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EY Accounting - Business Acumen > Module 16 - Business Structures > Flashcards

Module 16 - Business Structures Flashcards

1
Q

Is there a legal distinction between the business and the owner of the business? (Sole trader)

A

No

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2
Q

Is there a formal registration procedure required to operate a sole trader?

A

No

Although HMRC may need to be informed for tax purposes

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3
Q

Does a sole trader have to keep accounts?

Do these need to be made public?

A

Yes

No

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4
Q

Does a sole trader have unlimited liability for business debts?

A

Yes

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5
Q

Is there a limit to the liability of a sole trader?

What does this mean?

A

No

All of their personal assets (eg house) are at risk if the business fails

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6
Q

Advantages of sole trader

A

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

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7
Q

Disadvantages of sole trader

A

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

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8
Q

Why may several people combine to form a partnership

A

Combining expertise

Combining capital

Sharing risks

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9
Q

What are the three types of partnership?

A

General partnership

Limited partnership

Limited Liability partnership (LLP)

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10
Q

In a partnership is there more than one individual owning and running the business?

A

Yes

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11
Q

What is the minimum number of people in a partnership?

What is the maximum?

A

Two

No statutory maximum number of partners

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12
Q

If operating a partnership is it advisable that a formal partnership agreement is drawn up?

A

Yes

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13
Q

The legal document (formal partnership agreement) will include what?

A

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

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14
Q

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?

A

The Partnership Act 1890

Profits and losses would be shared equally

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15
Q

Can any natural person (human being) aged 16 (for England / Scotland?) (18 in the rest of the UK) enter into a partnership agreement?

A

Yes

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16
Q

Can corporate bodies, including registered companies also enter into partnership agreements?

A

Yes

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17
Q

Persons who have entered into a partnership are referred to collectively as?

The name under which the business is carried is known as?

A

A firm

The firm name

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18
Q

In Scotland, a firm is?

A

A legal person distinct from the partners of whom it is composed

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19
Q

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?

A

No

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20
Q

Do partnerships in parts of the UK other than Scotland have no legal status separate from that of their members?

A

No

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21
Q

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?

A

Yes

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22
Q

Advantages of general partnerships

A

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

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23
Q

Disadvantages of general partnerships

A

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

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24
Q

How does the partnership structure work in a limited company?

A

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

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25
Q

How does a limited partner work in a limited partnership?

A

Provides capital to the business but must not take an active role in running the business

Has no power to bind the firm

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26
Q

The liability of a limited partner is limited to what?

But, what happens if this partner becomes involved in management then what?

A

The capital contribution made to the partnership

They will become liable for the business debts as though they were a general partner

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27
Q

When is a limited partnership created?

A

When it registers with the Registrar of Limited Partnerships and is formed on the date of registration

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28
Q

A limited partnership is required to put what after its name to identify its status?

A

The Letters ‘LP’

Or the words ‘Limited Partnership’

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29
Q

Advantages of a Limited Partnership

A

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

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30
Q

Disadvantages of a Limited Partnership

A

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

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31
Q

What does LLP stand for?

A

Limited Liability Partnership

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32
Q

When were LLPs introduced?

And by what act?

A

By the Limited Liability Partnerships Act 2000

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33
Q

How can LLPs be identified?

A

By the use of the letters LLP after the partnerships name

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34
Q

Is an LLP required to have more than one member on incorporation?

A

Yes

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35
Q

JUST UP TO THE START OF LLP ON PAGE 332

A

Continue notes from here

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36
Q

When are traditional partnership arrangements usually more appropriate?

A

When partnerships are small and the partners are of the same profession working closely with one another

HOWEVER POINT

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37
Q

HOWEVER POINT CONT

However, over the years, unlimited liability for partners has become an increasing cause for concern given:

A

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)

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38
Q

What does the limited liability partnerships act 2000 allow?

A

Businesspeople to organise their affairs so that they can benefit from limited liability but still operate in a similar fashion to a traditional partnership

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39
Q

What is an LLP treated as?

How does this benefit partners?

A

A separate legal person and, in many ways, is similar in status to a limited liability company

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40
Q

Advantages of a Limited Liability Partnership (‘LLP’)

A

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

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41
Q

Disadvantages of Limited Liability Partnership (‘LLP’)

A

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

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42
Q

In law is a company recognised as being a person?

A

Yes

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43
Q

According to law, does a company have a separate and independent legal personality, distinct from its members and its directors?

A

Yes

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44
Q

What is a key advantage to separate personality experienced with companies

A

Opportunity to limit the owners’ liability for the company’s debt

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45
Q

Is a company itself fully liable for the debts of the business?

A

Yes

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46
Q

Have companies traditionally been a popular choice of business medium?

Why?

A

Yes

Primarily because the liability of its members for the debts of the company can be limited

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47
Q

In a sole trader or a general partner in partnership, are members fully liable for the debts of the business?

A

Yes

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48
Q

Is there extensive legal regulation which companies must comply with?

