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SQE1 - Business Practice > Starting a new business, Partnerships, LLPS, Sole trader > Flashcards

Starting a new business, Partnerships, LLPS, Sole trader Flashcards

1
Q

What are the three broad categories of business model in the UK?

A

Sole traders, Partnerships, Companies

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2
Q

What is a Sole Trader?

A

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

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3
Q

What are the advantages of sole trading?

A
  • No formalities (apart from registering with HMRC for self-assessment) - No set up costs
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4
Q

What are the disadvantages of sole trading?

A
  • 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
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5
Q

What is a partnership according to the Partnership Act 1890?

A

A relation between two or more persons carrying on business in common for profit.

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6
Q

What are the key characteristics of a traditional partnership?

A
  • 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
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7
Q

What is the evidence of partnership according to the Partnership Act 1890?

A

Prima facie evidence of partnership is profit sharing, but it is not conclusive.

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8
Q

What are the terms of a partnership according to the Partnership Act 1890 regarding profits and losses?

A

Partners are entitled to equally share in profits and losses, even if contributions are unequal.

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9
Q

What is the liability of partners for partnership debts according to the Partnership Act 1890?

A

Partners are personally liable for contracts binding the firm, as there is no separate legal personality for the partnership.

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10
Q

What is the tax treatment of partnerships according to the Partnership Act 1890?

A

Partners are taxed individually on their share of partnership income or gains, and must submit individual tax returns for income from the partnership.

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11
Q

What is required for a partnership to make a single tax return of its profits in the UK?

A

Partnership Tax Return

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12
Q

What do partners submit individually in the UK with income from the partnership and other sources?

A

Individual Tax Returns

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13
Q

What tax liabilities are partners in the UK responsible for on their share of profits?

A

Income tax and capital gains tax

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14
Q

Under what circumstances can partners vary mutual rights and obligations in the UK with unanimous consent?

A

Unanimous Consent (s 19 PA 1890)

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15
Q

What do most partnerships in the UK have in place to outline their formal agreements?

A

Formal, written partnership agreement

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16
Q

What should be outlined in a partnership agreement in the UK regarding commencement and duration?

A

Commencement date and whether it has a fixed term or continues until terminated

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17
Q

What restrictions apply to partnership names in the UK, such as not including certain terms?

A

Not including ‘limited’, ‘ltd’, ‘LLP’, offensive terms

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18
Q

What does each partner own in partnership property in the UK, where there is no separate legal personality?

A

A share in partnership property

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19
Q

What are the grounds for dissolution of a partnership under the Partnership Act 1890?

A
  • Mutual agreement
  • Completion of a specific venture
  • Death or bankruptcy of any partner
  • Dissolution by Notice
  • Unlawful business
  • Court order
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20
Q

What is the effect of dissolution on a partnership according to the Partnership Act 1890?

A

The partnership relationship ceases upon dissolution, and the assets of the business can be realised with partners having the right to demand their share.

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21
Q

What are the key characteristics of limited partnerships?

A
  • 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
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22
Q

What are the characteristics of Limited Liability Partnerships (LLPs) and their incorporation process?

A
  • 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
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23
Q

What is the purpose of a Certificate of Incorporation in a Limited Liability Partnership (LLP)?

A

To provide conclusive evidence of compliance with legal requirements, issued by the Registrar of Companies.

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24
Q

What information is included in the LLP Agreement of a Limited Liability Partnership (LLP)?

A

Office address and designation of members (as per section 2(2) of the LLP Act).

25
Q

How are LLPs treated for tax purposes?

A

LLPs are treated as partnerships for tax purposes, with members individually taxed on their share of income or gains.

26
Q

What tax do LLPs not pay, unlike companies?

A

LLPs do not pay corporation tax; instead, members are individually taxed.

27
Q

Can LLPs register for VAT?

A

Yes, LLPs may register for VAT.

28
Q

What tax is applicable on the disposal of LLP assets while trading?

A

Capital gains tax is applicable on the disposal of LLP assets while trading.

29
Q

What is the advantage LLPs have over traditional partnerships regarding floating charges?

A

Like companies, LLPs can create a floating charge over their assets, enhancing financial flexibility.

30
Q

How does the management structure in LLPs differ from companies?

A

Unlike companies, there is no distinct separation between members/shareholders and the management board in LLPs, allowing members to actively participate in management.

31
Q

What is the ‘clawback’ rule applicable to LLPs under the corporate insolvency regime?

A

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.

32
Q

What governs companies in the UK?

A

Companies Act 2006 (CA 2006)

33
Q

What is a key characteristic of companies regarding legal entity?

A

Companies are separate legal entities from their owners

34
Q

What are the constitutional documents of a company?

A

Articles of Association and Memorandum (CA 1985 for older companies)

35
Q

Who are shareholders in a company?

A

Owners of the company who invest money in return for shares and potential dividends

36
Q

Who are subscribers in a company?

A

First shareholders in a company during its setup, playing a crucial role in the initial investment phase

37
Q

Who are directors in a company?

A

Officers/managers responsible for day-to-day operations, collectively known as the Board

38
Q

Who are Persons with Significant Control (PSC) in a company?

A

Shareholders with over 25% of shares who must provide details to Companies House for transparency

39
Q

Who are considered as other stakeholders in a company?

A

Include employees, creditors, and anyone with an interest in the company’s affairs

40
Q

What is the responsibility of directors in a company?

A

Responsible for the day-to-day management, acting as agents of the company governed by statute and common law principles of agency

41
Q

What does the share capital of a company comprise?

A

Subscriber shares and additional shares issued post-incorporation

42
Q

What is the significance of allotment of shares in a company?

A

Allotment marks a significant step in shareholder registration, giving a person the unconditional right to be on the register

43
Q

What is the principle of limited liability in companies?

A

Shareholder liability is limited to the amount unpaid on their shares, providing financial protection for shareholders

44
Q

What are the criteria for Persons with Significant Control (PSCs) in a company?

A

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

45
Q

What are the different classes of shares in shareholder registration?

A

Ordinary shares, preference shares, and class rights

46
Q

What is the significance of limited liability for shareholders?

A

Shareholder liability is limited to the amount unpaid on their shares, providing financial protection.

47
Q

What are the key differences between private limited companies and public limited companies?

A

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.

48
Q

Definition of a private company according to S4(1) CA 2006

A

‘a private company is any company that is not a public company’

49
Q

Definition of a public company according to Section 4(2) CA 2006

A

‘public company is a company whose certificate of incorporation states that it is a public company’

50
Q

Key difference in the name between private and public companies

A

Private company ends in ‘Limited’ or ‘Ltd’, while public company ends in ‘Public Limited Company’ or ‘Plc’

51
Q

Share capital requirement for private companies

A

often incorporated with nominal share capital like £1

52
Q

Share capital requirement for public companies

A

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

53
Q

Number of directors required for private companies

A

Requires only one director

54
Q

Number of directors required for public companies

A

Must have a minimum of two directors

55
Q

Company secretary requirement for private companies

A

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

56
Q

Company secretary requirement for public companies

A

Must have a company secretary. The appointed person must possess requisite knowledge, experience, and specified qualifications

57
Q

Requirement for holding Annual General Meetings (AGM) in private companies

A

No longer required, although holding an AGM is optional

58
Q

Requirement for holding Annual General Meetings (AGM) in public companies

A

Required to hold one AGM each year. Provides non-director members with an opportunity to question directors, especially regarding the company’s finances

SQE1 - Business Practice (7 decks)

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