Revision Guide Flashcards
How are sole proprietorships/partnerships formed?
Can be formed without filing anything
How are sole proprietors taxed?
income is treated as their income + is subject to income tax
How is a partner’s share of partnership income taxed?
Treated as the partner’s personal income + is subject to income tax
How is a member’s share of income from an LLP taxed?
Treated as the member’s personal income + is subject to income tax
How is income of a company taxed?
Treated as the company’s income + is not subject to income tax.
- Subject to corporation tax
What may companies and LLPs grant when it comes to borrowing money that sole proprietors/partnerships may not?
Floating charges over their assets
What is a floating charge?
A charge over present and future assets that are to be retained in the business (e.g., inventory)
When is a partnership formed?
If:
1. Two or more persons
2. Carry on a business in common
3. With the intention to make a profit
What does ‘business in common’ mean?
Means 2 or more people are selling goods or services together
What is prima facie evidence that there is a partnership?
The sharing of profits
When is the sharing of profits not prima facie evidence that there is a partnership?
If the receipt of the profits is:
i. repayment of debt
ii. payment for employment,
iii. annuity to a partner’s survivor
When can a partner bind the partnership in contract?
When they act with actual or apparent authority
When does a partner have actual authority granted?
I. expressly in any partnership agreement,
II. expressly, from a vote of the partners, or
III. impliedly, from the partners’ failure to object to past actions
When is authority apparent?
A partner has apparent authority to carry on in the usual way business of the kind carried on by the partnership unless:
i. the partner had no actual authority to act, and
ii. the third party knew the partner lacked actual authority OR didn’t know they were dealing with a partner
What is the test for deciding whether an act is carrying on in the usual way business of the kind carried on by the partnership?
Objective - would a reasonable third party think a business of this kind would usually do this act?
What happens if a partner enters a contract with neither apparent nor actual authority?
The partnership will not be bound, but the partner will be.
What liability do the partners have in a partnership?
Each partner has unlimited liability if the partnership lacks sufficient funds to pay.
What will an outgoing partner be liable for when retiring from a partnership?
- Remains liable on all obligations the partnership incurred before the partner retired,
- Liable for obligations incurred after they retire unless they give:
i. Actual notice of their retirement to existing creditors, and
ii. Publication notice in the London Gazette to everyone else.
What happens if a person holds themselves out as a partner of a firm even if they are not actually a partner?
They may be held liable as if they were a partner to any third party who has given credit to the partnership on the strength of the holding out.
The same rule applies if a person knowingly allows another to hold the person out as a partner
Can partners use partnership property for personal use?
Partners have no right to use partnership property for personal use - they have a right to use it only for partnership purposes.
How is property owned by one of the partners before the partnership was formed treated?
Treated as the partner’s individual property unless the parties agree otherwise.
If a partner lends money to the partnership, what interest are they entitled to?
Interest at 5% per annum unless otherwise agreed
How are members of a partnership who are natural persons taxed?
Subject to income tax for their share of the firm’s profit each year, regardless of whether the partners have distributed profits
What do all partners in a partnership have the right to inspect?
The partnership’s books and records
How are most management decisions in a partnership approved?
Most can be approved by a majority vote
What management decisions in a partnership require unanimous consent?
i. admission of a new partner
ii. change in the nature of the partnership business
iii. alteration of the partnership agreement.
What is the effect of partners being fiduciaries of each other in a partnership?
i. they have a duty to disclose information relevant to the firm,
ii. they cannot compete with the firm’s business, and
iii. they must account to the firm for any benefit or profit from any transaction concerning the partnership, its business, or use of the partnership’s property
What will cause a dissolution of a partnership?
- Expiration of the term or accomplishment of the goal stated in the partnership agreement
- A partner gives notice of their intention to withdraw in a partnership at will - no term/goal was provided in the partnership agreement
- By death or bankruptcy of any partner (unless agreed otherwise)
- If the partnership business becomes unlawful, or
- By court order
Why would a court order a partnership to dissolve?
if a partner:
- becomes permanently incompetent to enter a contract,
- is guilty of conduct that would prejudicially affect the ability of the partnership to carry out its business, or
- wilfully and persistently breaches the partnership agreement, or
- if business can be carried on only at a loss.
