Business Mediums Flashcards
A former dentist decided to set up a partnership with a nurse and a pharmacist. The partnership provided medical equipment. On 18 June the partnership took delivery of medical equipment from its supplier (“the Contract”), but did not pay for that delivery on the due date. On 30 September, the former dentist retired from the partnership. When purchasing the dentist’s share, the nurse and the pharmacist agreed to indemnify the dentist against any pre-existing liabilities. On 1 October, a computer systems analyst joined the partnership as a partner. On 17 October the supplier advised that it was intending to commence proceedings for the recovery of the unpaid sum due under the Contract. There are no other relevant agreements / arrangements.
Which of the following statements best describes who is liable to the supplier under the Contract?
A-The nurse, the pharmacist, and the computer systems analyst are liable as they are all current partners of the firm.
B-The nurse, the pharmacist, the computer systems analyst and the former dentist are liable as they have all been partners during the dealings with the supplier.
C-The former dentist, the nurse, and the pharmacist are liable as they were all partners at the time that the Contract was entered into.
D-The nurse and the pharmacist are liable as they purchased the former dentist’s share when the latter retired from the partnership.
E-Only the computer systems analyst is liable as the incoming partner.
Option C is correct because the former dentist, the nurse and the pharmacist were all partners at the time that the Contract was entered into. Section 17(2) Partnership Act 1890 states that a partner who retires from a firm does not cease to be liable for partnership debts incurred before retirement. The former dentist has a right to be indemnified by the nurse and the pharmacist if all three are pursued.
Option A is wrong because the computer systems analyst does not become liable for anything done before joining the partnership, and the facts do not mention that the analyst agreed to accept any of the partnership’s pre-existing liabilities upon joining.
Option B is wrong because the computer systems analyst does not become liable for any debts that were incurred before joining the partnership.
Option D is wrong because section 17(2) Partnership Act 1890 states that a partner who retires from a firm does not cease to be liable for partnership debts incurred before retirement. The former dentist can still be pursued for the debt by the supplier.
Option E is wrong because the computer systems analyst does not become liable for anything done before joining the partnership, and the facts do not mention that the analyst agreed to accept any of the partnership’s pre-existing liabilities upon joining.
A shareholder owns all the shares in a private company limited by shares. He is also the only director. It has Model Articles.
The company is a fraudulent telemarketing company that sells advertising space to companies on a directory that does not exist. In order to protect his money, in case his crimes are discovered, the shareholder transfers the funds to the telemarketing company’s holding company.
Once evidence of the shareholder’s crimes come to light, which of the following best describes the options available to creditors?
A-Separate legal personality and limited liability mean that only the assets in the company are available to creditors.
B-The company and the holding company are a single economic unit and therefore the funds in both companies will be available to creditors.
C-As the shareholder is the sole director and sole shareholder (sometimes referred to as a “single member company”), he will be liable for their debts in any event.
D-Companies cannot commit crimes if other companies are the victims. A natural person must be either the perpetrator or the victim in order for there to be a crime.
E-In the case of fraud or a sham, it is permissible to pierce the corporate veil. In this case the holding company will also be liable for the company’s debts.
Option E is correct. This a case of a fraud or sham. The corporate structure is being used to deliberately frustrate the enforcement of creditor claims. The creditors will therefore be entitled to pierce the corporate veil, ie look behind the telemarketing company when bringing claims. Accordingly, option A is wrong.
Option B is wrong. There is no such concept of single economic units in English law.
Option C is wrong. In Saloman v Saloman, the House of Lords were concerned with a single member company, but nevertheless decided that as long as the company was legally incorporated, it must usually be treated like any other independent person with rights and liabilities. A single member company is therefore usually responsible for its own liabilities.
Option D is wrong as it is not a legal doctrine.
Three friends are considering going into a business together and are considering the choice of business medium to run the business. They are looking at the differences between a limited liability partnership and a general partnership.
The friends have not reached any express agreement as yet and need to consider factors that apply to their chosen business mediums.
Which of the following best describes a matter that the friends should consider?
A-In general partnerships, ordinary matters are decided by unanimous consent.
B-One of the advantages of a general partnership is that it can be created informally and does not have to be registered.
