Choice of Business Structure Flashcards

Question 1

Q

SOLE TRADERSHIP

Answer

A

^{Informal business strucutre where an individual is carrying out business without having registered a single member company. Business form is not governed by law but law of tort, contract and trust law.}

^{E.g. Electrician. Not necessary to incorporate a company to carry on his trade. He must be qualified and duly registered with some professional organisation (controls imposed despite there being no regulation).}

Requires only start-up capital (and skills). Not dependent upon the investment of capital by others.
Cannot have two members and a registered share capital.

Question 2

Q

PARTNERSHIP

^{When choosing corporate form you have consider different characteristics, features and strengths and weaknesses of each corporate form.}

Answer

A

Two or more people are carrying on a business together and have not registered a company to use for their business with a common view of profit.

Partnership Act 1890, s. 1(1)

^{Advantages over registered company include: fewer formalities}

No need for registration
No requirement for meetings. At least hold a meeting annually.
Lower costs to run.

Question 3

Q

COMPANY

Answer

A

Registration with Companies House.
Taxation - corporation tax (sole trader and partnership = personal income tax).

Formalities

Governance by SH general meeting and board of directors.
Disclosure information through annual reports with financial statements.
Limited liabilty for members to the amount not yet paid on shares.
Company has corporate personality = owns assets, can sue and be sued.
Can raise capital through equity financing (not possible with sole trader because if money was put in it would become a partnership).

^{Different types of companies}

^{Most registered - Companies House.}

^{Other methods:}

^{Incorporation by Royal Charter (e.g. Law Society): non-profit making, charitable and educational purposes.}

^{Incorporation through Act of Parliament (not common): Historic Buildings and Monuments Commission for England incorported by National Hertiage Act 1983.}

^{Most Limited (must state when registered s. 9(2) CA)}

^{May choose unlimited because of disclosure requirements to ensure the company has sufficent funds to prepay the creditors. Unlimited company such issue not exist SH would be personally liable for the debts to the creditors.}

^{Members liability when the company is wound ip is limited to a fixed amount agreed with the company when they become memners. Company will still have to repay the debt.}

^{Section 3 CA 3006:}

Limited = liability of its members is limited by its constitution. Shares or by guarantee (difficult to transfer as not divided).
Limited to amount unpaid of the shares = limited by shares
Limited amount as members undertake to contribute to the assets of the company in event of being wound up = limited by guarantee.
No limit = unlimied.
Public/Private - mosetly private.

Defintion of private not useful (s. 4 CA 2006). Distinguish between the two consider the -suffix.

^{Differences}

^{Minimum capital requirement.}

^{Private = none (£1)(s. 755 CA 2006).}

Public = £50,000 (s. 763 CA 2006).

Ability to raise funds in the public market

Private = not permitted issue shares to public.

Public = London Stock Exchange. Advantage of being listed prestiage and money.

‘Small company regime’

Use simple accounting system (audit accounts) and can save costs (qualification s. 381-82 CA 2006). Two or more of the requirements must be met.

^{Plc’s, quoted or unquoted? Most quoted.}

^{Well established = Main Market}

^{Start up = Alternative Investment Market.}

^{Must comply with Listing Rules (and CA). Premium or Standard listing - former recieves money from the investor more easily thus give the company a lower cost of capital. Requirements (and obligations for each of them).}

Single company or a group?

Corporate groups = relationship of parent and subsidary company (s. 1159 requirements for considering whether it is a subsidary).

For profit or not for profit? Most for profit.

‘Not for profit’ = Community Interest Company = CA 2006 (Companies (Audit, Investigations and Community Enterprise) Act 2004. Designed to benefit the community rather than for benefit of the owners of the company.

E.g. Building Societies Act 1986 - Nationwide.

Question 4

Q

ORDINARY PARTNERSHIP

Answer

A

^{Partnership Act 1890 - s. 1 defined ‘partnership’ as persons carrying on business in common with a view to profit.}

^{‘Persons’ - includes companies. Newstead v Frost.}
^{‘Business’ - every trade, occupation or profession (very wide).}
‘In common’ - participation in the business.

