Introduction to business law

Question 1

How is a sole trader taxed for income and CGT purposes?

Answer 1

• Any profits made taxed as individual’s income
• Any gains on one-off transaction charged as CGT

Question 2

What is the difference between how a partnership and LLP is taxed?

Answer 2

Not different - both tax transparent; partners taxed on individual share of profits and chargeable gains as either income or CGT

Question 3

How does a company pay tax?

Answer 3

Corporation tax at flat rate on taxable total profits (TTP) made up of company’s income profits and capital gains

Question 4

What is meant by double taxation on profits in the context of companies?

Answer 4

1. Company pays corporation tax on profits
2. Pays dividends to shareholder which will be taxed on income tax

Question 5

When can a private company, who has converted to a public company, begin trading as a Plc?

Answer 5

Once the new certificate of incorporation and trading certificate showing company’s allotted share capital is not less than minimum has been issued by Registrar

Question 6

What is a listed company?

Answer 6

Company whose shares are listed on a recognised stock exchange (allows commercial investors freedom to deal)

Not all public companies apply to have shares listed

Question 7

How do listed companies operate their various businesses?

Answer 7

Through private company subsidiaries (not listed but affected by governing rules of listed holding companies)

Question 8

Why does a listed company need greater regulation than private companies?

Answer 8

They have 1000s of shareholders only a few of whom have any managerial role at all - need more regulation to ensure accountability of directors as an individual shareholder will not normally have any access to the board

Question 9

What is the difference between a private and public companyin terms of how resolutions can be passed?

Answer 9

A private company can pass shareholder resolutions as written resolutions (bar for removing director/auditor), a public company cannot

Private / Written

Question 10

What is the difference in public and private companies re offering shares?

Answer 10

• Private prohibited from offering shares to public at large
• Public companies can raise further equity by applying for listing to access a wider investor base (inc international debt capital markets)

Question 11

Is an AGM required for all companies?

Answer 11

Only public, but private can if it wants

Question 12

What is the minimum share capital to be issued for a private and public company?

Answer 12

• Private - one share (could be only 1 share of 1p)
• Public - minimum of £50,000

Question 13

When can a private and public company commence trading?

Re certificates they have to receive

Answer 13

• Private - can start as soon as incorporated (certificate of incorporation)
• Public - can start when a trading certificate is issued by Registrar showing that company’s allotted share capital is not less than minimum

Question 14

What are the consequences of a company having separate legal personality?

Answer 14

• Continues to exist even if shareholders/directors change (is an entity itself)
• Directors owe duties to company, not shareholders
• Company owns own property and enters into contracts (and enjoys benefits and liabilities)
• Company sues and sued on its own

Question 15

Who do shareholders and TPs have rights against?

Answer 15

The company, rather than directors

Even though creditors will negotiate with directors!

Question 16

What is limited liability?

Answer 16

The liability of shareholders for the company’s debts is limited to the amount they paid (or agreed to pay) for their shares

Personal assets entirely separate from the company

Creditors cannot pursue claims against shareholder if company has insufficient funds to meet liabilities (but shareholders can lose investment if company becomes insolvent)

Question 17

Will shareholders of limited company be liable to liquidator in the event of insolvency?

Answer 17

No!

Question 18

What does ‘piercing the corporate veil’ mean?

Answer 18

A limit on LL - court can ‘pierce the corporate veil’ in the interests of justice e.g. company considered facade

Question 19

How can counterparties negate the advantage of limited liability?

Answer 19

By requiring security/guarantee from shareholder(s) of the companya s part of lending money to company for example

Comes down to bargaining power of parties

Question 20

How can creditors assess the financial viability of a company?

Answer 20

By checking publicly filed documents at CH

Question 21

When is a principal bound by its agent?

Answer 21

When it has authorised the agent to do so on its behalf

E.g. how a company is bound by directors

Question 22

What are the 3 types of acts by an agent and which will bind principle?

Answer 22

1. Within actual authority (express/implied) = principal bound
2. Outside actual authority but within apparent (ostensible) authority = principal bound
3. Outside his actual and apparent authority = principal not bound but can ratify agent’s acts

Question 23

What do heads of terms do in commercial contracts? Are they binding?

Answer 23

Outline the agreed intentions of the parties prior to negotiation of formal contract - intended to be expressly non-binding but carry substantial mount of moral force

Question 24

What are letters of comfort in loan finance transactions?

Answer 24

E.g. parent company seeks to provide ‘comfort’ to bank that subsidiary can make loan repayments (representations on subsidiary’s past/future peformance)

Question 25

What is battle of the forms and how is it resolved?

Answer 25

• Where parties attempt to contract on own standard terms
• Usually - whoever sends their terms last will prevail

(not a guarantee - safer to expressly agree)

Question 26

What are conditions precedent?

Answer 26

Criteria/conditions that must be met before (parts of the) agreement can come into force

Question 27

What is the difference between assignment and novation? Can both be effected without consent or knowledge of other party?

Answer 27

• Assignment = benefits of an agreement will be assigned but not burden (contracts state whether assignment permitted); usually can be effected without consent of other party
• Novation = both benefit and burden is transferred with effect that TP steps into shoes of party it is replacing; will usually require consent of all

Question 28

How can a company and partnership sign a contract?

Answer 28

• Partnership = by one or more of the partners
• Company = director authorised by BR (save for Articles)

Question 29

How does a company and a partnership execute a deed?

Answer 29

• Company = signed by 2 authorised signatories (2 directors or 1 director and secretary) if common seal used or signed by single director in presence of witness
• Partnership = signature of all partners (individual partner will not have authority to execute deed on behalf of partnership unless authority has expressly been conferred by deed)

Question 30

When should an agreement take the form of a deed rather than a contract?

Answer 30

• The document is required to be executed as a deed (e.g. certain transactions relating to land)
• It is desirable to have a limitation period
• It is questionable whether party to document is providing consideration (deed binding even if valuable consideration not given)

Question 31

What are ‘subscribers’?

Answer 31

The first shareholders in a company who invest when initially set up

Question 32

What are PSCs?

Answer 32

Persons with significant control - generally over 25% shares - details must be provided to CH

Question 33

What does a confirmation statement do?

Answer 33

For a private company - submit annual returns

Replaced the AGM for private companies

Question 34

How many directors are needed by private and public companies?

Answer 34

2 directors for public, 1 for private

Question 35

Are secretaries always needed for companies?

Answer 35

• Private = not obliged, director can carry out role
• Public = obliged, must have requisite knowledge, experience and specified qualifications

Question 36

What is the minimum share capital for a private and public company?

Answer 36

• Private = no requirement
• Public = £50,000

Question 37

If a company has ‘Plc’ in name, does that mean it is a listed company?

Answer 37

No!!!!