Starting a new business, Partnerships, LLPS, Sole trader Flashcards
What are the three broad categories of business model in the UK?
Sole traders, Partnerships, Companies
What is a Sole Trader?
An individual person carrying on some form of business activity on their own account- most will be in business for their own benefit - pay income tax on their trading profits
What are the advantages of sole trading?
- No formalities (apart from registering with HMRC for self-assessment) - No set up costs
What are the disadvantages of sole trading?
- Personally liable for the debts of the business - Personal contracts with clients and customers and personally liable for breaches/mistakes- Difficulties raising finance - banks are cautious in loaning to sole traders
What is a partnership according to the Partnership Act 1890?
A relation between two or more persons carrying on business in common for profit.
What are the key characteristics of a traditional partnership?
- No set-up costs or formalities
- Unlimited joint and several liability for debts
- Not a separate legal entity
- No Companies House filing or procedural requirements
- Complete privacy
- Contracts between third parties and individual partners
- Governed by Partnership Act 1890
What is the evidence of partnership according to the Partnership Act 1890?
Prima facie evidence of partnership is profit sharing, but it is not conclusive.
What are the terms of a partnership according to the Partnership Act 1890 regarding profits and losses?
Partners are entitled to equally share in profits and losses, even if contributions are unequal.
What is the liability of partners for partnership debts according to the Partnership Act 1890?
Partners are personally liable for contracts binding the firm, as there is no separate legal personality for the partnership.
What is the tax treatment of partnerships according to the Partnership Act 1890?
Partners are taxed individually on their share of partnership income or gains, and must submit individual tax returns for income from the partnership.
What is required for a partnership to make a single tax return of its profits in the UK?
Partnership Tax Return
What do partners submit individually in the UK with income from the partnership and other sources?
Individual Tax Returns
What tax liabilities are partners in the UK responsible for on their share of profits?
Income tax and capital gains tax
Under what circumstances can partners vary mutual rights and obligations in the UK with unanimous consent?
Unanimous Consent (s 19 PA 1890)
What do most partnerships in the UK have in place to outline their formal agreements?
Formal, written partnership agreement
What should be outlined in a partnership agreement in the UK regarding commencement and duration?
Commencement date and whether it has a fixed term or continues until terminated
What restrictions apply to partnership names in the UK, such as not including certain terms?
Not including ‘limited’, ‘ltd’, ‘LLP’, offensive terms
What does each partner own in partnership property in the UK, where there is no separate legal personality?
A share in partnership property
What are the grounds for dissolution of a partnership under the Partnership Act 1890?
- Mutual agreement
- Completion of a specific venture
- Death or bankruptcy of any partner
- Dissolution by Notice
- Unlawful business
- Court order
What is the effect of dissolution on a partnership according to the Partnership Act 1890?
The partnership relationship ceases upon dissolution, and the assets of the business can be realised with partners having the right to demand their share.
What are the key characteristics of limited partnerships?
- Limited partners have limited liability
- General partners have unlimited liability
- At least one limited and one general partner
- Governed by the Limited Partnership Act 1907
- Commonly used for investment vehicles
What are the characteristics of Limited Liability Partnerships (LLPs) and their incorporation process?
- Introduced by Limited Liability Partnership Act 2000
- Separate legal personality, taxed as a partnership
- All partners have limited liability
- Registered at Companies House with annual accounts filed
- Incorporation process involves filing Form LL IN01 with specified details
What is the purpose of a Certificate of Incorporation in a Limited Liability Partnership (LLP)?
To provide conclusive evidence of compliance with legal requirements, issued by the Registrar of Companies.
What information is included in the LLP Agreement of a Limited Liability Partnership (LLP)?
Office address and designation of members (as per section 2(2) of the LLP Act).
How are LLPs treated for tax purposes?
LLPs are treated as partnerships for tax purposes, with members individually taxed on their share of income or gains.
What tax do LLPs not pay, unlike companies?
