Different Types of Business Flashcards
What is the difference between an incorporated or unincorporated business?
Incorporated businesses exist as separate legal entities from their owners and managers – most common form is the limited company
- Owners are generally not liable for business debts
Unincorporated businesses have no separate legal entity
- Owners have full personal liability for business debts
Give an overview of sole traders
A sole trader is someone who runs an unincorporated business on their own as a self-employed person
They can have employees, but they own the business alone, benefit from the profits and bear any losses
They pay income tax as a self-employed person
They are personally liable for all the business’ debts
- This means the sole trader’s business assets and personal assets are treated the same for legal purposes
- The concept that there is no limit to the sole trader’s liability is called unlimited liability
Business ceases when they retire or die
Give an overview of partnerships
Exists where two or more people are ‘carrying on a business in common with a view of profit’
- Usually called general partnership to distinguish from limited and limited liability partnerships
A partnership is not a separate legal entity, so the partners are personally liable for all debts and personal assets might be at risk
Where all partners are individuals, they are income taxed separately as self-employed individuals
Give an overview of limited partnerships
There must be one general partner who has unlimited liability for the partnership debts and a limited partner whose liability is limited to the amount they initially invested is permitted
The limited partner must not:
- Control or manage the LP
- Have the power to take binding decisions on behalf of the LP
- Remove their contribution to the LP for as long as it is in business
If they breach any of the above, a limited partner is treated as a general partner with unlimited liability
LPs must be registered with Registrar of Companies
Companies benefit from the concept of ‘separate legal personality.’ What does this mean?
Means the owners and managers are separate from the company itself and the company would be sued, not them
Shareholders will not usually be liable for company debts; their liability is limited to the amount they paid for shares
Salomon v A Saloman and Co Ltd – House of Lords held that as long as the company is legally incorporated, it is treated as any other independent person with rights and liabilities
Using the company to manage risk and avoid liability for debts is acceptable
What is the concept of ‘piercing the corporate veil’ and when can this be done?
This concept means that liability can be imposed on those individuals who own or run the company
Can only be done where a person is under an existing legal obligation or liability or is subject to an existing legal restriction which he deliberately evades, or whose enforcement he deliberately frustrates, by interposing a company under his control
- Even then, the corporate veil can only be pierced so as to deprive the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality
In brief, what are the roles of directors and shareholders?
Directors run the company and make decisions about day to day running of the business
Shareholders are individuals who provide the money (in return for shares) which allow the company to operate; they only tend to get involved in more important decisions affecting the company
What are the requirements for a company to become a public company (limited by shares)?
1) The constitution (rules which govern the company) must state it is a public company
2) The word ‘public limited company’ or ‘plc’ must be at the end of the company’s name; and
3) The company’s owners must invest a specified minimum amount of money for use by the company
- The allotted share capital of the company must be at least the ‘authorised minimum’, currently £50,000 (ss 761 and 763 CA 2006)
- Each allotted share must also be paid up to at least a quarter of its nominal value, plus the whole of any premium on it (s 586 CA 2006)
In what ways do public companies differ from private companies?
Public companies can raise money by offering shares to the public, which private companies cannot
Public companies can apply to join the stock market; main two are London Stock Exchange’s Main Market and Alternative Investment Market (AIM)
- This allows companies to raise large sums of money by enabling investors to buy company’s shares quickly and easily
Public companies are more regulated and publicly traded companies further still to protect the public at large
Companies can register as a public company on original incorporation, or they can register as private and re-register
Give an overview of limited liability partnerships (LLPs)
Cross between a partnership and limited company
Has a separate legal personality, offers owners protection from liability for the LLP’s debts, but partners are taxed as if the business were a partnership and there is more informality and flexibility given by a partnership
Two or more members carrying on a lawful business with a view of profit
LLPs are formed by filing a series of documents with the Registrar of Companies at Companies House and paying an applicable fee
Once registered, Registrar issues a certificate of incorporation
Individual members of the LLP must register with HMRC as self-employed
What factors will affect which business medium a person might choose to go with?
Liability – shareholders have limited liability for company debts, whereas partners are personally liable for partnership debts
Tax might be a key consideration
Formalities – unincorporated businesses have no formal requirements and no legal documents to prepare, whereas companies have to complete minutes of meetings, file certain documents with Companies House and have to comply with strict rules of the CA 2006 in relation to decision making
Publicity of information – Companies must publicise information about directors, shareholders and significant decisions by filing documents with the Registrar of Companies; LLPs must also publicise certain information
Cost – sole traders and partnerships can set up without any legal or administrative costs, whereas there is a charge to form a company or LLP and the individuals will often need legal advice before formation; additional legal and administrative burdens result in higher costs during the running too
Status – individuals might trust companies more due to publicity of information
Finance – companies and LLPs can offer an additional form of security for loans, the floating charge, which is a charge over all of the business’s assets and is not available to partnerships or sole traders. This makes companies more desirable clients for lenders such as banks
