Intro Flashcards
Key characteristics of sole traders
- No set up costs: no formalities, the sole trader can start trading right away
- Not a separate legal entity: contracts are formed between the individual themselves and third parties
- Unlimited personal liability: personal assets can be sold to meet the debts of their business
- No formal structure
- No Companies House filing or procedural requirements for running the business
- Complete privacy - no publicly filed accounts
Key characteristics of partnerships
- No set up costs: no formalities, partnership can start trading right away. Partnerships can be formed without any formal agreement or intention.
- Not separate legal entity: contracts are formed between third parties and the partners as individuals
- Unlimited personal liability: partners have unlimited joint (in contract) and joint and several (tort) liability for the debts and liabilities of the partnership
- No CH filing or procedural requirements
- Complete privacy: no requirement for publicly filed accounts
- Partnerships are governed by the provisions of the PZ 1980
Formation of partnership
No need for intention. S1(1) defines partnership as:
the relation which subsists between persons carrying on a business in common with a view to profit
- therefore two or more people working together with a view to profit automatically form a partnership
List of factors in the partnership act 1890:
- Profit sharing: prima facie evidence of a partnership but not necessarily conclusive
Also look at:
- sharing of profits and losses (more likely)
- loans? a loan of money does not make a partnership in itself
- property held jointly?
- not being ‘held out’ as a partner makes the partnership less likely
PA 1890 default provisions
Profits and losses: partners are entitled to share equally in the profits of the business and must share equally un the losses of the business even where the parties have contributed unequally.
Remuneration: not entitled to a salary
Decision making: decisions in ordinary course of business need a majority unless change is to the nature of the business which requires unanimity
Expulsion: a partner cannot be expelled by a majority vote unless all partners have previously expressly agreed a majority can do this
Partners in a LP (limited partnership)
Two types:
- Limited partner: have limited liability and are not involved in the management of the business
- General partners: have unlimited liability and run the business
Must be at least one limited and one general partner
Characteristic of an LP
- Two types of partners: limited and general. Must have at least one of each
- Governed by the Limited Partnership Act 1907
- Must be registered at Companies House but there is no requirement to file accounts
- Not commonly used for general business but often used for investment vehicles
- Popular for joint venture business structures
LLP Key Characteristic
- Limited Liability Partnership Act 2000
- LLP has a separate legal personality which means it can own property and enter into contracts on its own behalf. However, it is taxed like a partnership, so members are taxed individually on their own shares of the income or gains.
- Has limited liability - which is limited to the amount they have agreed to pay under the terms of their partnership agreement
- Registered at Companies House and are required to file annual accounts and other information
LLP default provisions
- Members share equally in capital and profits
- LLP must indemnify members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business
- Every member may take part in the management but no member is entitled to remuneration for management
- no person can become a member or assign membership without the consent of all existing members
- ordinary decision making by majority
- change to nature of business requires unanimous consent
- no implied power of expulsion by a member of the majority unless expressly provided for
Key characteristics of companies
- Separate legal entity: owns property, enters into contracts and can sue and be sued in its own name. Profits and losses belong to the company and it is therefore liable for its own debts
- Limited liability: liability of shareholders is limited to the amount unpaid on their shares.
- Governed by Companies Act 2006
Who’s who in companies
Shareholders/members:
- Owners of the company
- Invest money in return for shares and possibility of dividends
- Not involved in the day to day management but usually have voting rights and control key decisions
Subscribers:
- name given to first shareholders in a company who who invest in the company when it is initially set up
Directors:
- officers/managers of the company
- involved in the day to day running of the company
- collectively known as the board
- small privately companies directors are often also shareholders
Persons with significant control (PSCs)
- details must be provided to companies house
- PSCs are shareholders with over 25% of shares
Other stakeholders:
- include anyone interested in the company such as employees, creditors etc.
