Chapter 6 - Types of trade Flashcards
What’s a sole trader?
Single person who owns and runs the business
What’s the distinction between the owner of the business and the business itself for a sole trader
There is none. The trader can be using a business name but it’s not a seperate legal entity
What’s the advantages of being a sole trader?
*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)
What are the disadvantages of trading as a sole trader
*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.
What’s a partnership
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.
Does a partnership separate legal entity
NO
What happens if one of the two partners die in a partnership
They become soletraders
How does HMRC decide what date the partnership begins?
Date on which the parties open the bank account
Why choose a partnership?
Follows specific legal rules about contract, agency and unique partnership law
How partnerships are formed
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.
What are the key points of the Partnership Act 1890
*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
According to the Partnership Act 1890 how are profits and losses shared?
Equally among all partners
According to the Partnership Act 1890 Who has the right to manage a partnership under the Act?
Every partner
According to the Partnership Act 1890 - How are the ordinary management decisions made in a partnership
By majority of the partners
According to the Partnership Act 1890 - How can changes to a partnership agreement be made?
With the unanimous consent of all partners
According to the Partnership Act 1890 - Is interest paid on the original capital contributed by partners?
5% Can be paid on further contributions
According to the Partnership Act 1890 - What is required to admit a new partner into a partnership
Approval from all existing partners
According to the Partnership Act 1890 - Can a partner be expelled from the partnership? If so, how?
Yes, if the agreement permits and a majority of partners agree
According to the Partnership Act 1890 - What happens when a partnership is dissolved?
Partners wind up affairs and distribute any remaining assets
According to the Partnership Act 1890 - How is a capital deficiency handled among partners?
It is shared in proportion to the capital originally contributed
According to the Partnership Act 1890 - Where must partnership records and acounts be kept?
At the business premises, accessible to all partners
What are the fiduciary duty of partners in a partnership
To act in good faith, avoid conflicts of interest, and not make personal profits without consent
In what situation can a partnership automatically end?
- Death or bankruptcy of a partner (unless agreed otherwise)
- End of a fixed term (if partnership was for a specific period)
- Completion of a single venture (if agreement specifies this will dissolve the partnership)
- If continuing of a single venture (if the agreement specifies this will dissolve the partnership)
- A partner gives notice to dissolve the partnership becomes illegal
- A court orders the dissolution.
Under section 35 Partnership Act 1890 the court can bring a partnership to an end in what following situations
*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
How can authority be set in a partnership?
Expressed or actual
What does Section 5 of the Partnership Act 1890 say about a Partner’s Authority
*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
How of the liability lies on the partners?
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
Where does liability lie on debts and contracts
The firm is liable for contract made by a partner
What does holding out mean?
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
Who is liable in a partnership?
*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
What does novation mean?
Creditor agrees the liability on the debt will be that of the continuing or incoming partner, not the outgoing partner
Difference between a company and a (ordinary partnership)
company is a legal entity a partnership is not
Who is liable for debts in a company vs a partnership
Liability is limited to shareholders’ contributions. In a partnership they’re all liable
What is required to create a company vs Partnership
Company needs a registration with a written constitution while a partnership has no formal requirements
Can shares or ownership interests be transferred easily in a company or a partnership?
Company are transferable in a partnership the transfer requires consent or dissolution
How are borrowing rules differ between companies and partnerships
Companies can create both fixed and floating charges for borrowing while partnership can only created fixed charges
Who manages a company vs a partnership?
Companies managed by directors (who aren’t owners) while partnerships are managed by the partners themselves
What is the difference in returning capital to members in company vs partnership
Companies usually cannot return capital to members except on dissolution. Partners can withdraw their capital
What happens to a company or partnership if a member dies or goes bankrupt?
Company still exists and partnership is automatically dissolved unless agreed otherwise.
How does tax differ from companies to partnerships?
Companies pay corp tax while partners pay income tax on their share of profits
What are limited liability Partnerships LLPs
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
How to form an LLP
- 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.
What happens if an LLP does not have a partnership agreement or certain issues aren’t covered
The limited Liability partnership Act 2000 and LLP regulations 2001 apply
Is there a limit to the number of members in an LLP?
No
How can new members join an LLP?
Agreement with an existing members
How can members leave an LLP
Give reasonable notice to other members with the change reported to Registrar within 14 days
Who manages an LLP and what are their responsibilities?
Every member can take part in management unless partnership agreement states otherwise. Their roles are similar to company directors
What can members do if they face unfair prejudice in an LLP?
They can apply to the court, although this right can be excluded by unanimous consent
What are the record-keeping obligations for an LLP?
Retain accounting records, prepare and publish audited accounts similar to a company
Can small and medium sized LLPs be exempt from certain filing requirements?
Yes can claim exemptions
What are the reporting requirements for LLPs to comply with
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
Are LLps required to file a director’s report?
No there is no requirement for an equivalent of a director’s report
What liability does an LLP have for its business debts?
Separate legal entity, primarily liable for its debts and obligations
When is the LLP not bound by a members actions?
If the member had no authority
And third party knew the member lacked authority or did not believe the member was a partner
Do LLP members have personal liability for a firm’s debts
No but members owe a duty of care
In an LLP when can a member be bound personally liable
Fraudulent or wrongful trading
Does the LLP get terminated if there’s a change of membership?
No but it can be or dissolved by agreement of members unanimously
If an LLP becomes insolvent what can the members do?
*Propose a voluntary agreement
*Apply to put the LLP into administration
*Resolve to go into compulsory or voluntary liquidation
What insolvency rules apply to LLPs?
Generally, the same rule applies except:
- 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
- Members may need to contribute to LLP assets on winding up, as agreed in the partnership agreement
