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Law > Chapter 6 - Types of trade > Flashcards

Chapter 6 - Types of trade Flashcards

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1
Q

What’s a sole trader?

A

Single person who owns and runs the business

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2
Q

What’s the distinction between the owner of the business and the business itself for a sole trader

A

There is none. The trader can be using a business name but it’s not a seperate legal entity

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3
Q

What’s the advantages of being a sole trader?

A

*Profits all belong to owner
*No formal procedures to set up
*Independence (no need to gain approval from other people)
*Self-accountability (no need to disclose information about the business other than to tax authorities)

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4
Q

What are the disadvantages of trading as a sole trader

A

*Risk (debt of the business accrue to the owner personally)
*Limited options for capital injections (owner must contribute personally or take personal loans)
*High dependence on the owner (if the owner is ill it can lead to issues for the business, death of the owner is likely to lead to end of the business)
*If the trader does not engage employees the success of the business is dependent on the owners skills.

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5
Q

What’s a partnership

A

Partnership is a business arrangement where two or more people share ownership and the responsibility of running the business. Partners typically contribute money, skills, or other resources and share the profits and losses of the business.

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6
Q

Does a partnership separate legal entity

A

NO

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7
Q

What happens if one of the two partners die in a partnership

A

They become soletraders

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8
Q

How does HMRC decide what date the partnership begins?

A

Date on which the parties open the bank account

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9
Q

Why choose a partnership?

A

Follows specific legal rules about contract, agency and unique partnership law

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10
Q

How partnerships are formed

A

They can be created informally by simply agreeing to run a business together

They can also create a formal partnership agreement which serves as a contract between them.

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10
Q

What are the key points of the Partnership Act 1890

A

*Profit and Loss Sharing: All partners share profits and losses equally
*Management rights: Each partner has the right to manage the business
*Liability Protection: Firm must protect partner from liabilities incurred
*No Salary: Partners don’t get paid for working in a partnership
*Agreement Changes: Changes to the partnership agreement needs all partners to agree
*Capital interest: No interest is paid on partnership agreement need all partners to agree
*Admitting new partners: Requires approval from all current partners
*Expulsion of Partners: A partner can be expelled if agreement allows and a majority agrees
*Dissolution: Partners manage affairs to wind up the business, settle debt and distribute the remaining assets
*Capital Deficiency: If there’s a shortfall, it’s shared in proportion to the original contributions of the partners
*Record Keeping: Partnerships records must be stored at the business location and accessible to all partners

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11
Q

According to the Partnership Act 1890 how are profits and losses shared?

A

Equally among all partners

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12
Q

According to the Partnership Act 1890 Who has the right to manage a partnership under the Act?

A

Every partner

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13
Q

According to the Partnership Act 1890 - How are the ordinary management decisions made in a partnership

A

By majority of the partners

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14
Q

According to the Partnership Act 1890 - How can changes to a partnership agreement be made?

A

With the unanimous consent of all partners

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15
Q

According to the Partnership Act 1890 - Is interest paid on the original capital contributed by partners?

A

5% Can be paid on further contributions

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16
Q

According to the Partnership Act 1890 - What is required to admit a new partner into a partnership

A

Approval from all existing partners

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17
Q

According to the Partnership Act 1890 - Can a partner be expelled from the partnership? If so, how?

A

Yes, if the agreement permits and a majority of partners agree

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18
Q

According to the Partnership Act 1890 - What happens when a partnership is dissolved?

A

Partners wind up affairs and distribute any remaining assets

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19
Q

According to the Partnership Act 1890 - How is a capital deficiency handled among partners?

A

It is shared in proportion to the capital originally contributed

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20
Q

According to the Partnership Act 1890 - Where must partnership records and acounts be kept?

A

At the business premises, accessible to all partners

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21
Q

What are the fiduciary duty of partners in a partnership

A

To act in good faith, avoid conflicts of interest, and not make personal profits without consent

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22
Q

In what situation can a partnership automatically end?

A
  1. Death or bankruptcy of a partner (unless agreed otherwise)
  2. End of a fixed term (if partnership was for a specific period)
  3. Completion of a single venture (if agreement specifies this will dissolve the partnership)
  4. If continuing of a single venture (if the agreement specifies this will dissolve the partnership)
  5. A partner gives notice to dissolve the partnership becomes illegal
  6. A court orders the dissolution.
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23
Q

Under section 35 Partnership Act 1890 the court can bring a partnership to an end in what following situations

A

*Partner has mental disorder or permanent incapacity
*Partner engages in activity prejudicial to the business
*Partner persistently breaches the partnership agreement
*Business can only be carried on at a loss
*It is just and equitable to do so

24
Q

How can authority be set in a partnership?

A

Expressed or actual

25
Q

What does Section 5 of the Partnership Act 1890 say about a Partner’s Authority

A

*Every partner is an agent of the firm and other partners
*Partners can bind the firm in transactions entered into during the ordinary course of business
*A partner acts within their implied authority if they handle transactions that are typical for the partnership business

26
Q

How of the liability lies on the partners?