C-In general partnerships and limited liability partnerships, a new partner can join the partnership by a majority decision of the current partners.
D-Because limited liability partnerships have a separate legal personality from their members, the split between owners and members means members have less management control.
E-In general partnerships partners are entitled to remuneration in the form of a salary.
Option B is the correct answer because a general partnership is formed as soon as at least two persons are carrying on a business in common with a view of profit (s1 Partnership Act 1890). No formalities are required and a general partnership does not have to be registered.
Option A is wrong because, subject to contrary agreement, ordinary matters are decided by majority in general partnerships (s24 (8) Partnership Act 1890) not by unanimity.
Option C is wrong because unanimous consent of the partners is required for the introduction of a new partner in both general partnerships and limited liability partnerships. (s24 (7) Partnership Act 1890, regulation 7(5) Limited Liability Partnerships Regulations 2001).
Option D is wrong because the owners are the members and all the members of a limited liability partnership (LLP) can participate in the management of the LLP and therefore have management control.
Option E is wrong because partners, subject to contrary agreement, are not entitled to remuneration (s24 (6) Partnership Act 1890).
Two friends are planning to set up a business to manufacture a range of horse toys. Although they both have the financial means to establish the business, they are keen to ensure that their investments are protected as they have other financial responsibilities, which they must continue to meet. They would also like to keep as much information as possible about the business confidential because they are concerned about competitors finding out too much about its financial position. Finally, they want to maintain control over decisions on how the business is run. The friends could set up the business using either a partnership, limited partnership, limited liability partnership or private limited company.
Would a limited liability partnership be the most suitable business medium for this business?
A-Yes, because a limited liability partnership would best meet the friends’ requirements.
B-Yes, because becoming owners of a company would prevent the friends from taking part in the day to day management of the business.
C-No, because, on incorporation, a limited liability partnership must have at least two designated members and, in addition, two other members.
D-No, because a limited partnership would be preferable as it would enable the friends to have the benefit of limited liability without needing to make the business’ financial information public.
E-No, because a partnership would be preferable as it would give the friends the management control and confidentiality they seek.
Option A is the best answer. A limited liability partnership provides the friends with the benefit of limited liability and management control. Some financial information will need to be made public but the facts demonstrate that the friends prioritise protection of their investments over confidentiality. The only other entity which provides limited liability and the possibility for management control is a private limited company but that requires more information to be made public and the friends want to limit publicity as far as possible.
Option B is wrong because, although owners (shareholders) of a company do not take part in the day to day management of the company, directors do and there is nothing to prevent shareholders from also being directors.
Option C is wrong because a limited liability partnership must have at least two members on incorporation. There is also a requirement to have two designated members but if there are only two members then those two will be the designated members. There is no need to have two members plus two designated members.
Option D is wrong because, in a limited partnership, a limited partner cannot participate in the management of the limited partnership.
Option E is wrong because, although a partnership does give the friends the management control and confidentiality they seek, it does not give them the investment protection, which they are keen to ensure they have.
Two companies decide to pursue a commercial joint venture together. Both companies will be involved in the management of the venture. Both companies would like to limit their liability flowing from the joint venture.
Are the companies correct in thinking that a limited partnership will be an appropriate business medium through which to run this commercial joint venture?
A-No, because a commercial joint venture is a contractual agreement.
B-No, because it is not possible for a limited partner to retain limited liability and also participate fully in the management.
C-No, because companies cannot be partners in a limited partnership.
D-Yes, because a limited partnership is the most tax efficient business medium.
E-Yes, because a limited partnership will provide the limited liability of a company with the flexibility of a partnership.
Option B is correct. It is clear from the facts that both companies will be involved in the management yet both companies would like to limit their liability. In order to retain limited liability status, limited partners cannot participate in the management of the limited partnership.
Option A is wrong because, whilst a commercial joint venture can be a purely contractual arrangement, it can also be run though a business medium such as a company limited by shares, limited partnership, limited liability partnership or a general partnership.
Option C is wrong because companies can be partners in a limited partnership.
Option D is wrong because, without knowing more facts, it is impossible to say which business medium would be most tax efficient for these parties. Even if a limited partnership was most tax efficient, a limited partnership would not be an appropriate choice due to their other aims.
