Business Law - Unit 1

Question 1

What is an incorporated business?

Answer 1

Incorporated business = separate legal entity from owners and managers.

Have to comply with various legal requirements to incorporate a business.

Owners are generally not liable for business debts.

Examples: limited company.

Question 2

What are unincorporated businesses?

Answer 2

Businesses run by individuals who have NOT set up a separate legal entity and who have full personal liability for the debts of the business.

Question 3

What is a sole trader?

Answer 3

• Unincorporated
• Runs the business on their own as a self-employed person.
• May have one or more employees but the sole trader is the person who owns the business.
• They pay income tax as a self-employed person.
• Sole trader is personally liable for all of the debts of the business - unlimited liability (no limit to the sole trader’s liability).
• When the sole trader retires or dies, the business ceases, though the individual assets or even the business itself can be sold if a buyer can be found.

Question 4

What is a partnership/general partnership?

Answer 4

• When two or more people run and own a business together.
• Governed by the Partnership Act (PA 1890).
• Partnership is formed when 2 or more people are ‘carrying on a business in common with a view of profit’ - may be in a partnership even if they’re unaware of it.
• Unincorporated business.
• PA 1890 provides a default partnership agreement for the partners but they can decide to enter into an agreement which disapplies some of the provisions. If not, PA 1890 provisions will be implied.
• Not a separate legal entity.
• Partnership assets are NOT OWNED by the partnership - rather owned by the partners themselves.
• Partners are personally liable for all the debts owed by the partnership.
• Partners divide the profits/losses of the business between themselves.
• Partners pay income tax on their share of the profits of the partnership (if they are individuals).
• ‘Sleeping partners’ are not involved in the day to day matters but rather make fundamental decisions about the business.

Question 5

What is a limited partnership?

Answer 5

• Must be at least one general partner who has UNLIMITED LIABILITY for the partnership debts.
• However, they can also have a limited partner whose liability is limited to the amount they initially invested. However this limited partner MUST NOT:
  control or manage the LP
  have the power to take binding
  decisions on behalf of the LP
  remove their contribution to the LP for
  as long as it’s in business.

If they do breach one of the above, they will LOSE the protection of limited liability and be treated as a general partner with unlimited liability.

LPs must be registered with the Registrar of Companies before they can start trading.

Question 6

What are companies?

Answer 6

• Can be private or public and can be limited by shares or guarantee.

Question 7

What are private companies limited by shares?

Answer 7

• A company in the UK is formed by registering certain documents with the Registrar of Companies in accordance with the Companies Act 2006.
• Company has a separate legal personality - if someone wishes to sue the company, the company will be the defendant.
• Individuals who own shares in the company will not usually be liable for its debts - their liability is limited to the amount they paid/agreed to pay for their shares.
• Saloman v Saloman confirmed that using a company to manage risk and avoid liability for debts is acceptable - didn’t pierce the corporate veil.
• Directors of the company run the company day-to-day. Shareholders are the individuals who provide money (in return for shares) which allow the company to operate.
• Even though directors/shareholders can be the same people, when they’re doing either duty, they have to think solely like a director or shareholder.
• Shareholders only tend to get involved in the more important decisions affecting the company.

Question 8

What is a public company limited by shares?

Answer 8

This is a company limited by shares which has complied with the requirements of the CA 2006 to enable it to be registered as a plc.

For this to happen:
1) The constitution must state it is a PUBLIC COMPANY
2) The words ‘public limited company’ or ‘plc’ has to be included at the end of the company name
3) The company’s owners must invest a specified minimum amount of money for use by the company - currently £50,000. Each allotted share must also be paid up to at least a quarter of its nominal value, plus the whole of any premium on it.

Question 9

What are the advantages to operating as a public limited company?

Answer 9

1) More prestigious

2) Can raise money by offering shares to the public - unlike private companies.

3) Can apply to join the stock market (though this can only happen if the business reaches a certain size).

Question 10

What are the advantages to a private limited company?

Answer 10

1) Subject to less regulation as compared to public companies

2) Though they can’t get the public to buy their shares, they can either raise finance from people who already know the company or specialist investors who understand the risks involved.