A

Responsible for the full amount of the firm’s liabilities

Outsiders can take legal action against the partner collectively or against individual partners. Known as joint and several liability

27
Q

Where does liability lie on debts and contracts

A

The firm is liable for contract made by a partner

28
Q

What does holding out mean?

A

A person represents themselves as a partner even when they’re not or they allow others to believe that they are liable as if they were an actual partner

29
Q

Who is liable in a partnership?

A

*Every partner
*New partners are not liable personally for debts incurred before they became a partner
*The partner will continue to be liable for the ongoing debts of the business until notice of retirement is given
*If there is a change of partners and third party deals with the partnerships against the change, the partners of the old firm remain liable unless the third party has notice of the change
*Novation
*Incoming or continuing partners may agree to indemnify the outgoing partner against any debts incurred prior to retirement

30
Q

What does novation mean?

A

Creditor agrees the liability on the debt will be that of the continuing or incoming partner, not the outgoing partner

31
Q

Difference between a company and a (ordinary partnership)

A

company is a legal entity a partnership is not

32
Q

Who is liable for debts in a company vs a partnership

A

Liability is limited to shareholders’ contributions. In a partnership they’re all liable

33
Q

What is required to create a company vs Partnership

A

Company needs a registration with a written constitution while a partnership has no formal requirements

34
Q

Can shares or ownership interests be transferred easily in a company or a partnership?

A

Company are transferable in a partnership the transfer requires consent or dissolution

35
Q

How are borrowing rules differ between companies and partnerships

A

Companies can create both fixed and floating charges for borrowing while partnership can only created fixed charges

36
Q

Who manages a company vs a partnership?

A

Companies managed by directors (who aren’t owners) while partnerships are managed by the partners themselves

37
Q

What is the difference in returning capital to members in company vs partnership

A

Companies usually cannot return capital to members except on dissolution. Partners can withdraw their capital

38
Q

What happens to a company or partnership if a member dies or goes bankrupt?

A

Company still exists and partnership is automatically dissolved unless agreed otherwise.

39
Q

How does tax differ from companies to partnerships?

A

Companies pay corp tax while partners pay income tax on their share of profits

40
Q

What are limited liability Partnerships LLPs

A

Introduced by the Limited Liability Partnerships Act 2000

*Hybrid entities
*Combine flexibility of partnerships with the limited liability of companies
*Separate legal entity from their members

41
Q

How to form an LLP

A
  1. Submit an incorporation document to the Registrar of companies which includes
    *LLP’s name (must include “Limited Liability Partnership or LLP”)
    *Location of its registered office
    *Address of it’s registered office
    *Name and addresses of all members
    *A statement designated members responsible for administrative and filing duties

If it’s not registered then it’s a general liability.

42
Q

What happens if an LLP does not have a partnership agreement or certain issues aren’t covered

A

The limited Liability partnership Act 2000 and LLP regulations 2001 apply

43
Q

Is there a limit to the number of members in an LLP?

A

No

44
Q

How can new members join an LLP?

A

Agreement with an existing members

45
Q

How can members leave an LLP

A

Give reasonable notice to other members with the change reported to Registrar within 14 days

46
Q

Who manages an LLP and what are their responsibilities?

A

Every member can take part in management unless partnership agreement states otherwise. Their roles are similar to company directors

47
Q

What can members do if they face unfair prejudice in an LLP?

A

They can apply to the court, although this right can be excluded by unanimous consent

48
Q

What are the record-keeping obligations for an LLP?

A

Retain accounting records, prepare and publish audited accounts similar to a company

49
Q

Can small and medium sized LLPs be exempt from certain filing requirements?

A

Yes can claim exemptions

50
Q

What are the reporting requirements for LLPs to comply with

A

Maintain a register of charges and register them with the registrar
Notify changes to membership or the registered office
Include the LLPs name on correspondence and outside its business premises

51
Q

Are LLps required to file a director’s report?

A

No there is no requirement for an equivalent of a director’s report

52
Q

What liability does an LLP have for its business debts?

A

Separate legal entity, primarily liable for its debts and obligations

53
Q

When is the LLP not bound by a members actions?

A

If the member had no authority
And third party knew the member lacked authority or did not believe the member was a partner

54
Q

Do LLP members have personal liability for a firm’s debts

A

No but members owe a duty of care

55
Q

In an LLP when can a member be bound personally liable

A

Fraudulent or wrongful trading

56
Q

Does the LLP get terminated if there’s a change of membership?

A

No but it can be or dissolved by agreement of members unanimously

57
Q

If an LLP becomes insolvent what can the members do?

A

*Propose a voluntary agreement
*Apply to put the LLP into administration
*Resolve to go into compulsory or voluntary liquidation

58
Q

What insolvency rules apply to LLPs?

A

Generally, the same rule applies except:

  1. Withdrawals made by members in the two years prior to winding up can be clawed back if the member knew or should have known teh LLP was insolvent
  2. Members may need to contribute to LLP assets on winding up, as agreed in the partnership agreement

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