What authority do partners have to bind the partnership following dissolution?
They have the authority to bind the partnership after dissolution in order to wind up the partnership’s business - but the partnership will be bound for other contracts made by a partner unless notice was given of the dissolution.
When a partnership is dissolved, what is the order assets must be distributed in?
- To repay debts owed to outside creditors,
- To repay loans made by the partners to the firm,
- To return the partners’ contributions
How are LLPs taxed?
Like general partnerships.
How are LLPs formed?
Only by registering with Companies House.
What does registration for an LLP include?
Must include:
i. the name of the LLP (must end in LLP or the words Limited Liability Partnership),
ii. location + address of the LLP’s registered office,
iii. names and addresses of the LLP’s members and who will serve as the designated members,
iv. details of people with significant control over the LLP
How can an LLP change its name?
At any time by delivering a notice of the change to the Registrar of Companies.
Change is effective when the Registrar issues a certificate of the name change.
What happens if an LLP carries on business without having at least 2 members for more than 6 months?
The person who carried on the business will be jointly and severally liable with the LLP for the debts of the LLP incurred after the initial 6 months + while the LLP has only 1 member.
How can new members be added to an LLP?
Only with unanimous consent of the existing members.
Registrar of Companies at Companies House must be notified of changes in LLP’s membership or in its designated members within 14 days of the change/
What are designated members, and how many does an LLP need?
Main duty is to submit required filings to Companies House.
LLPs must have at least 2.
How can a person cease to be a member of an LLP?
By giving reasonable notice to the other members + giving notice to the Registrar at Companies House within 14 days.
What are people with significant control?
Those holding:
> more than 25% of the surplus assets on a winding up,
> more than 25% of the rights to vote on those matters which are to be decided upon by a vote of the members of the LLP,
> the right to appoint or remove the majority of those entitled to take part in management,
OR
someone who otherwise can exercise significant influence or control over a trust or the members of a firm that is not a legal person but meets any of the other specified conditions in relation to the LLP
What is the minimum nominal share capital a public limited company needs?
£50,000
When does a company come into existence?
When it is registered at Companies House
Who goes about arranging to bring the company into existence?
Promoters
What happens when promoters sign pre-incorporation contracts on behalf of the company?
Promoters are personally liable.
They remain liable even after the company is formed unless there is an agreement among the company, the third party, and the promoter the substitute the company for the promoter (a novation)
What is a shelf company?
A company that has already been purchased but which has never traded.
Purchase of such a company enables a promoter to set up a corporation quickly
What must the promoters file for a company to become incorporated?
A memorandum of association along with an application for registration with the Registrar of Companies at Companies House
What is the memorandum of association?
An authenticated/signed agreement of persons wishing to become members of a company upon its formation procured by the promoters
What must a company’s application for registration include?
- The proposed name of the company
- must end in ‘Limited’, ‘Ltd’, ‘Public Limited Company’, or ‘Plc’ - Location of its registered office
- Details about the company’s business
- Whether the company will be limited by shares or guarantee
- A statement of capital and initial shareholdings
- Statement of proposed officers/directors
- Details of persons with significant control
- Statement of compliance with Companies Act 2006
- Relevant fee
What will the statement of capital and initial shareholding include?
- The total number of shares to be taken by the subscribers to the Memorandum of Association
- The aggregate nominal value of the shares
- If the shares are to be divided into classes, a description of each class,
- The amount that will be paid up by the shareholders and amounts left unpaid for shares
On what date does a company come into existence?
On the date specified on the Certificate of Incorporation issued by the registrar if all submitted documents are in order
What is a company’s constitution?