Question 11

How can a company become a public company?

Answer 11

They can either register as a public company on original incorporation OR

they can register as a private company and then re-register as a public company.

Question 12

What is a limited liability partnership?

Answer 12

Formed under the Limited Liability Partnerships Act 2000.

Cross between a partnership and a company.

Like a company, it has a separate legal personality. Also offers protection from liability for the LLP’s debts.

However, has the flexibility and informality given by a partnership. Partners are also taxed as if the business were a partnership not a company.

LLPs can be formed by 2 or more members carrying on a lawful business with a view of profit.

But formed by filing docs with the Registrar of Companies at Companies House and paying the applicable fee. Then a certificate of incorporation is issued - NOTE: The LLP legally comes into existence on the date of incorporation on the certificate.

LLP Regulations 2001 provides a default contract for partners.

Individual members of the LLP must register with HMRC as self-employed.

Question 13

What are some other types of business mediums?

Answer 13

1) Companies limited by guarantee - usually used for organisations that are not seeking to make a profit. Instead of buying shares, the shareholders guarantee the company’s debts up to a specified amount, usually £1.

2) Unlimited companies.

3) Community interest companies - form of limited liability company intended for businesses that wish to use their profits and assets for the public good and not private profit.

4) Charitable incorporated organisations - have a corporate structure but do not have the burden of dual regulation.

5) Overseas companies

6) Companies established by Act of Parliament or by Royal Charter

7) Joint ventures - commercial enterprise undertaken jointly by two or more parties. Pool their resources together for a specific purpose.

Question 14

What type of business is best for limited liability?

Answer 14

Companies and LLPs.

However, important to remember the nature of the business - can take out insurance for risks e.g. professional negligence so not a massive issue.

Question 15

What type of business is best for formalities?

Answer 15

Sole traders & partnerships - lack of formalities

LLPs & companies - require formalities.

Companies have the most formalities: having to complete minutes of meetings, maintain certain statutory registers and file certain documents with Companies House. Also subject to the strict requirements of the CA 2006.

Question 16

What type of business is best for publicity of information?

Answer 16

Sole traders and partnerships have to disclose the identity of the sole traders/partners & an address for service of documents - but that’s all.

Companies and LLPs must reveal certain info including financial information to the public at large. Must make public info regarding directors, shareholders and many of the significant decisions it has made by filing documents with the Registrar of Companies.

Question 17

What type of business is best for cost?

Answer 17

Sole traders & partnerships can be set up without any legal or administrative cost as these businesses trade straight away.

However, to form a company or an LLP, there is a charge. Additionally, these will also cost more to run from an administrative point of view due to the extra legal and administrative burdens placed on them.

Question 18

What type of business is best for status?

Answer 18

Company is the most well known medium for large, successful businesses.

Also might be more reassuring since there is more publicly available info.

Question 19

What type of business is best for finance?

Answer 19

Both companies and LLPs can offer additional forms of security for loans, the floating charge. More desirable for lenders such as banks.

This is a charge over all of the business’ assets and is not available to partnerships or sole traders.

Question 20

How do you incorporate a new company?

Answer 20

Companies House form IN01 + memorandum of association + (articles of association if using bespoke articles) + fee. This should be sent to Companies House, either electronically or on paper.

In return, Companies House will incorporate the company & issue a certificate of incorporation.

Question 21

When will the company become incorporated?

Answer 21

The company comes into existence upon the certificate of incorporation being issued.

Question 22

What must the certificate of incorporation state?

Answer 22

• The name and registered number of the company
• Date of incorporation
• Whether it is a limited/unlimited company and if limited, whether it is limited by shares or guarantee
• whether it is a private or public company
• Whether the company’s registered office is situated in England and Wales, or in Scotland or in Northern Ireland.

Question 23

What happens to the certificate?

Answer 23

Needs to be signed by the Registrar or authenticated by the Registrar’s official seal (shows that the requirements of CA 2006 have been complied with).

Question 24

What type of tax must companies register for and how is this done?

Answer 24

Must register for corporation tax.

If done by online application, this will be done automatically.

