Business Mediums Flashcards
Chapter 1
What is the key difference between an incorporated and an unincorporated business?
An incorporated business exists as a separate legal entity from its owners and managers. The owners of an incorporated business are generally not liable for business debts. An unincorporated business is run by individuals who have full personal liability for the debts of the business.
What is a sole trader, and what are the implications of operating as one?
A sole trader is someone who runs an unincorporated business on their own. A sole trader is personally liable for all of the debts of the business, meaning their personal and business assets are treated the same legally. This is called unlimited liability.
How is a partnership formed, and what are its key features?
A partnership is formed when two or more people carry on a business together with a view of profit. A partnership is an unincorporated business, and partners are personally liable for all the debts of the partnership. Partners are taxed separately as self-employed individuals.
What is a limited partnership (LP) and how does it differ from a general partnership?
A limited partnership has at least one general partner with unlimited liability and at least one limited partner whose liability is limited to their initial investment. Limited partners cannot control or manage the LP, make binding decisions, or remove their investment while the business is operating. LPs must be registered with the Registrar of Companies.
What is the main advantage of forming a company over other business structures?
A company has a separate legal personality from its owners. The owners of the shares in the company are not usually liable for its debts, their liability is limited to the amount they paid for their shares. This is a big advantage because it enables directors to take risks because their personal assets are safe from creditors.
What is a public limited company (plc) and how does it differ from a private company?
A public limited company is a company limited by shares that has met the requirements of the Companies Act 2006 to be registered as a plc. Public companies can offer shares to the public to raise money, unlike private companies. They also have a minimum share capital requirement of £50,000. Public companies can join the stock market.
What is a limited liability partnership (LLP)?
An LLP is a cross between a partnership and a limited company. It has a separate legal personality and offers its owners protection from liability for the LLP’s debts. However, it is run with the informality of a partnership and the partners are taxed as if the business were a partnership.
What factors should a client consider when choosing a business structure?
Factors include:
○Liability: The extent to which owners are personally liable for business debts.
○Tax: The tax implications for the business and its owners.
○Formalities: The administrative and legal requirements.
○Publicity: The amount of information that must be made public.
○Cost: The initial and ongoing costs of setting up and running the business.
○Status: Perceptions of the business structure by clients and lenders.
○Finance: The ability to secure loans, such as through the ability to offer a floating charge.
What is the significance of a company’s constitution?
A company’s constitution is comprised of its memorandum of association, articles of association, certificate of incorporation, current statement of capital and other items. The articles of association are the company’s rulebook. The memorandum of association now mainly states that the subscribers wish to form a company and become a shareholder.
What are Model Articles of Association?
Model Articles are a set of standard articles set out in the Companies (Model Articles) Regulations 2008, which companies can adopt to save time and avoid drafting articles from scratch. The Model Articles will apply by default if a company does not submit bespoke articles.
What is Form IN01, and what kind of information is required on it?
Form IN01 is the form used to apply to register a new company with Companies House. It requires information such as the company’s name, registered office address, email address, details of the directors, company secretary if any, shareholders and statement of capital. It also requires a lawful purpose statement.
What are some restrictions on company names?
A company name cannot be the same as an existing company. It cannot be offensive or suggest a connection to a government body without permission. Certain words and expressions need approval, and it cannot contain certain symbols. There is a 160-character limit and it cannot facilitate fraud.
What is a person with significant control (PSC)?
A person with significant control is someone who holds more than 25% of the shares or voting rights, or has the right to appoint or remove a majority of the board of directors. Companies House requests this information because such shareholders may exert significant influence over the company.
What is a shelf company?
A shelf company is a company that has already been set up and is available for purchase at short notice. Law firms and company formation agents often have shelf companies for clients who need a company quickly.
What are some typical post-incorporation steps for a company?
Post-incorporation steps include appointing a chairperson, opening a bank account, deciding whether to adopt a company seal, changing the company name (if necessary), adopting a business name, setting an accounting reference date, appointing an auditor if necessary, issuing service contracts, tax registrations with HMRC, insurance and possibly a shareholders’ agreement.
