Business Structures Flashcards
What is the set up cost of a sole trader?
A sole trader has no set up costs and can therefore start trading immediately
What is the liability risk of a sole trader?
A sole trader faces unlimited personal liability as it is not a separate legal entity. Individual’s personal assets, such as their home and cars, can be sold to meet business debts.
Define the structure of a sole trader.
There is no formal structure
What are the privacy benefits of being a sole trader?
A sole trader enjoys complete privacy as there is no requirement for publicly filed accounts or other formal disclosures.
Explain the formalities involved in operating as a sole trader.
There are no formalities such as Companies House filing or procedural requirements for running a business as a sole trader.
How are sole traders financed?
Through personal capital injection of cash by the sole trader personally. Contracts are formed between the individual themselves and third parties, so an individual can take out a personal loan.
What is the set up costs of partnerships?
Partnerships have no set up costs, allowing them to start trading immediately
Define the liability of partners in a partnership.
Partners have unlimited joint (in contract) or joint and several liability (in tort) for the debts and obligations of the partnership, meaning personal assets may be at risk.
What is the structure (entity) of a partnership?
A partnership is not a separate legal entity.
What are the formalities required to run a partnership?
There are no Companies House filing or procedural requirements for running a partnership. Partnerships can be formed without any formal agreement or even intention.
Explain the privacy aspect of partnerships.
Partnerships offer complete privacy, with no requirement for publicly filed accounts.
How are partnerships financed?
Contracts are formed between third parties and the partners as individuals. Individual partners can take out personal loans or inject their own cash into the partnership.
What are the set up costs of a Limited Liability Partnership?
There are costs involved including legal fees
What is the liability of partners in an LLP.
Partners in an LLP have limited liability, meaning their liability to third parties is restricted to the amount they agreed to pay under the LLP partnership agreement.
What is the structure of an LLP?
The organizational structure of an LLP is flexible and should be decided between the partners in a formal written Members’ Agreement.
What sort of entity is an LLP?
LLP has a separate legal personality.
Explain the privacy of an LLP.
LLPs are required to file annual accounts and other information
How are LLPs financed?
As a separate legal entity, an LLP can borrow in its own name and create floating charges, which are a type of security favored by banks.
What formalities must an LLP comply with
LLPs must be registered at Companies House in the same manner as companies.
What are the set up costs of a company?
There are costs involved in incorporating a company including legal fees.
What is the liability of a company?
The liability of shareholders is limited to the amount unpaid on their shares, meaning they are not personally responsible for the company’s debts beyond their investment.
What is the structure (entity) of a company?
A company is a separate legal entity, meaning it exists independently of its owners, who are not personally liable for the company’s debts.
What are the formalities required for a company to operate?
A company must be registered at Companies House .
Explain the privacy of a company
Companies must make various filings and disclosures at Companies House, which can be onerous, especially for small private companies.
How are companies financed?
Lenders often prefer to lend to companies due to their higher degree of regulation and disclosure, and companies can offer more forms of security for borrowing. Companies can also raise finance by issuing shares.
How does limited liability protect shareholders in case of company insolvency?
If a company becomes insolvent, shareholders are only liable to lose the money they invested in the company, and creditors cannot pursue claims against their personal assets.
How does the concept of limited liability encourage investment.
Limited liability encourages investment by allowing businesses to take risks without exposing shareholders to personal financial loss beyond their investment in the company, which can generate money and benefit the wider community.
How can the doctrine of limited liability be challenged by the courts?
The doctrine of limited liability can be limited or challenged in certain situations where the court may ‘pierce the corporate veil’ in the interests of justice, particularly if the company is seen as a façade.
What strategies can be used to circumvent limited liability?
Strategies to circumvent limited liability may include requiring personal guarantees from shareholders when a bank intends to loan money, or using contractual agreements that shift risk back to the individuals involved.
Define the principle established in Salomon v Salomon.
The principle established in Salomon v Salomon is that a legally incorporated company is a separate person responsible for its own debts and liabilities, distinct from its shareholders and directors.
Describe the tax implications for a sole trader.
A sole trader’s business is not a separate entity, so profits are taxed as the individual’s income for income tax purposes, and gains from one-off transactions are subject to capital gains tax.
Do sole traders have separate business entities for tax purposes?
No, sole traders do not have separate business entities; their business profits are treated as personal income.
Describe the tax treatment of partnerships in the UK.
Partnerships are considered tax transparent, meaning HMRC looks through the partnership to the individual profits and gains of the partners, who are taxed on their shares of profits as either income tax or capital gains tax.
How are partners taxed in a partnership?
Partners are taxed on their individual shares of the profits and chargeable gains, which can be subject to income tax or capital gains tax.
How are profits taxed in a partnership?
The profits in a partnership are not taxed at the partnership level; instead, each partner is taxed on their share of the profits.
Describe the tax treatment of LLPs.
LLPs are treated like a partnership for tax purposes, meaning partners are taxed as individuals on their share of the LLP’s profits and gains.
How are profits taxed in an LLP.
In an LLP, profits flow from the LLP to the partners, who then pay income tax on their respective shares.
How is corporation tax applied to a company’s profits?
Corporation tax is applied at a flat rate on the taxable total profits for the current tax year, and the company itself is liable to pay this tax.
Explain the concept of double taxation in the context of companies.
Double taxation occurs when a company pays corporation tax on its profits and then shareholders are taxed on dividends received as income tax.
What is the tax liability of a company regarding its profits?
The company itself is liable to pay corporation tax on its taxable total profits.
Do public companies have the ability to use written resolutions?