If by post/third party software, the applicant will have to make a SEPARATE APPLICATION to HMRC within 3 months of starting to do business.

Question 25

What are some requirements to do with names of the company?

Answer 25

If private company, must have end in Limited or Ltd/cyf or cyfyngedig for Wales.

If public company, must end in plc or public limited company/ccc for Wales.

Can’t be the same as the existing name - whether identical or ‘considered to be the same’ as another company.

Applicant can only register the same name if the proposed new company will be part of the same group as the company or LLP with the existing name and the applicant has written confirmation that the company/LLP has no objection to the applicant using the same name.

Question 26

What are examples of prohibited/restricted company names?

Answer 26

• Can’t use a name that, in the opinion of the Secretary of State, would constitute a criminal offence or be offensive
• The approval of the Secretary of State is needed to register a company which suggests connection with a govt department or authority
• Certain sensitive words or expressions must be approved by the SoS before they can be used e.g. ‘British’, ‘dental’ ‘university’
• Certain letters, characters, signs, symbols and punctuation can’t be used
• Name of the company can’t exceed 160 characters including spaces

Question 27

Under ECCTA 2023, Companies House can now reject an application to register a name where it believes…

Answer 27

1) It’s intended to facilitate fraud

2) Comprises of/contains a computer code

3) Is likely to give the false impression that the company is connected to a foreign government or international organisation whose members include 2 or more countries/territories

Question 28

What is the time limit within which companies MUST change their name if told to do so by Companies House?

What happens if they don’t?

Answer 28

28 days timelimit.

Companies House can choose a new name or suppress a name from the register.

It is an offence if a company doesn’t respond to a direction to change their company name within 28 days.

Question 29

Can companies use a different trading name from their registered name?

Answer 29

Yes.

Question 30

What are the risks of using a company or trading name that is too similar to another company’s trademark/name?

Answer 30

If the company’s name is too similar to another company’s trademark, can get sued for trademark infringement.

If a company’s name is too similar to another company’s name (not trademarked), they can take action against the client in the tort of passing off - benefiting from its good reputation by registering a similar name.

Question 31

What about the registered office of a company?

Answer 31

Needs a registered office and must insert this address onto the IN01.

This is the address to which any correspondence from Companies House will be sent and any official documents e.g. court documents.

Registered office address is publicly available and can’t be kept private.

Must be in the same part of the UK in which the company is registered.

Must be an appropriate address - ECCTA 2023 - meaning documents delivered there would BE EXPECTED to come to the attention of a person acting on company’s behalf. - PO BOXES NOT ALLOWED.

BOTH the company and its DIRECTORS are guilty of an offence - punishable by a fine - if it doesn’t have an appropriate registered office address.

Certain records must be kept here incl. board minutes and minutes of general meetings.

Statutory books may also be kept here e.g. registrar of members, directors and directors’ residential addresses. (But can choose to keep these at Companies House instead).

Question 32

How can you change the registered address?

Answer 32

Board resolution is required and company must file form AD01 at Companies House.

Note: documents can still be sent to the previous registered office for 14 days after the change - even though the change of registered office happens when the registrar changes it.

Question 33

Companies must give an appropriate email address according to ECCTA 2023. What counts as an ‘appropriate’ email address?

Answer 33

If, in the ordinary course of events, emails sent to it by the registrar would be expected to come to the attention of a person acting on behalf of the company.

Question 34

What are first directors and what details need to be included about them on the IN01?

Answer 34

Who will be the directors must be decided and their name & birth date must be included on IN01.

Every company must have at least 1 director (and public companies must have 2 or more).

The director must be a natural person (human being) and 16 or over.

Question 35

What are the directors’ residential and service address requirements?

Answer 35

A director’s service address is the address to which any OFFICIAL DOCUMENTS for that director must be sent - has to be included on the IN01 for each director as well as their residential address.

Service address usually = the registered address.

Residential address of director will NOT appear on public register unless they choose their service address to be their residential one.

Directors’ residential addresses are shared with specified public authorities (SPAs) and credit reference agencies. - If they do not want this, they can make an application to keep their residential addresses private.