A company’s articles of association, plus resolutions or agreements adopted by the members
If a company’s objectives have been restricted and the directors don’t adhere to this, what is the consequence?
They have breached their duty to the company.
An injunction can be obtained to prohibit prospective breaches, and
Damages can be sought from the directors for damages caused by such a breach
Who do the articles serve as a contract between?
The company and the shareholders, and
The shareholders with each other
When do the shareholders have the right to enforce the articles?
Shareholders have the right to enforce only the article provisions relating to their membership rights.
What does it mean to entrench articles?
Means that to amend the articles, the company must comply with additional conditions that go beyond the normal 75% approval required.
Can entrenched articles be included in the original articles?
Yes, but the Registrar must be given notice upon filing.
When will an entrenched article be ineffective?
If it purports to prevent amendment of a company’s articles.
When can shareholders challenge alterations to the articles in court?
If the shareholders make an alteration that no reasonable person would consider to be for the benefit of the company, a shareholder who didn’t vote in favour of the alteration can challenge it in court.
What is the veil of incorporation?
Protects members of a company against personal liability for obligations of the company.
When will the veil of incorporation be lifted/pierced?
Not unless the company form is being used to carry out a fraud or to avoid existing obligations.
- E.g., a business owner transfers all their assets to a company in an attempt to keep them out of the hands of a creditor
How many directors must a private company have?
1
Who must directors be?
Natural persons at least 16 years of age
How many directors must a public company have?
2
Under the Model Articles, who can appoint new directors?
Either the director or the shareholders (ordinary resolution)
When must the Registrar of Companies be notified of any new director appointments and of any changes to the details of existing directors?
Within 14 days
What is a shadow director?
A person who influences other directors, but who doesn’t claim to be a director, and hasn’t been appointed as a director.
What are executive directors?
Responsible for the day-to-day running of the company and are employees of the company
What are non-executive directors?
Usually consultants and take more of a supervisory role overseeing the activity of the executive directors
What is a nominee director?
Director appointed to the board to represent the interests of a particular stakeholder, usually a shareholder.
Still must act in the best interests of the company.
How may companies execute documents?
Either by affixing their seal to the documents, or
By the signature of either:
i. 2 directors, or
ii. a directors and a secretary, or
iii. a single director if signed in the presence of a witness who attests the signature
How are provisions in the articles/contract that try to exempt a director for liability that would otherwise attach to the director for breach of duty, negligence, or breach of trust in relation to the company treated?
Such provisions are void
When may a company indemnify directors against liability they incur?
On claims by third parties against the directors based on their position with the company except with respect to criminal or regulatory fines
What is the concept of enlightened shareholder value?
It means that when deciding what’s best for the company as a whole, in addition to maximising profits, directors may consider effects of decisions on the interests of shareholders, suppliers, customers, the community and the like
Who do directors owe a duty to when a company is insolvent/on brink of becoming insolvent?
They must consider/act in the interests of the creditors of the company.
- The duty to shareholders is displaced
What is the standard of care, skill and diligence expected of a director?
The higher of the care, skill, and diligence that would be exercised by a reasonably diligent person with:
I. the general knowledge, skill, and experience that reasonably may be expected of a person carrying out the duties of a director (objective), or
II. the general knowledge, skill, and experience the director in question actually has (subjective)
When can a director obtain a loan from the company?
Only if the transaction is approved by the board
Who may call a meeting of the directors?
Any director may call a meeting of the directors by giving reasonable notice of the meeting to the other directors
What is needed for notice of a directors’ meeting?
Need not be in writing, but
Must indicate the proposed date, time, and location + it must be given to each director
Under the Model Articles, what is the quorum requirement?
At least 2 directors must attend
When can directors pass written resolutions?
Without a meeting if all the directors approve - unanimous approval
What are Bushell v Faith clauses?
Clauses giving weighted voting to a director who is also a shareholder in the case of a vote to remove a director
What notice is needed before adopting a resolution to remove a director?