Saywell v Pope - Mr D and P partners in firm. Obtained franchise; Mrs S and P employed to do small amount of work but then became more active. Formal agreement made that recongised wives as partners of the firm. Were the wives partners before the agreement? Thier formal authority in deciding affairs of partnership was limited therefore not a partnership beforehand - never intergrated into the firm.

‘With a view to profit’ -

Newstead v Frost - D formed partnership with B companu to exploit his highly profitable activities. Purpose company to avoid taxation. Was this a partnership? Factor: right to participate in the profits of the firm (s. 2(3) PA) however this not conclusive. HL: profits derived from D’s activiries; avoidance tax not affect that basic idea.

Features of Partnership

Unlimited Liability

To the debt of the firm - s. 9 PA.

Mutual Agency

Agency relationship between partners. Acts of every partner bind the firm and his partners. Exception (s. 5): partner acting has no authority and person whom dealing knows or does not know or believe him to be a partner.

Three types of authority: actual, implied and apparent. Exception arises in absence of ‘actual’ authority. Act partner (dishonest) not bind anyone and will be personally liable. Difficult to invoke - third party can rely on apparent authority.

Number of Partners

Until 2002 - max 20. Now defined.

Formal agreement

^{Not essential. Absence rights and responsibilities of partners decided PA 1890.}

Question 5

Q

DUTIES OF PARTNERS

ORDINARY PARTNERSHIP

&

RIGHTS

Answer

A

Ref formal agreement and Act clear picture of the rights and responsibilites of the existance of the formal agreement. Partnership relationship mutual trust; partners owe each other duty of good faith i.e. act honestly and for the benefit of the partnership as a whole.

s. 28 - duty to render accounts to each other. Disclose financial position in the partnership to any partner or his legal representative. Partners not have disclouse personal position unless have business account.
s. 29 - account for private profits. Must account to firm any benefit derived by him without consent of the other partners. Unless disclosed to firm that a transaction if for them and not the firm, when they carry our profitable activity the surplus earned will go back to the company.

Difficult to draw line between the personal and business activities of the partners. Business accounts may be in the personal names of the partners.

s. 30 - not supposed to compete with the firm.

^{Rights of Partners }

s. 24(1) - divide their profits and losses equally. If like different allocation then need formal agreement.
^{s. 24(5):} ^{entitled to take part in management. May be difficult to ensure each partner gets a fair load therefore may have to adjust allocation of profits to the work load - formal agreement.}
^{s. 24(8) - pass motion = simple majoirty (over 50%). Fundamental affairs need agreement of all partners.}

^{cf- company - day to day decisions require a ordinary resolution (simple majority) but fundamental = special resolution (75%).}

Question 6

Q

LIMITED PARTNERSHIP

LIMITED PARTNERSHIP ACT 1907

Answer

A

Different from ordinary partnership:

Two types of partners
(1) General Partners - liable for all debts and obligations to the firm (s. 4(2)).
(2) Limited Partners - contribute a sum of capital or property valued at a stated amount, and who will not be liable for the debts or obligations of the firm beyond the amount contributed. Not permitted participate in management - if dp - considered general partners.
LP must be registered.

Ensure creditor can discover the identity and liability of the limited partners (s. 6).

Limited partners can ensure their interest is not expropriated by inspecting the books of the firm and exmaine into the state and prosepcts of the partnership business, and may advise with partners.

Question 7

Q

LIMITED LIABILITY PARTNERSHIP

LLP

LIMITED LIABILITY PARNTERSHIP ACT 2000

Answer

A

^{A body corporate (with legal personality separate from that of its members), which is formed by being incorporated under the LLPA s.1}

^{Must be registeed (s. 2 and 3)}
^{Unlimited capacity to do business (s. 1(3)) - theory adopted by professionals but can be used for any aspect of business (no issue of ultra vires - old mem laws).}

^{Member has limited liability (s.1(4)) towards debt of partnership. Expose to debt is not limited in the case of personal tort such as a mistake wholly and exclusively commited by a member. TP attempt hold LLP vicarious liable - theory s. 6(4) - both LLP and member will be liable.}

A company or a partnership? - Hybird.

Term ‘LLP’ appears to be partnership but general provisions as evident in PA 1890 will not apply therefore arguable that LLP more similar to company. Effectively modified form of private company.

