N.B. Also state in partnership agreement the proportions in which income profits are to be shared (e.g. may be based on working hours).
What should be set out under ‘drawings and salaries’ in a partnership agreement?
How much each partner is allowed to ‘draw down’ in any given period, usually a month.
What is the default position RE expulsion under PA 1890?
No majority of partners may expel another partner unless the partners have expressly agreed to this.
Partnership agreements will therefore often contain an expulsion clause, allowing the partners to expel one of their number if they have conducted themselves in a certain way.
What is the default position RE dissolution under PA 1890?
Any partner may end the partnership at any time by giving notice of their intention to do so to all of the other partners.
Important that partnership agreements stipulate a notice period (often not in year 1 trading) and/or circumstances causing partnership to end.
Under PA 1890, when is a partnership dissolved?
When a partner retires.
On expiry of a fixed term.
By the death or bankruptcy of any of the partners.
If the partners give notice of dissolution to a partner who (by order of the court) granted a charge over their share of the partnership property, for a debt owed by them alone and not the partnership as a whole.
N.B. A partnership agreement can disapply the above.
What is the effect of automatic dissolution?
Unless the partners all agree otherwise, the partnership must end, all the assets must be sold and outgoing partner has to receive their share.
N.B. An outgoing partner can insist on the business being sold so the other partners do not necessarily have the option of continuing in business and just paying the outgoing partner for their share.
What must be included in partnership agreements to prevent automatic dissolution?
In the event that a partner leaves, the remaining partners will continue in partnership (partial dissolution).
Specific provisions as to whether other partners must buy the outgoing partner’s share or merely have option to do so, how the share should be valued and when it should be paid (instalments best).
What is to happen where the partnership agreement does not address the issue of payment for the outgoing partner’s share?
The outgoing partner is entitled to either interest at a rate of 5% per annum on the value of their partnership share until they receive their share from the other partners, or such sum as the court may order representing the share of profits made which is attributable to the use of their share.
What should be set out under ‘goodwill’ in a partnership agreement?
Part of the purchase price will be for the business’s goodwill (reputation and value of clients/contacts).
Value of goodwill usually taken as 2 years profit.
How are the proceeds of sale of the business or its assets applied under PA 1890 (unless parties have decided otherwise by agreement)?
First, creditors of the firm are paid in full, with any shortfall balance paid by partners from their private assets.
Second, partners who have lent money to the firm must be repaid the amount outstanding on the loan, including interest.
Third, partners must be paid the share of the partnership’s capital to which they are entitled.
Last, any surplus is shared between the partners in accordance with partnership agreement terms.
What should be set out under ‘restraint of trade’ in a partnership agreement?
A restraint of trade clause which seeks to restrict outgoing partners in their business dealings once they have left the partnership.
A restraint of trade clause will only be enforceable if it protects a legitimate business interest (e.g. business contacts, confidential information) and is no wider than is reasonable to protect that interest, in terms of duration, geographical area, and scope.
N.B. Restraint of trade clauses cover non-compete, non-solicitation, and non-dealing clauses.
What should be set out under ‘dispute resolution’ in a partnership agreement?
Provision for arbitration or another form of ADR, rather than court process.
What specific common law duties do partners owe towards one another under PA 1890?
A duty of the utmost fairness and good faith.
Partners;
- Must be completely open with one another regarding any relevant information regarding the partnership.
- Must account to the firm for any private profits they have earned without the other partners’ consent from any transaction concerning the partnership.
- Must not compete with the firm. If done without other partners’ consent, that partner must account for and pay over to the firm all profits made by them in that competing business.
Who can make contracts and who is liable in a Partnership?
All of the partners acting together (e.g. all sign a lease of business premises) or by just one partner.
N.B. If a partnership is bound, creditor has right to sue one or all of the partners for the entire amount.
How can the firm be bound by any contract or deed entered into by partners in the firm’s name?
Provided that the partner’s actions were authorised by the partners. May be authorised in the following ways;
– Partners may have acted jointly in making the contract.
– Express actual authority (partner has permission to enter into a particular transaction or type of transaction/contract on behalf of the firm).
– Implied actual authority (partners may have impliedly accepted that 1 or more partners have the authority to represent the firm in a particular type of transaction; often through regular course of dealings to which the other partners have not objected).
When will the firm be liable to 3rd parties under PA 1890 for apparent authority?
Mix of subjective and objective elements;
1) The transaction is one which relates to business of the kind carried on by the firm.
2) The transaction is one for which a partner in such a firm would usually be expected to have the authority to act.
3) The other party to the transaction did not know that the partner did not have authority to act.
4) The other party deals with a person whom they know or believe to be a partner.
What is the personal and 3rd party liability when a partner acts with apparent authority?
Firm is liable to 3rd party under contract.
Partner is liable to indemnify their fellow partners for any liability or loss which they incur, because the partner has breached their agreement with their partners by acting without actual authority.
Why are law firms happy to assume the risk of being run as partnerships?
As the main source of potential liability for solicitors is professional negligence claims; these are usually covered by professional indemnity insurance.
