Module 16 - Business Structures Flashcards
Is there a legal distinction between the business and the owner of the business? (Sole trader)
No
Is there a formal registration procedure required to operate a sole trader?
No
Although HMRC may need to be informed for tax purposes
Does a sole trader have to keep accounts?
Do these need to be made public?
Yes
No
Does a sole trader have unlimited liability for business debts?
Yes
Is there a limit to the liability of a sole trader?
What does this mean?
No
All of their personal assets (eg house) are at risk if the business fails
Advantages of sole trader
Limited admin - quick and easy to start
Keep all profits
No publishing accounts - reduce costs / help keep certain info a secret from competition
Tax advantages when loss making
Relatively straight forward to change business structure or end trading
Disadvantages of sole trader
Personally liable for business debts
The options and capacity for raising finance are limited
When employing people - sole trader will only be able to rely on their own expertise and capital when starting the business and taking time off from the business may be hard
Why may several people combine to form a partnership
Combining expertise
Combining capital
Sharing risks
What are the three types of partnership?
General partnership
Limited partnership
Limited Liability partnership (LLP)
In a partnership is there more than one individual owning and running the business?
Yes
What is the minimum number of people in a partnership?
What is the maximum?
Two
No statutory maximum number of partners
If operating a partnership is it advisable that a formal partnership agreement is drawn up?
Yes
The legal document (formal partnership agreement) will include what?
Details of how partners will share profits and losses
Whether any salaries are to be paid to partners
Any interest that is to be paid on capital they contribute to the partnership
Occasionally a partnership agreement document may not exist and unless it can be considered that the agreement has been established by practice, these types of situations will be governed by what?
What would this mean?
The Partnership Act 1890
Profits and losses would be shared equally
Can any natural person (human being) aged 16 (for England / Scotland?) (18 in the rest of the UK) enter into a partnership agreement?
Yes
Can corporate bodies, including registered companies also enter into partnership agreements?
Yes
Persons who have entered into a partnership are referred to collectively as?
The name under which the business is carried is known as?
A firm
The firm name
In Scotland, a firm is?
A legal person distinct from the partners of whom it is composed
Partnerships
Does the separate personality of the firm in Scotland give rise to limited liability which may be enjoyed by members of a registered company?
No
Do partnerships in parts of the UK other than Scotland have no legal status separate from that of their members?
No
In both Scotland and the rest of the UK, does each partner face unlimited, personal liability for the entire debts of the business leaving them to recover any contribution from the partnership assets or the other partners, who in the absence of an agreement to the contrary are liable to the other partners for an equal share?
Yes
Advantages of general partnerships
Pooling resources and expertise can make running a business easier than a sole trader
Employees can be incentivised with the prospect of becoming a partner
There is limited admin when starting a partnership
Partnership accounts do not need to be published
Disadvantages of general partnerships
Partners have unlimited liability for the partnerships debts
Decision-making could become difficult or impossible if partners disagree
Partners will become liable for debts even if they were caused by actions of another partner
How does the partnership structure work in a limited company?
At least one partner, known as the ‘general partner’ must have unlimited liability for the debts of the firm
Other partners, known as limited partners, have limited liability provided certain conditions are met
How does a limited partner work in a limited partnership?
Provides capital to the business but must not take an active role in running the business
Has no power to bind the firm
The liability of a limited partner is limited to what?
But, what happens if this partner becomes involved in management then what?
The capital contribution made to the partnership
They will become liable for the business debts as though they were a general partner
When is a limited partnership created?
When it registers with the Registrar of Limited Partnerships and is formed on the date of registration
A limited partnership is required to put what after its name to identify its status?
The Letters ‘LP’
Or the words ‘Limited Partnership’
Advantages of a Limited Partnership
Attractive for someone who can provide finance but not expertise / someone who doesn’t have the time to devote to being a hands-on partner in the business
Widely used structure for venture capital and private equity investment funds
Disadvantages of a Limited Partnership
General partner still has unlimited liability
There is a risk that the limited partner might be treated as a general partner if they get involved in the day-to-day operations of the business and so will have personal liability for those debts
What does LLP stand for?
Limited Liability Partnership
When were LLPs introduced?
And by what act?
By the Limited Liability Partnerships Act 2000
How can LLPs be identified?
By the use of the letters LLP after the partnerships name
Is an LLP required to have more than one member on incorporation?
Yes
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When are traditional partnership arrangements usually more appropriate?
When partnerships are small and the partners are of the same profession working closely with one another
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However, over the years, unlimited liability for partners has become an increasing cause for concern given:
Increase in no. Of litigation for professional negligence
Growth in size of partnerships
Increase in specialisation among partners and the coming together of different professions within a partnerships
Risk to a partners personal assets (claims can exceed sum of assets and insurance cover)
What does the limited liability partnerships act 2000 allow?
