Company Law Flashcards
Gerry McDonald has recently been made redundant from his position as Transport Manager for a small
distributor in Glasgow. He now plans to start up his own business with his wife, Nicola, who will manage
the office and accounting functions. Gerry appreciates that he has a number of choices: to operate as
either sole trader, in partnership with Nicola, or incorporate a limited company.
Identify 4 advantages of each of the 3 options.
Sole trader
Can form a business with little formality; can be one step closer to the customers; service can be more personal; can
make all decisions if desired; has central control; can vary the capital employed; often has limited overheads; can take
risks more easily; can keep all the profits.
Partnership
A partnership has greater financial resources than an individual; a partnership can be set up with limited formalities;
responsibility is shared; control can be flexible; expertise is greater; a partnership is not required to have accounts
audited annually.
Limited company
Being a limited company helps separate the personal identities of owners from that of the business; liability is limited
to the amount, if any, unpaid on individual member company shares; access to funding – banks prefer to lend to
companies; adds credibility – company structure communicates permanence, credibility and stature; an enduring
structure – companies may continue on regardless of what happened to individual directors, eg changes to directors;
Easier transfer of ownership – may be transferred without substantially disrupting operations.
Limited liability
Liability is limited to the amount, if any, unpaid on individual member company shares.
Ownership and shares
Forming a limited company allows changes to the business without affecting the legal entity, eg replace directors etc.
This offers much more flexibility in the way the business is managed and makes it easier to take on additional funding
and expertise.
‘Limited title’
Lots of large businesses prefer to deal with limited companies rather than with sole traders. Limited company accounts
are subject to public register and can be easily checked.
Tax
Reduce the tax bill. Sole trader profits are taxed in the same way as PAYE income. With a limited company you can pay
a salary through loans, dividends and PAYE.
Edward Carruthers and Thomas Mayhew have worked together in a partnership for 7 years. They
have recently bought out a competitor and realise that the business will have to adapt to meet their
change in circumstances. Their favoured option is to form a private limited company, but to bring it
into existence, they will have to follow certain procedures and create prescribed documents.
a) Identify the key documents they must compile in order to create their company.
Memorandum of Association; Articles of Association; Form IN01.
b) Briefly describe the procedures they must take, mentioning FOUR important steps which
must be taken before they can trade under the name of the new company.
Edward and Thomas must appoint themselves as directors – company secretary (is optional) and together they must draw up the three documents listed in 2a. These documents must be submitted to the Registrar of Companies. Trading can only commence when a Certificate of Incorporation has been received from the Registrar.
James and Catherine Glover started their household removals company, James Glover Removals Ltd,
in Suffolk almost 17 years ago. They currently employ over 40 staff, of which you are the Transport
Manager. The company requires further investment for a rapid expansion programme and James and
Catherine have decided to make the transition to a plc.
a) Briefly describe FOUR conditions that the company will be required to meet to become a
public limited company.
As a PLC: It must have at least two directors (who may also be members of the company); all individual directors
must be aged 16 or over; it must have at least one secretary; the secretary must be qualified to act as a secretary;
at least two members (shareholders) as it is answerable to them; in its title ‘Public Limited Company’; a minimum of£50,000 shares.
b) As part of the application process, identify and explain TWO of the actions required to
complete the transition to a plc.
Re-name the company: Rename the company to include ‘PLC’.
Prospectus: Prepare and publish the Prospectus, which details financial prospects.
Submit amended documents to the Registrar of Companies: These include amended Memorandum and Articles and the Prospectus.Certificate of Trading: Apply for a trading certificate by completing and delivering form SH50 to Companies House.
This entitles the company to trade as a PLC, selling shares and debentures to the public.
Identify TWO legal documents to be amended or created by the company.
Memorandum of Association; Articles of Association; Prospectus.