A

Yes

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49
Q

Can companies be public or private?

A

Yes

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50
Q

How many members are required to form a company?

A

One

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51
Q

A public companies name must end with?

A

Public limited company

Plc

(Welsh = CCC (abbreviation))

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52
Q

A private company’s name must end with what?

A

The word limited

The abbreviation Ltd

(Welsh = Cyf (abbreviation))

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53
Q

Can a company be public without being listed on a stock exchange?

A

Yes

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54
Q

What are the main differences between a public and a private company?

A

Only a public company may offer its shares to the public

And a public company is subject to more rigorous regulation

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55
Q

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?

A

Nine months of the financial year end

Within six months (if listed in a stock exchange this is shortened to four months)

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56
Q

Are all companies registered under the CA 2006

A

No

E.g ICAS / BBC we’re established through a royal charter

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57
Q

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?

A

Community Interest Companies

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58
Q

How may companies be classified?

A

Limited by shares

Limited by guarantee

Unlimited

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59
Q

Advantages of companies registered under the CA 2006?

A

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

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60
Q

Disadvantages of companies registered under the CA 2006?

A

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

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61
Q

Are all companies in the UK registered with the Companies House?

A

Yes

62
Q

Is it possible to register your company online or via paper application with the Companies House?

A

Yes

63
Q

Relevant documents and procedures to form a company?

A

Application for registration

Memorandum of association

Statement of capital and initial shareholdings

Statement of proposed officers

Statement of initial significant control

Statement of compliance

64
Q

What must the application for registration state?

A

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

65
Q

What is a memorandum of association?

A

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

66
Q

What is statement of capital and initial shareholdings?

A

A ‘snapshot’ of a company’s share capital the point of registration

67
Q

What is statement of proposed officers

A

All applications must include a statement of the company’s proposed officers

68
Q

What is a statement of initial significant control

A

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

69
Q

What is a statement of compliance?

Is it an offence to make a false statement of compliance? What could a penalty be?

A

A statement that the requirements of the CA 2006 as to registration have been complied with

Yes

Imprisonment or a fine

70
Q

Must a company have Articles of Association (‘articles’) which form part of the constitution of the company?

Must a company pay a registration fee?

A

Yes

Yes

71
Q

The fee for an online application to form a company is how expensive?

A

£12

72
Q

The constitution of a company comprises of?

A

It’s articles and any resolutions and agreements which affect the company’s constitution

73
Q

What are a company’s articles?

A

Rules, agreed by the company’s members, which govern a company’s internal affairs

74
Q

All the company’s key internal rules will be set out in the articles including:

A

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

75
Q

Does the CA 2006 require that all companies have articles?

A

Yes

76
Q

Can a company choose to adopt a model form (from the CA 2006) or draft it’s own articles?

A

Yes

77
Q

Are there different model articles depending on the type of company which is being formed?

A

Yes

78
Q

Every company must keep certain company registers and other information available for inspection, these include:

A

Register of members

Register of directors

Register of charges

Register of people with significant control

79
Q

What is included in Register of Members

A

Name and address of each member

Number of shares each member holds

The date of becoming a member and ceasing to be a member

80
Q

What is the Register of Directors

A

Names of present and former directors

A service address (official contact address)

Directors country of residence and nationality

Date of birth

81
Q

What is the Register of Charges

A

Copies of fixed and/or floating charge, including any instruments amending charges, and related documents

82
Q

What is Register if people with significant control

A

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)

83
Q

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?

A

Yes

84
Q

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?

A

Yes

85
Q

Is every company at least every 12 months required to deliver a confirmation statement to Companies House?

A

Yes

86
Q

What is the purpose of the confirmation statement?

A

To keep the registrar informed about changes to the company

87
Q

The confirmation statement will state what?

A

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

88
Q

In the confirmation statement, confirmation is required of matters which include:

A

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

89
Q

Do shareholders have a role in the administration of companies?

A

Yes

90
Q

Certain decisions which company law requires the company shareholders to vote on before it can take effect

How is this done?

A

Through the passing of resolutions

91
Q

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?

A

In a general meeting

Yes

92
Q

Private companies are no longer required to hold general meetings, instead?

A

Provision is made for decisions to be taken by:

Written resolution

93
Q

Do decisions by public companies require to be taken at a general meeting of the company?

A

Yes

94
Q

Two types of general meeting which a company can hold?

A

An annual general meeting (‘AGM’)

A general meeting

95
Q

Are private companies required to hold an AGM?

A

No

96
Q

Are public companies required to hold an AGM?

By when?

A

Yes

Must be within six months of the financial year end

97
Q

Why must AGM be held in six months in public companies?

A

To ensure shareholders have a timely opportunity to hold the directors of a public company to account

98
Q

Rules for calling an AGM

A

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

99
Q

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

A

5%

100
Q

As a general rule who will call a general meeting?

A

The directors

101
Q

General meetings require as a minimum how much notice?

In what situation could this be different?