Notice to adopt a resolution to remove a director must be given at least 28 days before the meeting + the director must be given notice and a right to respond in writing and orally at the meeting
What are the statutory requirements for qualification of a secretary of a public company?
- Must have previously been a company secretary for at least 3 years,
- Member of a regulated accounting or secretarial body, or
- Is a barrister or solicitor
What is a ‘large company’?
Typically companies with an annual turnover greater than £10 million + more than 50 employees
Where may dividends be paid from?
Only from profits available for the purposes.
- Accumulated realised profits less accumulated realised losses
What are preference shares?
Have a right to be paid the stated preference before dividends can be paid to common shareholders
What is needed for approval of a dividend?
Majority vote of shareholders (ordinary resolution)
When is a dividend unlawful?
If it’s paid out of funds other than profits available for the purpose (such as paid in capital)
What is a derivative claim? When would it be used?
A shareholder who believes a director has or is about to breach a duty owed to the company and to whom it appears the board will not assert the company’s rights to prevent or remedy the action may apply to the court to bring a derivative claim against the director
What can a minority shareholder do if it feels that the company’s affairs are being conducted in a manner which is unfairly prejudicial to that shareholder?
They can petition the court for a remedy.
Usual remedy - force the majority shareholders to buy the minority’s interest at a fair value.
When can a shareholder apply to have the company wound up?
If the company is solvent and the shareholder can show it is just and equitable to do so.
Where must directors’ service contracts be kept, and for how long?
At the registered office for at least 1 year after the director leaves
Where must the register of members be kept?
At the registered office
What is needed for a shareholder to inspect the register of members?
Must have a proper purpose (one related to their rights as a shareholder)
the company has 5 working days to comply with the request
Who can call a general meeting?
Directors, or
Shareholders owning shares representing at least 5% of the paid-up voting capital shares can demand a meeting
If the shareholders demand a general meeting, when must the directors call it?
The directors must call it within 21 days of the request + the meeting must be held within 28 days
Who must notice of a general shareholders’ meeting be given to?
Must be given to:
> all the shareholders + directors,
> the personal representatives of any deceased shareholders, and
> the trustee in bankruptcy of any bankrupt shareholders
When must notice for a general meeting be given?
At least 14 clear days in advance of the meeting,
Plus 2 days for deemed delivery if the notice isn’t hand delivered.
What must a notice for a general shareholders’ meeting include?
- Company name
- Time, date, and place of the meeting
- General nature of the business to be discussed at the meeting
- Statement of the right to appoint a proxy to attend the meeting
- The full text of any special resolution
When must notice be given for the annual meeting of a public company?
Require 21 clear days’ notice
What is needed for a general meeting to be held on short notice?
Agreed by a majority in number of the shareholders who hold 90% of the shares.
- 95% for non-traded public companies
What is needed for an ordinary resolutioN?
At least a majority of members at the meeting
What is needed for a special resolution?
75% or more of the members at the meeting
What is the normal method for voting at a shareholders’ meeting?
By show of hands
What is a poll vote?
When voting is one vote per share
Who may request a poll vote?
5 or more shareholders, or
Shareholders with at least 10% of the voting rights, or
Shareholders with 10% of the paid-up capital of the company
When cannot written resolutions not be used?
To dismiss a director or auditor
Who can require the board to circulate a written resolution?
Shareholders who hold at least 5% of the total voting rights can require the directors to do so
When will a written resolution lapse if using the unamended model articles?
After 28 days from and including the day of circulation
How is voting based when using a shareholders’ written resolution?
Based on all shareholders entitled to vote + based on 1 vote per share
What are matters that require shareholder approval by ordinary resolution?
- Appointment/removal of a director or auditor
- Adoption of the annual accounts _. the reports of the directors and auditors
- Approval of a declaration of dividends
- Approval of the directors’ decision to allot shares
- Approval of substantial property transactions
- Ratification of a director’s breach of duty
- Entering a service contract with a director for more than 2 years
- Making a loan to a director
- Giving a director a payment for loss of office