Business Structures Flashcards
What is a sole proprietorship? What are the 2 types?
An individual carrying on some form of business on their own account.
Sole practitioner if professional
Sole trader if not
How is a sole proprietorship formed and what 3 things must they do?
Individual must register as self-employed with HMRC and chose a name that is compatible with Part 41 CA2006.
- File their own tax returns - maintain adequate records of sales and purchases
- Register for VAT purposes once revenue reaches a certain amount
- Register employees with HMRC for PAYE
What are the 4 ways a sole proprietorship can raise finance?
- Invest their own money and risk losing it
- Obtain a loan from a bank but banks are cautious
- Seek investment from outside persons but they usually want a share of the profits
- Adopt a different business structure
How is a sole proprietorship dissolved?
Inform HMRC that they are no long self-employed and simply stop trading.
Any profits of the business belong to the individual
What are 6 advantages and 3 disadvantages of a sole proprietorship?
Advantages:
- Straightforward to set up
- Subject to little regulation
- Can hire employees
- Easy to dissolve
- All business’s assets belong to individual
- Can run business privately
Disadvantages:
- No separate legal personality - liability is personal and unlimited
- No perpetual succession
- Difficult to raise finance
Which Act governs ordinary partnerships? What is the definition of a partnership?
Partnership Act 1890
The relationship which subsist between persons carrying on a business in common with a view of profit.
What does s.5 PA1890 say?
When will partners not be bound?
All partners are agents of the firm and bind each other contractually when dealing with 3rd parties in usual ways of business or within their authority.
Not bound if partner had no authority and 3rd party knew this, or if 3rd party did not know / believe them to be a partner
What does s.9 and s.10 PA1890 say?
S.9 = partners are jointly liable for the debts of the partnership incurred whilst they are partners
s.10 = each partner is vicariously liable for the wrongful acts or omissions of another partner if they were acting within ordinary course of business of the partnership or within their authority
Liability is joint and several = the claimant can sue each partner in turn or all the partners at once, until the amount of loss is recovered
What does s.19 PA1890 say?
The partnership agreement can be altered if all the partners consent
When is a partnership dissolved? (5 instances)
- If all partners agree
- If partnership agreement provides it will be dissolved on occurrence of a particular event
- It becomes unlawful for partnership to continue
- The court choses to dissolve following an application from a partner
- The relationship between the partners breaks down
What are the 4 advantages and 2 disadvantages of an ordinary partnership?
Advantages:
- Pooling of skill, experience and finances
- Sharing risks
- Conduct is private
- Decisions are unanimous = gives each partner a veto on all decisions
Disadvantages:
- No perpetual succession
- Liability is joint, several, personal, and unlimited
What are the 2 main differences between an ordinary partnership and a limited partnership?
- Created an governed by different acts - OP: formed by agreement and PA1890. LP: formed by registering docs at CH and Limited Partnership Act 1907
- Liability of partners - OP: joint, several, personal, and unlimited. LP: can have limited partners
What does s.1 LPA1907 say?
Limited partnerships must consist of 1 or more general partners and 1 or more limited partners
What does s.8A LPA1907 say?
General partners are liable for all the debts and obligations of the partnership and limited partners are only liable for a specified amount (contained in the registration document)
What does s.6 LPA1907 say?
Limited partners cannot take part in management or bind the firm
If they do, become liable for the firm’s debts and obligations
What 4 things must a limited partnership do?
- suffix their name ‘LP’
- Have a UK-based principle place of business
- File a confirmation statement
- Partners must be registered with an anti-money laundering supervisory body
How is a Limited Liability Partnership formed? How is it governed?
Under Limited Liability Partnership Act 2000 and by registering specific documents at Compnaies House.
Governed under company law unless the LLPA2000 says otherwise.
What does s.1 LLPA200 say?
LLP is a body corporate with separate legal personality = responsible for its own debts and obligations
What does s.6 LLPA2000 say about the members?
Who is vicariously liable?
Every member is an agent of the firm.
LLP itself can be vicariously liable for the wrongful acts and omissions of its members
What does s.14 LLPA2000 say?
On winding up, every member is liable to contribute to the LLP such assets as he has agreed
Regulation 5, schedule 3, para 1 LLP Regulations 2001
What are the 6 differences between an ordinary partnership and a LLP?
- Regulating legislation - OP: PA1890. LLP: LLPA2000
- Governed by - OP: PA1980. LLP: Company law unless LLPA2000 says otherwise
- Formed by - OP: agreement. LLP: registering specific docs at CH
- Has corporate personality - OP: no. LLP: yes
- Partners are known as - OP: partners. LLP: members
- Liability of partners - OP: joint, several, personal, and unlimited. LLP - limited, LLP is responsible for its debts and obligations
What are the 3 key decisions when setting up a company and the 5 different types of companies?
