Starting a new business: types of business medium

Question 1

What is the difference between an unincorporated business and an incorporated business?

Answer 1

An unincorporated business does not have its own legal identity so there is no legal distinction between the business and its owner. An incorporated business does have its own legal identity.

Question 2

What are the two unincorporated business models?

Answer 2

Sole trader and partnerships (not including limited liability partnerships)

Question 3

What are the advantages of being a sole trader or partnership?

Answer 3

• Keeping ownership
• Simple management
• Easy set up/no specific formalities
• Low/no set up costs
• More privacy/no filing and disclosure requirements
• Less paperwork/regulatory work

Question 4

What is the disadvantage of being a sole trader?

Answer 4

Unlimited liability

Question 5

What does unlimited liability mean?

Answer 5

The owner of the business is personally liable for all the debts and liabilities incurred and therefore their personal assets would be at risk and they could be made bankrupt.

Question 6

What tax do sole traders pay?

Answer 6

Income tax on their trading profits and capital gains tax on their capital gains

Question 7

When does a partnership arise?

Answer 7

When two or more people actually carry on a business in common with a view of profit

Question 8

Is a formal partnership agreement required?

Answer 8

No but it is desirable as it sets out the terms of the partnership

Question 9

What are the disadvantages of a partnership?

Answer 9

Unlimited liability and no separation of ownership and control. This means every partner may act for the purposes of the partnership business and the acts of any one partner bind the partnership. This can however make management easier.

Question 10

What tax is paid in a partnership?

Answer 10

Individual partners pay income tax on their share of the trading profits and capital gains tax on their share of the capital gains.

Question 11

What is a company?

Answer 11

An incorporated business with separate legal personality and where the members have limited liability.

Question 12

How can a company be limited?

Answer 12

By shares or by guarantee.

Question 13

For a company to be ‘born’ what must happen?

Answer 13

Documents need to be filed at Companies House.

Question 14

The principle of separate legal personality was enshrined in which case?

Answer 14

Salomon v A Salomon and Co Ltd [1897]

Question 15

As a separate legal person, what can a company do?

Answer 15

Own property, enter into contracts, be a party to legal proceedings and it can have perpetual succession (continue indefinitely)

Question 16

What is a shareholder?

Answer 16

Someone who owns shares in the company - also referred to as members.

Question 17

What is a director?

Answer 17

Someone who has general management powers to control what the company does on a day to day business. They run the company

Question 18

What does limited liability mean?

Answer 18

That members have a limit on their liability to contribute towards the company’s debts.

Question 19

What does limited by shares mean?

Answer 19

The liability of members is limited to any amount unpaid on their shares

Question 20

What does limited by guarantee mean?

Answer 20

The liability of members is limited to any amount they promise to pay in the event that the company is wound up

Question 21

What are the advantages of incorporation?

Answer 21

• separate legal personality
• limited liability
• can be seen as more prestigious
• companies can grant floating charges, which are more a more flexible form of security, as well as fixed charges

Question 22

What are the disadvantages of incorporation?

Answer 22

• can be an expense to set up
• onerous ongoing formalities
• filing and disclosure requirements
• information public on Companies House

Question 23

What tax do companies pay?

Answer 23

Corporation tax on both their income profits and their capital gains

Question 24

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

Answer 24

• Private: shares cannot be offered to the general public
• Public: general public can be invited to subscribe for shares
• Private: no minimum capital requirements
• Public: minimum capital requirement of £50k and shares must be at least one-quarter paid up
• Public: more stringent/onerous rules and additional disclosure rules
• Public: shares can be officially listed on investment exchange
• Private 1 director minimum & public 2 directors minimum

Question 25

What is a limited liability partnership formed under and by?

Answer 25

Under the Limited Liability Partnerships Act 2000 and by sending form LLIN01 to Companies House

Question 26

What tax do limited liability partnerships pay?

Answer 26

Income tax on their share of the trading profits and capital gains tax on their share of the capital gains for the partnership