Explain what novation agreements are?
A retiring partner will be released from an existing debt, by entering into a contract with the creditor and the other partners, and possibly an incoming partner.
The creditor will release the original partners from their liability under the contract and the firm as newly constituted (new partner) will instead take it on.
What happens in the absence of a novation agreement for a debt incurred before the partner retired?
The partner is liable for the debt but may be able to claim an indemnity from the other partners.
What debts does a partner remain liable for after leaving the partnership?
Those debts incurred while they were a partner (unless novation agreement exists to release them).
How can a partner escape liability for debts entered into after they had left the partnership?
By complying with s36 PA 1890 requirements;
– Anyone who the firm has dealt with before must be given actual notice (informed directly) of the partner in question leaving.
– Anyone who the firm has not dealt with before must be notified by placing a notice in the London Gazette; ‘notice to the whole world’.
N.B. If the reason for ceasing to be a partner is death or bankruptcy (not retirement or expulsion), no notice of the event is required. The estate of the deceased/bankrupt will not be liable.
Explain ‘holding out’?
When a creditor of a partnership has relied on a representation that a particular person was a partner in the firm, they may be able to hold that person liable for the firm’s debt, even if that person had never been a partner or had retired before the contract was made.
Holding out may be oral e.g. person described as a partner in conversation, in writing e.g. leaving partner’s name online/website or by conduct e.g. person representing the firm in a previous course of dealings.
Can holding out be made by another person?
Yes (provided it is made with the person’s knowledge).
List the range of possible defendants for a person to sue when seeking to enforce a liability of the firm?
The claimant can sue the partner(s) with whom they made the contract due to privity of contract between them.
The claimant can sue anyone who was a partner when the debt was incurred and that partner can then claim an indemnity from their partners to share liability between them.
The claimant can sue the firm (all partners) in the firm’s name and anyone who was a partner at the time the debt was incurred is jointly liable to satisfy the judgment.
N.B. Best option = sue all of the partners in a firm instead of just one partner. The judgment can then be enforced against the partnership assets and also against the partners’ personal assets if necessary.
What will a partner usually do when leaving the partnership in relation to liability and debts?
Leave in the partnership bank account a sum of money to pay their share of any outstanding debts.
What happens if a partner cannot pay a judgment debt owed to a 3rd party?
The 3rd party can enforce the debt in the usual way; obtaining a charge over the partner’s property(s), and applying for an order of sale of those properties in order to satisfy the outstanding debt.
Alternatively, the 3rd party may seize assets belonging to the partner.
How can limited liability partnerships (LLPs) be best summarised?
As a hybrid between a company and partnership, offering advantage of both limited liability for the LLPs debts and fewer administrative requirements than a Company.
List some of the legal requirements for a limited liability partnership?
- Must have at least 2 members on incorporation, and 2 designated members responsible for filing documents at Companies House.
- The original 2 designated members will usually be the subscribers to the incorporation document, but can cease to be designated members at a later date if members decide this.
- Incorporated by filing form LL IN01 at Companies House, along with applicable fee (they then issue a certificate of registration).
- LLP name must end LLP, with similar restrictions applying as do to Companies.
- Name can be changed at any time with consent of all the members.
- Must have a registered office, which is its address for service of official documents.
What are designated members responsible for?
- Signing and filing the annual accounts with the Registrar.
- Appointing, removing and remunerating the auditors.
- Filing the annual confirmation statement.
- Sending notices to the Registrar of Companies, e.g. concerning a member leaving or joining the LLP.
- Winding up the LLP.
Do designated members owe a duty of reasonable care and skill to the LLP?
Yes.
List the common default rules (very similar to PA 1890) as found in the LLP Agreement as governed by LLP Regulations 2001 focusing on capital and profits and management and decision-making?
Capital and profits - members of the LLP share equally.
Management and decision-making - ordinary matters can be decided by a majority of the members; changing the nature of the business and changing the terms of the contract can only be done by unanimous consent.
What is the process for changes in membership of an LLP (e.g. new members)?
Notice to be sent to Companies House within 14 days for both, using appropriate forms (LL AP01/02 + LL TM01).
How can members leave the LLP?
By giving reasonable notice to the other members; cannot be expelled unless members agree on a right of expulsion to be included in the LLP agreement.
When a member leaves an LLP, the LLP must notify Companies House on form LL TM01 within 14 days of the member leaving.
What duties to members owe to the LLP?
Fiduciary duties as its agents; includes a duty of good faith, duty to account for any money received on behalf of the LLP and a duty to the other members to render true accounts and full information on matters concerning the LLP.
List some advantages of an LLP?
- Members have limited liability for the debts of the LLP.
- Members are able to grant fixed and floating charges over their assets, unlike general partnerships.
- Leeway with regard to management structure; can decide how they wish to structure their organisation.
List some disadvantages of an LLP?
- Administrative and accounting requirements; must file accounts with Registrar of Companies and other information such as notice of termination of membership with Companies House; these are then available for public inspection.
- Subject to potential clawback provisions on insolvency.