There must be a serious risk of violence or intimidation to the director/director’s family member in order for Companies House to accept the application - evidence will need to be provided.

Under ECCTA 2023, the Registrar of Companies can change the service address of a director if it is satisfied that it isn’t a place where docs may be effectively served on that director.

Question 36

Do companies need to have a company secretary?

Answer 36

Private companies DO NOT NEED to have a company secretary. If they choose to, their name and service address must be added to the IN01.

Responsible for admin tasks.

Directors = still responsible if the company secretary fails to carry out their duties.

Question 37

What are the companies first shareholders?

Answer 37

They are called subscribers.

Their names, addresses and details of shareholding need to be put on the IN01.

Companies = usually incorporated with 1 shareholders, with one each holding an ordinary £1 share but companies can be incorporated with just 1 shareholder.

No maximum number of shareholders.

Question 38

What is a statement of capital?

Answer 38

When an applicant registers a company, they need to provide info about the shares (statement of capital) on the IN01.

Includes the number of shares of each type the company has & their total nominal value.

Names & addresses of all shareholders.

Also need to provide info about what rights each type of share gives the shareholder:
- What share of dividends they receive
- Whether they can redeem their shares for money
- Whether they can vote on certain company matters and
- How many votes their shares entitle them to.

Question 39

What happens once the company has been incorporated (registered)?

Answer 39

Directors will hold the first board meeting (or make decisions unanimously in writing) and then may decide to allot more shares - either to the subscribers and/or to other new shareholders.

Money raised will be used to run the business.

Question 40

What makes up a company’s constitution?

Answer 40

Memorandum of association
Articles of association
Certificate of incorporation
Current statement of capital
Copies of any court orders
Legislation altering the company’s constitution
Shareholders’ resolutions affecting the constitution
Certain agreements involving shareholders

Question 41

What are the company’s articles?

Answer 41

Company’s rulebook which sets out the notice period for board meetings, the minimum number of directors required in order for a board meeting to be valid, whether the board of directors can refuse to register a new shareholder meeting and the circumstances in which a director will be prevented from voting at a board meeting.

Question 42

What is the memorandum of association?

Answer 42

Used to be a detailed document.

Under CA 2006, has been streamlined & is now just a statement that the subscribers wish to form a company and agree to become a shareholder and take at least one share each.

Signed by the subscribers.

Question 43

What are model articles?

Answer 43

These are a set of standard articles which are set out in the Companies (Model Articles) Regulations 2008.

Will apply by default if bespoke set of articles are not provided when company is incorporated.

Some can be disapplied.

Question 44

What are Table A articles?

Answer 44

CA 2006 came into full force on 1st October 2009.

Any companies incorporated from this date have Model Articles - or an amended form of Model Articles - as their articles.

Those incorporated BEFORE 1 OCTOBER 2009 are likely to have Table A articles (the articles under the Companies Act 1985).

Table A articles = Consistent with the CA 1985
Model articles = Consistent with the CA 2006.

Question 45

How can articles be amended?

Answer 45

Articles of association can be amended by SHAREHOLDERS through special resolution.

Means must be passed by a majority of at least 75% of shareholders.

Question 46

What happens once a company changes its articles?

Answer 46

Must file a copy of the amended articles at Companies House within 15 DAYS OF THE AMENDED ARTICLES TAKING EFFECT.

Must also file a copy of the special resolution used to amend the articles at Companies House within 15 days after it’s passed.

Question 47

Who are people with significant control (as needs to be marked on the IN01 form?)

Answer 47

Can be an individual or a corporate body.

It is deemed significant if the person holds:
more than 25% of the shares in the company
more than 25% of the voting rights in the company
Holds the right to appoint or remove a majority of the board of directors of the company.

The applicant must tick the relevant box to show that the person holds:
- More than 25% but not more than 50% of the company’s shares/voting rights.
- More than 50% but less than 75% of the company’s shares/voting rights or
-75% of more of the company’s shares/voting rights.

Reason why this is asked for is because third parties will want to know if someone exerts a significant amount of influence over the company.

Once a company has been incorporated, it must keep a register of persons with significant control.

