Forms of Business Organisation Flashcards
What are the primary factors to consider when choosing a legal form for business activity?
Consider the required inputs, risk levels, expected returns, and consequences of incorporation.
What are the advantages of operating as a sole trader?
- No legal filing requirements
- Simplicity and privacy
- Full control over the business
- Ability to trade under a chosen name
Why is unlimited liability a disadvantage for sole traders?
Sole traders are personally liable for business debts, meaning personal assets can be seized if the business collapses.
How does the Partnership Act 1890 define a partnership?
A partnership exists when two or more people agree to carry on a business in common for profit (Section 1, Partnership Act 1890).
What is the difference between property ownership in partnerships and companies?
Partnerships cannot own property; legal title is usually held in trust for the partners, whereas companies can own property as legal entities.
What does ‘entity shielding’ mean in the context of partnerships?
Entity shielding protects partnership assets from personal creditors of partners, but this is weaker compared to corporate limited liability.
How does a limited partner differ from a general partner in a limited partnership?
A limited partner contributes capital and has no personal liability beyond that amount but cannot participate in management.
What are the main advantages of a Limited Liability Partnership (LLP)?
- Separate legal personality
- Limited liability for members
- Organizational flexibility akin to partnerships
- Privacy in member agreements
What case clarified the liability of LLP members for the actions of others in the partnership?
Dixon Coles and Gill (2021) clarified that innocent LLP members are not liable for misdeeds they were not party to.
What was the significance of Salomon v Salomon [1897]?
It established that a company is a separate legal entity, distinct from its members.
What distinguishes public companies from private companies in the UK?
- Public companies can offer shares to the public, while private companies cannot
- Public companies must use ‘plc’ in their name and have a minimum of two directors
- Private companies are the default under the Companies Act 2006 unless specified otherwise
What is the primary disadvantage of limited companies in terms of administrative burden?
They must comply with formalities such as registration and filing requirements, which can be time-consuming and costly.
What are the five core attributes of a company as defined in the lecture?
- Legal personality
- Limited liability
- Transferable shares
- Delegated management with a board structure
- Investor ownership
Why is limited liability important for encouraging investment?
It limits investors’ risk to their contributions, encouraging participation without fear of personal asset loss.
What is the goal of company law according to the lecture?
To provide a legal framework for businesses with key attributes (e.g., limited liability) while reducing transaction costs and agency conflicts.
Why is the perpetuity of business a disadvantage for sole traders?
The business ceases to exist upon the death or abandonment of the sole trader.
Why are partnerships considered ‘unincorporated associations’?
They are not separate legal entities distinct from the partners, and liabilities rest with the individual partners.
What happens to partnership contracts that appear to be made with the partnership itself?
They are, in fact, contracts with the individual partners, as partnerships cannot enter into contracts themselves.
What is the significance of the capital and profit-sharing rule in the Partnership Act 1890?
It sets default provisions for sharing profits and managing the partnership, though these are often overridden by agreements.
How does the absence of a 20-partner limit impact partnerships today?
It allows partnerships, such as those formed by solicitors and accountants, to grow into large multinational associations.
Why have limited partnerships been popular with private equity firms?
They allow limited partners to invest without liability beyond their contributions, while general partners manage the business.
What reform introduced transparency measures for limited partnerships?
The Economic Crime and Corporate Transparency Act 2023 requires disclosure of partners’ details, such as names and addresses.
What is a Private Fund Limited Partnership (PFLP)?
A subcategory of LPs introduced in 2017, designed to reduce administrative burdens on private funds using LP structures.
What is the main limitation for limited partners in a limited partnership?
They are prohibited from participating in the management of the business.
How does the concept of ‘tax transparency’ apply to LLPs?
The profits of the LLP are taxed as if they were earned directly by the members, not the LLP itself.
Can LLP members avoid personal liability entirely?
Not always; members may still be liable for misfeasance, clawback provisions under the Insolvency Act, or by agreement.
How does an LLP compare to a company in terms of floating charges?
LLPs, like companies, can create floating charges over their assets.
What filing and disclosure requirements apply to LLPs?
LLPs have the same accounting and filing obligations as companies but benefit from confidentiality in their member agreements.
What is the primary distinction between companies limited by shares and companies limited by guarantee?
Companies limited by shares are designed for profit-making activities, while those limited by guarantee are often used for not-for-profits.
What flexibility do companies limited by guarantee provide regarding membership?
Members can join or leave easily, similar to a club or society.
Why is raising finance challenging for companies limited by guarantee?
They lack share capital and rely on limited contributions from members in the event of liquidation.
What advantage do companies limited by guarantee have for not-for-profit organizations?
They allow for easy management and reduced liability while meeting the needs of non-commercial objectives.
Why might some businesses opt for an unlimited company despite the risk of insolvency?
Unlimited companies are not required to file accounts with the registrar, offering a higher degree of privacy.
What is the minimum share capital requirement for a public limited company (PLC)?
t must have at least two shareholders and directors; 25% of its shares must have been issued to the public, amounting to a minimum share capital of at least £50,000
Public limited companies must meet an authorized minimum share capital as specified by the Companies Act 2006.
How does the Companies Act 2006 define private and public companies?
- Private company: Any company not classified as a public company (Section 4(1))
- Public company: A company whose certificate of incorporation explicitly states it is public (Section 4(2))
Can a public company exist without being listed on a stock exchange?
Yes, public companies do not need to be listed to qualify as a public company.
What is Richard Posner’s argument regarding limited liability?
Limited liability encourages investment by reducing investors’ risk of loss to their contributions, increasing the supply of investment.
How does the corporate form address the non-perpetuity of unincorporated businesses?
Companies allow for perpetual succession, enabling the business to continue regardless of changes in ownership or management.
What is the ‘cost of limited liability’ for companies?
Companies face an administrative burden, including filing with the registrar and adhering to regulatory requirements.
Why might banks require personal guarantees despite limited liability?
Banks often insist on personal guarantees for loans, negating the limited liability benefit for small company directors.
What is affirmative asset partitioning in corporate law?
It allows companies to separate the firm’s assets from personal assets, protecting the business from personal creditor claims.
How do transferable shares benefit a company?
They enhance liquidity, enabling ownership changes without disrupting business operations.
What is the role of a board of directors in a company?
The board centralizes management, coordinates productive activity, and makes fundamental decisions separate from day-to-day operations.
What conflicts does company law aim to address?
It seeks to manage conflicts between managers and shareholders, among shareholders, and between shareholders and other corporate constituents.