No, public companies cannot pass shareholder resolutions using the written resolution procedure.
What certificate is required for a public company to commence business?
A public company cannot commence business until a trading certificate is issued by the Registrar.
Define the minimum share capital required for a public company.
A public company must have a minimum of £50,000
Describe the minimum share capital required for a private company
A private company must have at least one share, which can be incorporated with one share of 1p.
Are public companies required to hold an Annual General Meeting
Yes.
Are public companies required to have a secretary?
Yes
What is the minimum number of directors required for a public company in the UK?
A public company must have a minimum of 2 directors
Do private companies in the UK need to hold an Annual General Meeting (AGM)?
Private companies are not required to hold an AGM, but they can choose to do so if they wish.
Are private companies required to have a secretary?
No.
How many directors are required for a private company in the UK?
A private company is required to have a minimum of 1 director
State the minimum number of shareholders required for a public company in the UK.
A public company must have a minimum of 1 shareholder
How can public companies raise funds ?
Public companies limited by shares can offer their shares to the public, allowing them to raise funds.
What are the advantages of using written resolutions for private companies?
Using written resolutions results in considerable cost, time, and administration savings for private companies.
Define the exceptions to the use of written resolutions in private companies.
Written resolutions cannot be used for resolutions to remove a director or to remove an auditor.
What advantages do public companies have in terms of financing?
Public companies have greater access to equity and debt finance, including the ability to issue debt securities in international capital markets.
Define the level of regulation for private companies compared to public companies under CA 2006.
Private companies enjoy lighter regulation under CA 2006 than public companies, which require more extensive regulation due to their larger number of shareholders and greater accountability.
How do the management structures of private companies differ from those of public listed companies?
Public listed companies are managed differently as they may have thousands of shareholders, with only a few having any managerial role, while private companies typically have a more direct management structure.
Do all public companies apply for a stock exchange listing?
No, not all public companies apply to have their shares listed on a stock exchange.
What sort of company can apply for a stock exchange listing?
A company must be a public company before it applies to have its shares listed on a stock exchange.
Explain the term ‘listed companies’.
Listed companies are those whose shares are listed on a recognized stock exchange, allowing for trading of those shares.
Why might a plc seek a listing on a stock exchange?
Seeking a listing on a stock exchange, such as the London Stock Exchange, allows a company to permit trading in its shares, making it more attractive to investors.
Explain the treatment of a trade or business carried on by an LLP.
A trade, profession, or business carried on by an LLP with a view to profit is treated as being carried on in partnership by the members, not the LLP itself.
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Describe how members share in capital and profits in an LLP.
Members share equally in capital and profits as per Regulation 7(1).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Define the indemnification obligation of an LLP towards its members.
An LLP must indemnify its members for payments made and personal liabilities incurred in the ordinary and proper conduct of the business, according to Regulation 7(2).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Explain the remuneration policy for members managing an LLP.
No member is entitled to remuneration for managing the LLP, as outlined in Regulation 7(4).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
What is required for a person to become a member of an LLP?
No person can become a member or assign their membership without the consent of all existing members, according to Regulation 7(5).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Describe the decision-making process for ordinary decisions in an LLP.
Ordinary decision making may be by the majority of the members, as per Regulation 7(6).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
What is the requirement for changing the nature of the business in an LLP?
Any proposed change to the nature of the business requires the consent of all the members, according to Regulation 7(6).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
How must a member account for profits made from competing businesses without consent?
If a member carries on a competing business without consent, they must account for and pay over to the LLP all profits made from that business.
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Explain the power of expulsion of a member in an LLP.
There is no implied power of expulsion of a member by the majority unless such power is expressly provided for in a Members’ Agreement.
Describe the tax treatment of individuals in an LLP.
Individuals in an LLP are taxed as individuals, meaning they are liable for income tax or capital gains tax on their share of the LLP’s income or gains.
How is an LLP treated for tax purposes compared to a company?
An LLP is treated as ‘transparent’ for tax purposes, meaning it is not taxed itself, but the partners are taxed on their share of income. In contrast, a company pays corporation tax on its own profits.
Define the taxation implications for individuals receiving dividends from a company.
Individuals receiving dividends from a company may be liable to pay income tax on their dividend income after the company has paid corporation tax on its profits.
What economic reliefs might be available to members of an LLP?
Members of an LLP may have access to reliefs similar to those available to partners, such as relief on interest and the ability to set off losses against other income.
What happens if there are gaps in an LLP’s governance structure?
Gaps in an LLP’s governance structure will not be filled by partnership law due to the disapplication of the PA 1890.
How is the taxation of an LLP similar to that of a traditional partnership?
For tax purposes, an LLP is treated as a partnership, allowing for similar tax treatment and reliefs as traditional partnerships.
Describe how assets held by an LLP are treated for capital gains tax purposes.
Assets held by the LLP are treated as being held by the members as partners for capital gains tax purposes.
Who is responsible for the disposing of an LLP asset such as land.
A disposal of an LLP asset, like land, is regarded by HMRC as a disposal by the members of the LLP while it is trading.
Is an LLP subject to stamp duty
The LLPA provides relief from stamp duty when a partnership is incorporated as an LLP and assets of the partnership business are transferred to the LLP, subject to strict tax avoidance conditions.
What is the VAT registration status for an LLP and its members?
The LLP itself may register for VAT, but not the individual members.
Describe the tax obligations of partners in an LLP regarding profits.
Both partners pay income tax on their share of the profits.
Define the ability of LLPs to create charges over assets.
LLPs can create a floating charge over their assets, a capability not available to traditional partnerships.