Question 48

What is the lawful purpose statement?

Answer 48

New introduction by ECCTA 2023.

They need to confirm that the company is being formed for lawful purposes.

The applicant will also have to complete the statement of compliance to confirm that the requirements of the CA 2006 as to registration have been complied with.

They will then make the application.

If this is all ok, Companies House will issue a certificate of incorporation & when this is ISSUED, company = a separate legal person.

Question 49

How to register as a public company?

Answer 49

• Same as above except

1) Model articles must be in a form suitable for a public company.

2) Before it commences trading, the public company MUST obtain a trading certificate as proof it can trade and borrow and that it has met the allotted share capital requirements.

The application for the trading certificate is made to CH on form SH50.

Question 50

How to convert to a public company from a private company?

Answer 50

• Special resolution must be passed which approves the re-registration of the company, altering the company’s name so it’s in a form suitable for a public company (by adding public company, plc or the Welsh equivalents) and altering the articles so they are in a form suitable for a public company.

At the time the shareholders pass the special resolution, the company must have satisfied the share capital requirements.

Trading certificate NOT REQUIRED as CH will not re-register a private company as a public one unless its satisfied the same allotted share capital conditions.

Question 51

What is the application for re-registration when converting to a public company?

Answer 51

Applicant must file at Companies House = the special resolution, an application for re-registration on Form RR01 which includes a statement of compliance, the fee for re-registration, the revised articles and a balance sheet and a written statement from the company’s auditors and a valuation report on any shares which have been allotted for non-cash consideration.

If the above requirements are met, Companies House will issue a certificate of incorporation proving the company’s existence and status as a public company.

Question 52

What are shelf companies?

Answer 52

Companies which have already been set up (usually with 2 directors and 2 shareholders) which can be used at short notice when a client needs a company set up.

Question 53

What are post-incorporation steps that can/must be taken?

Answer 53

After incorporation, directors are likely to have a board meeting (or pass a directors’ written resolution) to make a decision on matters below:

1) Chairperson - Need to decide whether to have one - they can have a casting vote in the event of a board resolution being tied.

2) Bank account - Practical terms = need to have one. Board needs to decide who can spend company money and how much and complete a BANK MANDATE letting the bank know who can make payments on the company’s behalf.

3) Company seal - can be adopted by board resolution. Can be used to execute a document but the Model Articles additionally require the document to be signed by at least one authorised person in the presence of a witness who attests the signature (though this can be disapplied).

4) Changing the company’s name - Can be done by a special resolution of shareholders or by other means provided for in the company’s articles.

Should be done by filing form NM01 at Companies House + copy of special resolution + fee. If all is fine, CH will issue a new certificate of incorporation - only when this is issued, that the company’s name is officially changed.

5) Accounting reference date = date up to which it must prepare its annual accounts (last day of the month in which the company was incorporated). Can be changed by the company by passing a board resolution and filing form AA01 at Companies House.

However, can’t make the accounting reference period more than 18 months. Also can’t be extended less than 5 years after the end of an earlier accounting reference period.

Question 54

What are post-incorporation steps that can/must be taken?

Answer 54

6) Auditor - may need to appoint an auditor (though small companies are exempt from this).

7) Service contracts - Employment contracts for directors. The board of directors can decide to award service contracts but if it is for a guaranteed period longer than 2 years, must be approved by ordinary resolution of the shareholders.

8) Tax registrations - Companies House will automatically notify HMRC of the registration of the new company & HMRC will send an introductory pack about tax affairs to the registered office address.

9) Corporation tax - Pack mentioned above will include a form which must be completed and returned to HMRC. Will initiate the company’s registration for corporation tax purposes.

10) PAYE and National Insurance - Directors should register the company with HMRC to arrange for the deduction of income tax from salaries under the PAYE scheme.

11) VAT - Most businesses must register for VAT with HMRC.

The directors will approve the applications for tax registration at the first board meeting which will then be submitted.

12) Insurance - Board have to decide what insurance they want to take out and make arrangements for it to be put into place.

13) Shareholders’ agreement - Not an appropriate item for the board meeting as it involves shareholders and not directors.