Businesspeople to organise their affairs so that they can benefit from limited liability but still operate in a similar fashion to a traditional partnership
What is an LLP treated as?
How does this benefit partners?
A separate legal person and, in many ways, is similar in status to a limited liability company
Advantages of a Limited Liability Partnership (‘LLP’)
Partners have limited liability and are therefore not personally liable for the debts of the partnership
Flexibility in the management of the business and how profits are distributed to the partners through the partnership agreement
Disadvantages of Limited Liability Partnership (‘LLP’)
Accounts need to be published which may reveal certain commercially sensitive info to competitors
Partners are tied as if all profits have been distributed (even if all profits have not actually been distributed) - this can cause large tax liabilities compared to shareholders in a company
In law is a company recognised as being a person?
Yes
According to law, does a company have a separate and independent legal personality, distinct from its members and its directors?
Yes
What is a key advantage to separate personality experienced with companies
Opportunity to limit the owners’ liability for the company’s debt
Is a company itself fully liable for the debts of the business?
Yes
Have companies traditionally been a popular choice of business medium?
Why?
Yes
Primarily because the liability of its members for the debts of the company can be limited
In a sole trader or a general partner in partnership, are members fully liable for the debts of the business?
Yes
Is there extensive legal regulation which companies must comply with?
Yes
Can companies be public or private?
Yes
How many members are required to form a company?
One
A public companies name must end with?
Public limited company
Plc
(Welsh = CCC (abbreviation))
A private company’s name must end with what?
The word limited
The abbreviation Ltd
(Welsh = Cyf (abbreviation))
Can a company be public without being listed on a stock exchange?
Yes
What are the main differences between a public and a private company?
Only a public company may offer its shares to the public
And a public company is subject to more rigorous regulation
A private company needs to file its accounts with the registrar of companies (I.E companies house) within how long?
How long with a public company?
Nine months of the financial year end
Within six months (if listed in a stock exchange this is shortened to four months)
Are all companies registered under the CA 2006
No
E.g ICAS / BBC we’re established through a royal charter
Companies which aim to undertake an activity for the benefit of a community rather than for the benefit of the owners of the company might be registered as what?
Community Interest Companies
How may companies be classified?
Limited by shares
Limited by guarantee
Unlimited
Advantages of companies registered under the CA 2006?
Shareholders have limited liability so that they are not personally liable for the company’s debts?
Limited company is separate legal entity from shareholders (will cont if shareholders retire)
Companies can raise finance through issuing shares as well as raising debt
Combination of dividends and low salaries can be used to distribute profits to shareholders in a tax efficient way
Disadvantages of companies registered under the CA 2006?
Strict registration and ongoing compliance
Accounts need to be published (reveal sensitive info)
Profits earned not automatically available to shareholders (need to be distributed somehow)
More shares distributed - decision-making abilities of founder reduced
Are all companies in the UK registered with the Companies House?
Yes
Is it possible to register your company online or via paper application with the Companies House?
Yes
Relevant documents and procedures to form a company?
Application for registration
Memorandum of association
Statement of capital and initial shareholdings
Statement of proposed officers
Statement of initial significant control
Statement of compliance
What must the application for registration state?
Company’s proposed name
Where registered office is situated (eg England and Wales / Scotland / Northern Ireland)
Intended address of the company’s registered office
Whether liability of members is to be limited (and whether limited by shares or by guarantee)
Private or public
Intended principal business activities
What is a memorandum of association?
Brief document which provides evidence the subscribers (people starting company) intend to form a company and become members of the company on formation
Where owner by shares - memorandum provides evidence that subscribers agree to take at least on share in the company on formation
What is statement of capital and initial shareholdings?
A ‘snapshot’ of a company’s share capital the point of registration
What is statement of proposed officers
All applications must include a statement of the company’s proposed officers
What is a statement of initial significant control
A statement saying whether, on incorporation there will broadly be any person who holds, directly or indirectly more than 25% of the shares in the company (think as well can be anyone with an equivalent)
If so, it must include the prescribed particulars of such individuals
What is a statement of compliance?
Is it an offence to make a false statement of compliance? What could a penalty be?
A statement that the requirements of the CA 2006 as to registration have been complied with
Yes
Imprisonment or a fine
Must a company have Articles of Association (‘articles’) which form part of the constitution of the company?
Must a company pay a registration fee?
Yes
Yes
The fee for an online application to form a company is how expensive?
£12
The constitution of a company comprises of?
It’s articles and any resolutions and agreements which affect the company’s constitution
What are a company’s articles?
Rules, agreed by the company’s members, which govern a company’s internal affairs
All the company’s key internal rules will be set out in the articles including:
Appointment and dismissal of directors
The powers, responsibilities and liabilities of directors
Admin requirements relating to the calling, conduct and voting at general meetings
Members rights
Dividend policy
Does the CA 2006 require that all companies have articles?