Definition of LLP (s. 2(1)) more similar with a form of partnership (ordinary). Further s.4 provdies that persons become ‘memners’ of the LLP by two route (note use of members as opposed to partners): (1) original members when LLP incorporated or (2) subsequent members by agreement.

Dissolution

Ordinary partnership - partner dies or choose to leave the company then the partnership will be immediately dissolved or suspended. As LLP has seperate legal personality, if a person ceases to be a member will not affect the existence of this form of business structure.

How interpret nature of members in an LLP?

Clyde & Co LLP - are members (equity partners) entitled to protection under Employment Act (as employees)? Yes. Employers at the same time they are employees for a worker therefore entitled to protection under the Act.

Duties of members

Ordinary partnership as it does not have seperate legal personality, the duties of the partners are owned to each other. LLP has two sets of duties:

(1) Owed to the LLP

^{Arises from relationship between members and LLP as a SLP.}

^{(2) Owed to other members (s. 5)}

^{In absence of express agreement of the rights and responsibilities refer to legislation. Default provisions:}

All members entitled to share equally in the capital and profits of the LLP (s. 24 PA).
Every member may take part in the management of the LLP (s. 24(5) PA).
Render accounts to any member (cf 28)
Account for private profits (cf s. 29)

Agency - one partner will bind the whole LLP. With the same exception as ordinary partnership. LLP not bound by anything done by member in dealing with a person if:

The member in fact has no authority to act for the limited liability partnership by doing that thing, and
The person knows that he has no authority or does not know or believe him to be a member of the limited liability partnership.

Taxation -taxed as a partnership - s. 10.

^{No share can be issued, held and trasnferred which is possible with a company. Leaving an LLP is by cessation.}

^{Dissolution - s. 14 LLPA - government by IA which legisaltion applicable to insolvency of companies - not used for OP or LP. LLP’s regarded as companies and not partnerships for winding up and insolvency purposes. Example of corporate insolvency concepts applied LLPs to make members liable to contribute to the assets.}

^{Section 74 IA has provided the basis that members in the case of having committed a personal tort may be asked to contribute assets back to the LLP.}

Question 8

Q

PARTNERSHIP LAW

REFORM

Answer

A

^{LLP - new business structure. Not considered whether we should reform.}

^{Considered LP and OP - business environment has changed a lot.}

^{Joint Law Comission - explored possibilties reforming partnership law. Concern that not a SLP in OP. If avaliable then partnership can own property, form a contract and sue others. Necessary to distinguish property held for partnerhip and property of its individual members.}

^{Careful distinction between accounts of firm and personal accounts.}
^{Suggestsed giving OP SLP.}

^{Two options proposed:}

^{Voluntary continuing legal personality dependent on registration in a new register of partnerships; and}
^{Compulsory separate legal personality not dependent on registration with optional continuing legal personality. The provisional preference was for the second option.}

^{Dissolution of the partnerhsip- another area considered.}

^{Distinction between the dissolution of the partnership as between a partner who leaves, and dissolution as regards all of the partners. Ensure continuity of the firm then other partners have former another partnership. Long and inconvient. Proposal suggested reform insolvency regime of OP:}

^{Default rules should be altered e.g. death should have another treatement.}
General provision whole partnership comes to an end at sny such time, or on the occurance of act or event, as may be provided expressly or impliedly in partnership agreement.

Key feature of new system appointment of an officer with powers and duties modelled on these of the liquidator in the members’ voluntary winding up of a company (Commission).

Another suggestion: instead OP SLP, introducing company law insolvency regime. If company goes insolvent two ways resolving the issue (1) liquidation (2) adminstration.

If SLP given to OP then members will owe duties to the firm itself.

agency - partners are agents of the partnership, rather than each other.

Question 9

Q

LPA 1907 SUGGESTS REFORMS

Answer

A

^{Law Commission - Joint Consultation Paper - recongised importance of business form for some sectors of business: venture capital. Venture capitalists prefer this business form because a public company's disclosure requirements would be higher and the avaliability limited liability.Balance between numbers of different factors.}

^{- Explored the idea of introducing seperate legal personality.}

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Choice of Business Structure Flashcards

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