Option E is wrong because limited liability is only possible for partners not involved in the day to day management. This statement would seem to be more relevant in relation to a limited liability partnership (rather than a limited partnership). In any event, whatever the benefits of a limited partnership, it would not be an appropriate choice due to the aims of both companies given in the facts.
A shareholder buys 100 ordinary £1 shares in a company and is entered on the company’s register of members. The company has two other members who are directors of the company and three other directors.
Which of the following statements best describes the shareholder’s rights under the statutory contract created by a company’s constitution?
A-The shareholder can sue any of the other members of the company if his membership rights are infringed.
B-The shareholder can sue any of the directors of the company if his membership rights are infringed.
C-Any of the directors can sue the shareholder if he does not abide by the terms of the company’s constitution.
D-The shareholder can sue someone who is not a member of the company if that person has infringed rights granted to him by the company’s constitution.
E-The shareholder can only sue the company if his membership rights are infringed.
Option A is correct. The shareholder has been entered on the register of members of the company and so is a member of the company. The statutory contract imposes obligations upon the members when dealing with each other, so that means that the shareholder may bring an action for breach of contract against other members of the company where his rights have been infringed.
Option B is wrong. Only if the directors were members of the company could the shareholder bring an action against them. On the facts, not all of the directors are members. Three of them are what are described as ‘outsiders’ – non-members.
Option C is also wrong. ‘Outsiders’ cannot enforce rights under the constitution.
Option D is wrong. As above, the shareholder cannot enforce his rights against ‘outsiders’.
Option E is wrong. The shareholder can bring an action against the company to enforce his rights under the constitution, but it is not his only option.
A successful sole trader, who is currently trading as ‘DBC Enterprises’, wants to incorporate his business as a private limited company. He wants to continue to use the DBC Enterprises name. He wants to continue to control the business and to be the only director. He and his wife will subscribe for 50% of the shares each. It will have one class of shares (ordinary £1 shares). The assets of the business have been valued at £100,000.
Which of the following statements most accurately reflects the position in relation to the incorporation of the company?
A-As the business is worth more than £50,000, the sole trader must incorporate the business as a public company and name it DBC Enterprises plc.
B-As the business is worth £100,000, the sole trader and his wife must subscribe for £50,000 worth of shares each.
C-There is no need for the company to have more than one director to be validly incorporated.
D-Either the sole trader or his wife must be named in the application for registration as the company secretary.
E-As she will not be a director, the wife need not be named in the application for registration as a person with significant control (PSC).
Option C is correct. The sole trader is proposing to register the company as a private company, DBC Enterprises Ltd. A private company need only have one director.
Option A is wrong. The company does not have to register as a public company. Having capital of over £50,000 is one of the criteria that enables it to do so, but does not oblige it to do so.
Option B is wrong. There is no minimum prescribed share capital requirement for a private limited company. The share capital of the company can be as little as £1 (or less). The only requirement is that the share (or shares) are given a nominal (or par) value.
Option D is wrong. A private limited company need not have a company secretary.
Option E is wrong. A PSC includes those persons who hold more than 25% of the shares, whether or not they are directors.
A client wants advice on possible names for a new company. An unconnected company is already registered with the name Biggs Butchers Limited.
Which one of the following would be the most likely to be permitted as a company name for a new company?
A-Her Majesty’s Butchers Limited.
B-Biggs Butchers UK Limited.
C-The British Butchers Limited.
D-Biggs Sausages Limited.
E-Bigg’s Butchers Limited.
Option D is correct, as the name is sufficiently different from the name of the existing company to be allowed from a company law perspective.
Option A would not be allowed as it suggests a connection with the government.
Option B would be too close to Biggs Butchers Limited. The addition of UK has previously led to the name being refused.
Option C would not be allowed as it suggests a geographical area so needs the permission of the Secretary of State.
Option E would not be allowed as special characters such as punctuation do not stop similarity with an existing registration.
Three people decide to set up a limited liability partnership (‘the LLP’). The terms of a partnership agreement are negotiated and agreed.
What must be filed with the Registrar of Companies to incorporate the LLP?
A-Form LL IN01 and the applicable fee.
B-Form LL IN01 and the partnership agreement.