A

14 days

Can be shortened if 90% (private company) or 95% (public company) of members with voting rights agree to a shortened notice period

102
Q

Members of a company can require the directors to call a general meeting provided:

A

Shareholding qualification

Requisition

Timing

Action members can take

103
Q

Members of a company can require the directors to call a general meeting provided:

What is shareholding qualification?

A

Members holding 5% of the voting rights may requisition a general meeting

104
Q

Members of a company can require the directors to call a general meeting provided:

What is requisition?

A

The members requisition can be either in hard copy at the company’s registered office, or in electronic form

105
Q

Members of a company can require the directors to call a general meeting provided:

What is timing?

A

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

106
Q

Members of a company can require the directors to call a general meeting provided:

What is action members can take

A

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))

107
Q

Can the court order that a company hold a meeting?

When would the court become involved?

A

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)

108
Q

Are there circumstances where an auditor can requisition a general meeting?

What are they?

A

Yes

If for example entity were removing previous auditor and new auditor wanted to put forward their position

109
Q

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?

A

Yes

110
Q

What are the types of resolution?

A

Ordinary

Special

111
Q

What is an ordinary resolution?

A

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)

112
Q

When is an ordinary resolution used?

A

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

113
Q

What is a special resolution

A

Requires a 75% majority to pass it

Notice period will depend on type of meeting at which resolution is being voted on

114
Q

When is a special resolution used?

A

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

115
Q

What is special notice with ordinary resolution (nothing to do with special resolution)

A

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

116
Q

Is special notice related to special resolution?

A

No

117
Q

What requires the authority of an ordinary resolution of which special notice has been given?

A

Removal of a director before the expiry of their period in office

Removal of an auditor before the expiry of their period in office

118
Q

Can public companies pass written resolutions?

A

No

119
Q

A private company may not use a written resolution either:

A

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)

120
Q

What is a director

A

Person responsible for the overall direction of the company’s affairs

121
Q

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?

A

Yes

122
Q

What are de jure directors?

A

Those formally appointed to be a director

123
Q

What is a de facto director

A

Someone who is never formally appointed as a director but acts as a director

124
Q

The test in determining whether a person is a director of a company is what?

A

One function

To manage the business of the company and any person who acts in this way

125
Q

Can the term ‘director’ include a number of different roles?

A

Yes

126
Q

What is an executive director?

Are they required to have a regular, possibly daily involvement in the management of the company?

A

A person who performs a specific role in a company under a service contract

Yes

127
Q

Is the appointing of a managing director a legal requirement?

A

No

128
Q

Main task of a non executive director (NED)

A

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

129
Q

Should NEDs be consulted on all major issues of audit and control?

A

Yes

130
Q

What is an alternate director?

A

A person who acts as a director in place of another

Could be another director or an outsider

131
Q

Are shadow directors under the same legal duties as individuals formally appointed as directors?

A

Yes

132
Q

Do public companies have to appoint a company secretary?

Do private companies have to appoint a company secretary?

A

Yes

No

133
Q

Principal duties of the company secretary

A

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

134
Q

Can the company secretary be a director of the company?

A

Yes

But does not need to be

135
Q

Does the secretary have to be a natural person?

A

No

Therefore it is possible to appoint another company to act as the secretary

136
Q

Do some companies specialise in providing company secretarial services?

A

Yes

137
Q

Does any decision that directors take have to be unanimous or a majority?

A

Yes

138
Q

With board of directors and decision making

The model articles for a private company provide, among other things that:

A

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

139
Q

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?

A

Yes

10 years at least from the date of the decision

140
Q

General duties owed by director to their company are set out where?

A

In the CA 2006 which codified the principal duties that had been established over the years by case law

141
Q

General statutory duties for directors (by CA 2006)

A

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

142
Q

As a general rule a director has no personal liability for the debts of the company with the following exceptions

A

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

143
Q

Is every member of a company contractually bound to the company by the articles?

A

Yes

144
Q

Is there an obligation for shareholders to act in the best interests of the company?

A

No

145
Q

What are derivative claims?

A

Claims by individual shareholders, acting on behalf of the company against the directors of the company

146
Q

Common law

The general rule is known as what?

A

Foss v Harbottle

147
Q

Common law

What is the general rule? (Rule in Foss v Harbottle)

A

Provides that it is for the company itself to bring proceedings where w wrong has been done to the company?

148
Q

Common law

What are the four key exceptions to the rule in Foss v Harbottle

A

Illegal act

Special procedure

Membership rights

Fraud on the minority

149
Q

Under the CA 2006? A derivative claim can be brought in respect of?

A

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

150
Q

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?

A

Only where that director has benefitted from it

Actionable even if director has not personally benefitted from it

151
Q

When did provisions with derivative claims for CA 2006 come into force?

A

1 October 2007

152
Q

Maybe have a look over derivative claims and what they are again

A

AROUND PAGES 352/353

EY Accounting - Business Acumen (16 decks)

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