3 key decisions:
- Public or private?
- Share capital? (public must)
- Limited or unlimited liability? (public = limited)
5 different types of company:
- Public company limited by shares
- Private company limited by shares
- Private company limited by guarantee
- Private unlimited company with share capital
- Private unlimited company without share capital
What are the 2 major differences between a public and private company? What are 7 other differences?
Part 20 CA2006 sets out 2 major differences:
- s.755 CA2006 = Private limited companies cannot offer securities to the public at large (public companies can)
- s.76 CA2006 = Public companies must be issued a trading certificate before engaging in any business (only issued if have the minimum share capital)
Other differences:
- Required to have a share capital: public = yes (£50,000), private = no
- Liability of members: public = limited, private = unlimited or limited
- Offer shares on a stock exchange: public = yes, private = no
- Min. no. of directors: public = 2, private = 1
- Suffix: public = plc (public limited company), private = ltd (limited)
- Company secretary: public = must have, private = optional
- Classified as micro-entity, small, or medium-sized: public = no, private = yes
What is a listed company? What is a quoted company? What is a traded company?
A listed company = has a class of securities listed on the UK’s Official List
A quoted company = has share capital (i) included on the Official list, or (ii) is officially listed in an EEA state, or (iii) is dealing on the NYSE or NASDAQ
If none of these apply the company is unquoted
A traded company = shares carry rights to vote at general meetings, and are trading on a regulated market in an EEA state by or with consent of the company
When is the liability of members limited? What is it limited to if the company is limited by shares? What about limited by guarantee?
Liability of members is limited if limited by its constitution
Limited by shares = when owned by shareholders
S.3 CA2006; S.74 IA1986 = liability is limited to the amount unpaid on their shares
If fully paid = no liability to contribute upon liquidation
Limited by guarantee = when no share capital
S.3 CA2006; S.74 IA1986 = liability is limited to the amount they have agreed to contribute in the event of winding up (stated on incorporation)
Usually £1 and usual business structure for not for profit companies
What does it mean if a company is unlimited? Can members become liable?
Unlimited = company itself that is sued not the members because companies have a corporate personality
Members can become liable during liquidation if creditors petition for a winding up order - liquidator can require the members to contribute to the company’s assets
No limit on the amount the creditor can claim (subject to the debt owed)
What are the 2 ways to classify a company’s size? Why are both significant?
- determined by turnover, balance sheet total, and number of employees
Significant because certain statutory regulations don’t apply to small companies e.g. no need to audit accounts - determined by size of market capitalisation e.g. FTSE 100, 250, and 350
Significant because certain laws and governance principles only apply to such companies
What is a CIC? How is it formed? What is the community interest test? Which law are they subject to? What report must they produce? Can they register as a charity?
Community Interest Company = companies that combine a commercial purpose with social, charitable, or community-focused activities
Register documents with CIC Regulator who will allow incorporation if a reasonable person would consider the business’s activities are for the benefit of the community = ‘community interest test’
Generally subject to CA2006
Must produce an annual ‘community interest company report’ = shows how business activities benefited the community
Cannot register as a charity
What is a CIO? What is the difference between companies registered as a CIO and those that aren’t?
Charitable incorporated organisation (CIO)
Charitable companies that are not CIOs are subject to general company law and additional rules relating to charities
Deal with 2 regulators = the Charity Commission and CH
If CIO = regulated by Charities Act 2011 and accompanying subordinate legislation
Deal with 1 regulator = the Charity Commission
How can a company re-register?
Part 7 CA2006 allows for most forms of re-registration except from limited by guarantee to limited by shares
S.90 CA2006 = private to public = pass a special resolution, deliver specific documents to CH. and comply with public company conditions e.g. minimum share capital
s. 97 CA2006 = public to private limited = pass a special resolution and deliver specific docs to CH
s. 102(1) CA2006 = private limited to unlimited = all members assent to the re-registration and deliver specific docs to CH
s. 105(1) CA2006 = unlimited private to limited = pass a special resolution and deliver specific docs to CH
s. 109(1) CA2006 = public to unlimited private with a share cap = all members assent to the re-registration and deliver specific docs to CH
May need to change name and articles to comply with the requirements of its new status
Re-registration fee is payable and a new certificate of incorporation issued
What is a mutual organisation? How is one set up? What are the 2 specialist structures?
An organisation that is owned by, and run for, the benefit of its members, who are actively and directly involved in the business
Can be set up using standard business structures e.g. partnership, company
Two specialist structures can be registered with the FCA under the Co-operative and Community Benefit Societies Act 2014:
- co-operative societies = run for the benefit of those members who use its services; and
- community benefit societies = run for the benefit of the community, and not just its members
Other types = building societies