C-Form LL IN01, the partnership agreement, the applicable fee, and the articles of association.
D-Form LL IN01, the partnership agreement, and the applicable fee.
E-Form LL IN01.
Option A is correct. Form LL IN01 and the applicable fee are the filing requirements to incorporate an LLP.
Option B is wrong. There is no requirement to file the partnership agreement, but there is a need to provide the applicable fee.
Option C is wrong. There is no requirement to file the partnership agreement, and an LLP does not have articles of association.
Option D is wrong. There is no requirement to file the partnership agreement.
Option E is wrong. The LL IN01 must be accompanied by the applicable fee when filed.
In 2018, a client set up a private limited company and subscribed for one ordinary £1 share.
In 2019, the company issued a further £99,000 £1 ordinary shares. The client purchased the shares from the company for £1.50 each.
In 2020, the company re-registered as a public company and issued a further 100,000 shares. The shares were purchased by an investor, who paid £200,000 for the shares.
In 2021, the company listed on the London Stock Exchange and the shares started trading at £2 per share. The investor sold his 100,000 shares for £2 each.
Which of the following statements most accurately reflects the position in relation to the issue and transfer of the shares?
A-In 2018, the company did not have a share capital.
B-In 2019, the nominal value of all of the company’s shares was £150,000.
C-In 2020, the nominal value of the investor’s shares was £100,000.
D-In 2021, the investor has sold his shares at par.
E-Until 2021, the company could not offer its shares to the public.
Option C is correct. Shares are allotted at a ‘nominal value’ (or ‘par value’) which is the original value of the shares. If shares are allotted for £1, their nominal value will be £1, even though the market value of the shares increases. Therefore in 2020, the nominal value of the shares purchased by the investor was £100,000 (and the market value of the shares was £200,000).
Option A is wrong as the share capital of the company was £1. A company may be set up with a share capital of £1 or less.
Option B is wrong. The nominal value in 2019 was £100,000. The market value was £150,000.
Option D is wrong. If the investor had sold them at par, he would have sold them for their nominal value (£1) not the amount which he paid for them. The market value of the shares has not gone up so he has simply not made a profit on the shares.
Option E is wrong. Public companies, as the name suggests, can offer their shares to the public. However, a public company will not be able to gain the exposure to potential investors which it needs unless it becomes a publicly traded company (i.e. has been admitted to a recognised stock exchange, e.g. the London Stock Exchange, or AIM (alternative investment market)).
A client, an entrepreneur, is proposing to set up in business working with two friends. The client wants to do so quickly, with the minimum of formality and minimise any legal costs. The client wants to be responsible for the day to day management decisions of the business himself. The client will invest £100,000 in the business, which will have minimal borrowings. Neither of the two friends are in a position to make an investment in the business, but they have skills and expertise which will be useful in the running of the business.
Which of the following would be the best option for the client?
A-A general partnership.
B-A limited liability partnership.
C-A limited partnership.
D-A sole tradership with employees.
E-A private limited company.
Option D is correct. There are no formalities for setting up as a sole trader, apart from notifying the tax authorities. The client can simply open the doors and start trading. Sole traders are, however, personally liable for all the debts of the business, so the risk is greater than for the other partners, but the facts indicate that there would be minimal borrowing, so the risk is not substantial and the client is an ‘entrepreneur’ so may be more prepared to assume a higher degree of risk.
Option A is not the best answer. A general partnership would be less suitable as, in the absence of a formal partnership agreement (for which it would be advisable to take legal advice), the partners share responsibility for the day-to-day management of the business. Partners have joint and several liability for the debts of the business.
Options B, C and E are not the best options for the client. Setting up either a private limited company, a limited partnership or a limited liability partnership requires a formal registration process.
A client runs a catering business with his friend. The business has not been incorporated but both the client and the friend invested equal amounts in the business and the two share profits equally. The client signed a long-term supply contract with a limited company which supplies seafood, for the purchase of seafood for the business. The terms of the contract were negotiated with the Purchasing Director of the seafood company by the client’s friend.
Which of the following options most accurately describes who are the parties to the contract?
A-The client and the seafood company.
B-The client and the Purchasing Director of the seafood company.
C-The client, his friend and the seafood company.
D-The client, his friend and the Purchasing Director of the seafood company.