Companies Act 2006
Key legislation governing companies in England and Wales
Different types of private companies
Private companies limited by shares (Ltd):
- most common type of company
- no minimum share capital requirements
- prohibited from offering shares to the public
- can be formed by one person
Private companies limited by guarantee:
- no share capital
- liability of members is limited to the amount that they agreed to contribute in the event of a winding up
- membership is not transferable
- rare
Unlimited companies:
- liability is unlimited
- these companies are rare
Types of public companies
Public companies limited by shares (Plc):
- can offer shares to the public
- minimum 2 directors
- minimum share capital of £50,000
- Requires a trading certificate before it can trade
Listed companies:
- only public companies can be listed
- not all public companies are listed
- listed means admitted on a regulated investment exchanges such as LSE.
Differences between private and public company
Name:
- ltd vs plc
Share capital:
- private companies do not have a minimum amount of share capital
- Public companies must have minimum share capital of at least £50,000 of which one quarter must be paid up.
Number of directors:
- Private: one director
- Public: minimum two directors
Company secretary:
- private: does not need one
- public: must have one
Annual general meetings:
- private: don’t need to hold one
- Public: required to have one general meeting each year.
Regulation:
Public companies are subject to a higher level of regulation than private companies
Advantage and disadvantages of LTD
Adv:
- allows investment with limited liability
- minimises risk
- gives business a formal structure
- easier to raise finance though shares and bank loans
- potential for return on investment through bank loans
Dis:
- small priv companies where directors are also shareholders there is no separation of ownership and control
- high levels of formality may not be appropriate or desirable
- public disclosures are necessary
Business models for SQE
- sole trader
- partnership
- limited liability partnership
- private and unlisted public companies
Key considerations for business structures
- Costs
- Risks
- Structure
- Formalities
- Privacy
- Finance
CRSFPF: sole trader
Costs: none
Risk: unlimited personal liability
Structure: no formal structure
Formalities: no formalities
Privacy: complete privacy
Finance: personal capital injection, loans would be personal, contracts are with the individual
CRSFPF: partnership
Costs: no set up costs (unless decides to make partnership agreement and incurs legal fees)
Risk: unlimited joint (contract), unlimited joint and several (tort)
Structure: no formal structure
Formalities: no CH or procedural requirements
Privacy: complete privacy
Finance: own cash or personal loans
CRSFPF: LLP
Costs: incorporation and legal fees
Risk: limited liability up to amount agreed to pay in membership agreement
Structure: separate legal entity but flexible and can use members’ agreement
Formalities: registered at companies house
Privacy: required to file annual accounts and other information
Finance: can borrow in the name of the LLP. Can create floating charges
CRSFPF: companies
Costs: incorporation and legal fees
Risk: limited to amount unpaid on shares
Structure: separate legal entity
Formalities: registered at companies house
Privacy: various filings and disclosures must be made - can be onerous
Finance: most lenders will prefer to lend to companies rather than sole trader or partnership because they are subject to a higher degree of regulation and disclosure. Companies can give more forms of security for borrowing than individuals or partnerships. Can also issue shares.
Tax: sole trader, partnership, LLP
Sole trader, partners and members are taxed on their share of the profits and gains as individuals.
Tax: companies
- Pay corporation tax on total taxable profits (income and capital gains)
Double taxation of profits
The company pays corporation tax on its profits before the payment of dividends to its shareholders. The individual shareholders who receive the dividends will pay income tax on the amount of the dividend.
If a private limited company coverts to a plc when may the company commence trading as a plc?
Once the new certificate of incorporation and trading certificate showing that the company’s allotted share capital is not less than the minimum has been issued by the Registrar of companies.
Consequences of a separate legal personality
- The company owns its own property
- the company enters into its own contracts
- the company sues and is sued on its own liabilities
- company can separate out different elements of a business
Principal/agent relationship
E.g.: company and directors
- Agent acts within actual authority, principal is bound
- Agent acts outside actual authority but within apparent authority, principal is bound
- Agent acts outside actual and apparent authority, principal is not bound (but principal can ratify the agent’s actions)
Why chose to execute a deed rather than a contract?
- transaction requires it (e..g land transactions)
- limitation period for a deed is 12 years rather than
- questions around valuable consideration - do not need valuable consideration for a deed