Yes
Can a company choose to adopt a model form (from the CA 2006) or draft it’s own articles?
Yes
Are there different model articles depending on the type of company which is being formed?
Yes
Every company must keep certain company registers and other information available for inspection, these include:
Register of members
Register of directors
Register of charges
Register of people with significant control
What is included in Register of Members
Name and address of each member
Number of shares each member holds
The date of becoming a member and ceasing to be a member
What is the Register of Directors
Names of present and former directors
A service address (official contact address)
Directors country of residence and nationality
Date of birth
What is the Register of Charges
Copies of fixed and/or floating charge, including any instruments amending charges, and related documents
What is Register if people with significant control
Prescribed particulars of any person who has significant control (holds more than 25% of shares) over the company
There can be situations which indicate sig control without 25% of shares (eg right to appoint or remove majority of directors)
Does the CA 2006 require the statutory registers and copies of charges must be available for inspection by shareholders, creditors and members of the public?
Yes
Is it possible for PRIVATE companies to keep certain statutory registers at the public register at Companies House rather than at their own registered office or other inspection address?
Yes
Is every company at least every 12 months required to deliver a confirmation statement to Companies House?
Yes
What is the purpose of the confirmation statement?
To keep the registrar informed about changes to the company
The confirmation statement will state what?
Either that there have been no changes to the company in the previous 12 months or it will state the changes which have been made
In the confirmation statement, confirmation is required of matters which include:
Changes to the PSC register
Particulars of directors and the company secretary (if applicable)
The type of company and its business activities
Changes to share capital
Do shareholders have a role in the administration of companies?
Yes
Certain decisions which company law requires the company shareholders to vote on before it can take effect
How is this done?
Through the passing of resolutions
Historically the main way in which decisions were taken by members of a company was?
In more recent times, has a more flexible regime been introduced for private companies?
In a general meeting
Yes
Private companies are no longer required to hold general meetings, instead?
Provision is made for decisions to be taken by:
Written resolution
Do decisions by public companies require to be taken at a general meeting of the company?
Yes
Two types of general meeting which a company can hold?
An annual general meeting (‘AGM’)
A general meeting
Are private companies required to hold an AGM?
No
Are public companies required to hold an AGM?
By when?
Yes
Must be within six months of the financial year end
Why must AGM be held in six months in public companies?
To ensure shareholders have a timely opportunity to hold the directors of a public company to account
Rules for calling an AGM
Minimum notice period for calling a public company AGM is 21 days (could be extended or shortened if ALL members agree)
If private company decides to hold an AGM - 14 days minimum notice (unless articles provide otherwise)
Notice must be sent to all members, directors and any person entitled to a share as a consequence of the death or bankruptcy of a member
Notice may be sent electronically or in hard copy
Notice must state the time, date and place of the meeting and, subject to the articles, the general nature of the business to be conducted at the meeting
Members holding, broadly, what % of the voting rights have the right to propose a resolution to be included in the AGM agenda provided the shares they hold give them the right to vote on the relevant resolution
5%
As a general rule who will call a general meeting?
The directors
General meetings require as a minimum how much notice?
In what situation could this be different?
14 days
Can be shortened if 90% (private company) or 95% (public company) of members with voting rights agree to a shortened notice period
Members of a company can require the directors to call a general meeting provided:
Shareholding qualification
Requisition
Timing
Action members can take
Members of a company can require the directors to call a general meeting provided:
What is shareholding qualification?
Members holding 5% of the voting rights may requisition a general meeting
Members of a company can require the directors to call a general meeting provided:
What is requisition?
The members requisition can be either in hard copy at the company’s registered office, or in electronic form
Members of a company can require the directors to call a general meeting provided:
What is timing?
The directors must call a meeting within 21 days from the date in which the members request for the meeting is lodged with them
The meeting must then be held no more than 28 days after the date of the notice calling the meeting
Members of a company can require the directors to call a general meeting provided:
What is action members can take
If directors fail to call meeting at members request, members are permitted to call a meeting (must be within 3 months from the date in which the members lodged their meeting request)
Any expenses incurred during this must be reimbursed to members by the company (which must then recover this from the directors (can be out of remuneration))
Can the court order that a company hold a meeting?
When would the court become involved?
Yes
If a member or director with voting rights asked it to and normally this would be done only as a last resort (eg to resolve a deadlock)
Are there circumstances where an auditor can requisition a general meeting?
What are they?
Yes
If for example entity were removing previous auditor and new auditor wanted to put forward their position
Must directors of a public company convene a general meeting if the company’s net assets fall to half or less of the amount of its called-up share capital?
Yes
What are the types of resolution?
Ordinary
Special
What is an ordinary resolution?