E-The client’s friend and the seafood company.
Option C is correct. The catering business appears to be run as a partnership, as it meets the definition in s.1 Partnership Act 1890. The two friends are carrying on business together with a view to profit. As every partner is an agent of the firm and the other partners for the purpose of the business of the partnership, the client’s purchase of the seafood binds both the client and his friend. Both are therefore liable under the contract. Accordingly, options A and E are wrong.
Options B and D are wrong. The seafood company, as an incorporated body, can enter into contracts on its own behalf, so it is the company itself that is liable under the contract. The Purchasing Director is an agent of the company so is not personally liable.
Three people started a business together two months ago. They each have their own area of responsibility; they meet often to make decisions and they intend to share any profits the business makes. The business is yet to make any profit. No formal incorporation process for the business has been followed. However, they have told other businesses verbally and in writing that they are run as a company. The three people file their own tax returns as individuals.
Is the business a company?
A-No, because the busines is run as a partnership, and no formal incorporation has occurred.
B-No, because each person in the business is a sole trader due to their tax returns being filed as self-employed individuals.
C-Yes, because it is a limited liability partnership as they intend to share their profits.
D-Yes, because they each have decision making responsibility at business meetings.
E-Yes, because they have told others that the business is a company.
Option A is correct. They are running a business in common with a view to make a profit and therefore they satisfy the s.1 definition in the Partnership Act 1890 with some elements of s.2 PA 1890. The business is not formally incorporated so cannot be a company.
Option B is wrong, as the people filing their tax returns as individuals does not mean that they are classed as sole traders. Partners also file their tax returns as self-employed individuals. A company files its own tax return.
Option C is wrong, as sharing of profits does not make this business an LLP and an LLP also needs to be incorporated.
Option D is wrong, as decision making responsibility does not mean it is a company.
Option E is wrong. The people may be holding themselves out to be a company, but it has not been formally incorporated so does not benefit from separate legal personality.
(BLP SQE 1 Manual paras 1.2 – 1.6 inclusive)
Two people incorporate a private company limited by shares with Model Articles (amended to allow partly paid-up shares). There are 100,000 £1 ordinary shares in issue. The first person has 50,000 shares (fully paid up) and is the managing director (the managing director). The second person has 50,000 shares (partly paid up by half) and is the finance director (the finance director). The company has failed to pay a £20,000 instalment of a loan. The managing director provided a personal guarantee for this loan. There is no evidence of any director wrongdoing.
Will the lender be able to claim against the finance director, as well as the company and the managing director in relation to the unpaid instalment?
A-No, because the finance director would need preference shares to enable the lender to claim against them.
B-No, because the company is a separate legal person and is responsible for this instalment, and only the managing director guaranteed it.
C-No, because the company has not called the finance director to pay up the amount due on their shares. Only once this is done can the lender claim from the finance director.
D-Yes, because the company is in debt to the lender and the finance director owes £25,000 on their shares to the company. The lender can claim £20,000 directly from the finance director.
E-Yes, because the finance director is responsible for all finances of the company including debts.
Option B is correct. The principle of separate legal personality means that the company is liable for its debts. Where a shareholder still owes money on their shares, this money is owed to the company. Any debts the company owes is separate to this. Therefore, third parties cannot claim against shareholders who have partly paid-up shares to settle company debts. The managing director has guaranteed the company’s debts under a separate contract so the lender can rely on this when claiming against the managing director.
Option A is wrong, as the share type is irrelevant.
Option C is wrong, as even if the company called the finance director to pay up on their shares, this would not affect the principle of separate legal personality.
Option D is wrong, because due to separate legal personality it is the company that owes the instalment to the lender and not the finance director. The finance director owes money to the company. The lender cannot claim the debt that the company owes from the director as this would evade the principle of separate legal personality.
Option E is wrong, as being a finance director does not mean they assume responsibility to pay all debts.
(BLP SQE 1 Manual para 1.6 (and para 5.17.3 for the personal guarantee)
What are the documents which will form part of a company’s constitution?
A company’s constitution consists of its memorandum of association, articles of association, certificate of incorporation, current statement of capital, shareholder resolutions and agreements, court orders and legislation which affect the company’s constitution.
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