Business Law - Unit 1 Flashcards
Unit 1
What is an incorporated business?
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.
What are unincorporated businesses?
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.
What is a sole trader?
- 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.
What is a partnership/general partnership?
- 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.
What is a limited partnership?
- 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.
What are companies?
- Can be private or public and can be limited by shares or guarantee.
What are private companies limited by shares?
- 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.
What is a public company limited by shares?
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.
What are the advantages to operating as a public limited company?
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).
What are the advantages to a private limited company?
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.
How can a company become a public company?
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.
What is a limited liability partnership?
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.
What are some other types of business mediums?
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.
What type of business is best for limited liability?
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.
What type of business is best for formalities?
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.
What type of business is best for publicity of information?
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.
What type of business is best for cost?
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.
What type of business is best for status?
Company is the most well known medium for large, successful businesses.
Also might be more reassuring since there is more publicly available info.
What type of business is best for finance?
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.
How do you incorporate a new company?
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.
When will the company become incorporated?
The company comes into existence upon the certificate of incorporation being issued.
