Structures for Running a Business

Question 1

What are the key advantages and disadvantages of using a sole trader structure?

Answer 1

Advantages
* Responsible for own income tax / CGT;
* No set up costs because no formalities
* Very private, need not publish accounts publicly

Disadvantages
* Unlimited liability for the debts of the business
* Personal injection of cash needed

Question 2

What are the advantages and disadvantages of partnership?

Answer 2

Advantages
* No set up costs
* Responsible for own taxation
* Very private, do not need to share accounts publicly or follow CH procedure
* Can regulate relationship using partnership agreement

Disadvantages
* Unlimited joint liability or joint and several liability for debts of the partnership.

Question 3

What are the advantages and disadvantages of the LLP structure?

Answer 3

Advantages
* Liability is limited to how much they have committed to the company financially (as a member or partner);
* Taxed individually as partners
* Can access more investment opportunities
* Often used for investments rather than actual business
* Flexible structure and can be regulated by LLP agreement

Disadvantages
* Procedural requirements and reporting requirements so limited privacy

Question 4

What are the advantages and disadvantages of the company structure?

Answer 4

Advantages
* Access to a wider source of financing (debentures and floating charges)
* Limited liability (by guarantee or by shares)

Disadvantages
* Procedural requirements for GMs, AGMs etc
* Must publish financial accounts publicly and other information
* Risk of double taxation (corporation tax, then income tax on dividend for shareholders).

Question 5

How is a simple contract executed by a business (i.e sole trader, partnership, LLP, co)?

Answer 5

1. Board resolution: authorising the director to enter into the contract
2. Articles: might specify additional requirements
3. Signature:
   * individual sole trader can sign without a witness
   * Partnership: can be signed by one or both partners
   * company: can be signed by director with authority on behalf of the company - it is company who is party to contract.

Question 7

How is a deed executed by a business (i.e sole trader, partnership, LLP, co)?

Answer 7

1. Formalities of Deed: clear on face of it as a deed + witnessed + delivered
2. Signature:
   * for co: by 2 authorised signatories (directors or company secretary) if common seal used OR single director + witnessed
   * for partnership: all partners must sign unless one has POA + signatures witnessed.

Question 8

How is a partnership formed?

Answer 8

Automatically when at least two persons (legal or natural) carry on business together with a view to making a profit.

Court will consider evidence of profit-sharing, decision-making and holding themselves out as partner.

Question 9

Who is liable for partnership debts?

Answer 9

• Contract: every partner jointly liable for debts incurred whilst they were a partner
• Tort: joint and several liability
• New partners: not automatically liable for debts incurred before they were a partner
• Former Partners: will be liable for continuing debts of the partnership if a 3rd party did not receive actual or constructive notice and knew them / believed them to still be a partner.

Still liable for debts incurred whilst they were a partner. Should novate with creditor on retirement.

Question 10

What are some of the key default provisions in the Partnership Act 1980?

Answer 10

1. Commences when s.1(1) satisfied. Can have fixed term or be terminated by notice.
2. All property brought into the partnership by purchase or otherwise on account of the firm / in the course of business is Partnership Property and will assumed to be so if bought with partnership money unless contrary intention shown.
3. No entitlement to salary
4. Partners entitled to share equally in capital and profits even where they contributed unequally.

Question 11

What are the key default provisions in the PA 1980 for ending a partnership?

Answer 11

Expulsion: A partner cannot be expelled by majority vote unless explicitly agreed in the partnership agreement; otherwise unanimous.

Partner leaving: dissolves the partnership + new partnership created amoungst remaining partners. Can apply to have it wound up.

Non-compete: partners who compete must account for profits.

Dissolution: caused by many different events + leftover assets used to pay partners initial capital or if no profit sharing ration, shared equally.

Question 12

When will the partnership be automatically dissolved under the 1980 Act?

Answer 12

• Death
• Banktuptcy
• By effluxion of time
• By notice to terminate
• Completion of specific venture
• By court
• Unlawfulness.

Question 13

How are LLPs created and incorporated?

Answer 13

• 2 or more people carrying on lawful business with a view to making a profit
• Subscribing members complete Form LL IN01 and send to CH with fee
• Certificate of incorporation is issued

Question 14

How many members are required for an LLP?

Answer 14

At least 2, and at least 2 must be designated (responsible for signing accounts, filings at CH etc). If there are only 2 and 1 leaves, LLP can continue on with only 1 designated partner for 6 mths before losing limited liability.

Question 15

What must LLPs file at CH?

Answer 15

• Change of name / registered office / members
• Creation of charge
• Annual confirmation statement and accounts
• Maintain in-house registers of members and PSCs.