LLPs do not pay corporation tax; instead, members are individually taxed.
Can LLPs register for VAT?
Yes, LLPs may register for VAT.
What tax is applicable on the disposal of LLP assets while trading?
Capital gains tax is applicable on the disposal of LLP assets while trading.
What is the advantage LLPs have over traditional partnerships regarding floating charges?
Like companies, LLPs can create a floating charge over their assets, enhancing financial flexibility.
How does the management structure in LLPs differ from companies?
Unlike companies, there is no distinct separation between members/shareholders and the management board in LLPs, allowing members to actively participate in management.
What is the ‘clawback’ rule applicable to LLPs under the corporate insolvency regime?
LLP members are subject to the ‘clawback’ rule, where money withdrawn by members up to two years before winding up can be reclaimed for the benefit of creditors.
What governs companies in the UK?
Companies Act 2006 (CA 2006)
What is a key characteristic of companies regarding legal entity?
Companies are separate legal entities from their owners
What are the constitutional documents of a company?
Articles of Association and Memorandum (CA 1985 for older companies)
Who are shareholders in a company?
Owners of the company who invest money in return for shares and potential dividends
Who are subscribers in a company?
First shareholders in a company during its setup, playing a crucial role in the initial investment phase
Who are directors in a company?
Officers/managers responsible for day-to-day operations, collectively known as the Board
Who are Persons with Significant Control (PSC) in a company?
Shareholders with over 25% of shares who must provide details to Companies House for transparency
Who are considered as other stakeholders in a company?
Include employees, creditors, and anyone with an interest in the company’s affairs
What is the responsibility of directors in a company?
Responsible for the day-to-day management, acting as agents of the company governed by statute and common law principles of agency
What does the share capital of a company comprise?
Subscriber shares and additional shares issued post-incorporation
What is the significance of allotment of shares in a company?
Allotment marks a significant step in shareholder registration, giving a person the unconditional right to be on the register
What is the principle of limited liability in companies?
Shareholder liability is limited to the amount unpaid on their shares, providing financial protection for shareholders
What are the criteria for Persons with Significant Control (PSCs) in a company?
Own more than 25% of shares or voting rights, power to appoint or remove a majority of directors, or significant influence or control over the company
What are the different classes of shares in shareholder registration?
Ordinary shares, preference shares, and class rights
What is the significance of limited liability for shareholders?
Shareholder liability is limited to the amount unpaid on their shares, providing financial protection.
What are the key differences between private limited companies and public limited companies?
Private companies end with ‘Limited’ or ‘Ltd’, while public companies end with ‘Public Limited Company’ or ‘Plc’.
Private companies have no minimum share capital requirement, while public companies require a minimum share capital of £50,000.
Definition of a private company according to S4(1) CA 2006
‘a private company is any company that is not a public company’
Definition of a public company according to Section 4(2) CA 2006
‘public company is a company whose certificate of incorporation states that it is a public company’
Key difference in the name between private and public companies
Private company ends in ‘Limited’ or ‘Ltd’, while public company ends in ‘Public Limited Company’ or ‘Plc’
Share capital requirement for private companies
often incorporated with nominal share capital like £1
Share capital requirement for public companies
Must have a share capital with a nominal value of at least £50,000 (or the euro equivalent). At least one quarter of the share capital must be paid up at the time of purchase
Number of directors required for private companies
Requires only one director
Number of directors required for public companies
Must have a minimum of two directors
Company secretary requirement for private companies
May choose to have a company secretary, but not obliged to. Directors (or authorised persons) can fulfil the duties if no company secretary is appointed
Company secretary requirement for public companies
Must have a company secretary. The appointed person must possess requisite knowledge, experience, and specified qualifications
Requirement for holding Annual General Meetings (AGM) in private companies
No longer required, although holding an AGM is optional
Requirement for holding Annual General Meetings (AGM) in public companies
Required to hold one AGM each year. Provides non-director members with an opportunity to question directors, especially regarding the company’s finances