Requires a simple majority vote to pass (50%+1)
14 days notice to be given
Certain ordinary resolutions require special notice to be given to the company (not the same as special resolution)
When is an ordinary resolution used?
For most decisions made by the members
To remove a director or an auditor from office before the expiry of their term in office
To give directors authority to allot shares
What is a special resolution
Requires a 75% majority to pass it
Notice period will depend on type of meeting at which resolution is being voted on
When is a special resolution used?
To change the registered name of the company
To alter the company’s articles of association
To vary class rights
To put a company into voluntary liquidation
What is special notice with ordinary resolution (nothing to do with special resolution)
Notice of intention to move the resolution must be given to the company at least 28 days before the meeting at which it is to be moved
Is special notice related to special resolution?
No
What requires the authority of an ordinary resolution of which special notice has been given?
Removal of a director before the expiry of their period in office
Removal of an auditor before the expiry of their period in office
Can public companies pass written resolutions?
No
A private company may not use a written resolution either:
To remove a director before the expiration of their term of office
To remove an auditor before the expiration of their term of office
(Company must hold a meeting for these)
What is a director
Person responsible for the overall direction of the company’s affairs
According to the CA 2006, does any person who occupies the position of a director have to be treated like a director, even if their title is not that of a director?
Yes
What are de jure directors?
Those formally appointed to be a director
What is a de facto director
Someone who is never formally appointed as a director but acts as a director
The test in determining whether a person is a director of a company is what?
One function
To manage the business of the company and any person who acts in this way
Can the term ‘director’ include a number of different roles?
Yes
What is an executive director?
Are they required to have a regular, possibly daily involvement in the management of the company?
A person who performs a specific role in a company under a service contract
Yes
Is the appointing of a managing director a legal requirement?
No
Main task of a non executive director (NED)
Contribute an independent view to the boards deliberations, to help the board provide the company with effective leadership and to ensure high standards of financial probity on the part of the company
Should NEDs be consulted on all major issues of audit and control?
Yes
What is an alternate director?
A person who acts as a director in place of another
Could be another director or an outsider
Are shadow directors under the same legal duties as individuals formally appointed as directors?
Yes
Do public companies have to appoint a company secretary?
Do private companies have to appoint a company secretary?
Yes
No
Principal duties of the company secretary
Convene, attend and minute board meetings
Organise company’s AGM
Liaise with the company’s auditors
Prepare and file the annual return
Maintain the company’s statutory registers
Ensure all documents are filed with Companies House
Deal with any changes in membership
Remind directors and members of the terms of the company’s articles of association
Can the company secretary be a director of the company?
Yes
But does not need to be
Does the secretary have to be a natural person?
No
Therefore it is possible to appoint another company to act as the secretary
Do some companies specialise in providing company secretarial services?
Yes
Does any decision that directors take have to be unanimous or a majority?
Yes
With board of directors and decision making
The model articles for a private company provide, among other things that:
Any director may call a meeting of directors
Every director must be given a reasonable notice of a meeting of directors unless that is not practicable, or the director has waived their entitlement to notice
Are directors responsible for ensuring that the company keeps a record of every unanimous or majority decision taken by the directors?
How long must this record be kept for?
Yes
10 years at least from the date of the decision
General duties owed by director to their company are set out where?
In the CA 2006 which codified the principal duties that had been established over the years by case law
General statutory duties for directors (by CA 2006)
Act in accordance with the company’s constitution
To promote the success of the company for the benefit of its members as a whole
To exercise independent judgement
To exercise reasonable skill, care and diligence
Duty to avoid conflicts (personal conflicts)
Not accept benefits from third parties
Declare any interest in a transaction or arrangement proposed by the company
As a general rule a director has no personal liability for the debts of the company with the following exceptions
Lifting the veil of incorporation
Limited company can say its directors will have unlimited liability for its debts
A director can be liable to the company’s creditors, or be held liable to contribute to the company’s assets on a winding up
Is every member of a company contractually bound to the company by the articles?
Yes
Is there an obligation for shareholders to act in the best interests of the company?
No
What are derivative claims?
Claims by individual shareholders, acting on behalf of the company against the directors of the company
Common law
The general rule is known as what?
Foss v Harbottle
Common law
What is the general rule? (Rule in Foss v Harbottle)
Provides that it is for the company itself to bring proceedings where w wrong has been done to the company?
Common law
What are the four key exceptions to the rule in Foss v Harbottle
Illegal act
Special procedure
Membership rights
Fraud on the minority
Under the CA 2006? A derivative claim can be brought in respect of?
A cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company
At common law when can a claim be brought in respect of a directors negligence?
Under the CA 2006, when can a claim be brought in respect of a directors negligence?
Only where that director has benefitted from it
Actionable even if director has not personally benefitted from it
When did provisions with derivative claims for CA 2006 come into force?
1 October 2007
Maybe have a look over derivative claims and what they are again
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