The Different types of Business Flashcards
What are the primary distinctions between incorporated and unincorporated businesses regarding liability and legal status?
Incorporated businesses are separate legal entities, protecting owners (usually through limited liability) from personal responsibility for debts (e.g., limited companies). Unincorporated businesses, like sole traders, lack a separate legal identity, meaning owners are personally liable for all business debts and legal issues, exposing personal assets.
Describe the structure and liability of a sole trader business, and what are the implications of unlimited liability?
A sole trader operates an unincorporated business alone, bearing full responsibility for profits and losses. Unlimited liability means both business and personal assets are accessible to creditors if the business fails. For example, if a sole trader’s café accrues debt, suppliers can claim payment from the owner’s personal assets if business funds are insufficient.
How does a general partnership operate under the Partnership Act 1890, and what liabilities do partners face?
A general partnership is formed when two or more people run a business jointly for profit, as defined by the Partnership Act 1890. Partners share ownership and are personally liable for partnership debts, risking personal assets if business funds fall short. Profits are divided among partners, who pay tax as self-employed individuals, unless they’re companies, which pay corporation tax.
What are the unique characteristics of limited partnerships (LPs) compared to general partnerships, including the role and restrictions of limited partners?
Limited partnerships include general partners (with unlimited liability) and limited partners (with liability limited to their initial investment). Limited partners cannot manage the LP, make binding decisions, or withdraw contributions during operation. Breaching these conditions removes their limited liability, converting them into general partners. LPs must be registered with the Registrar of Companies to operate legally.
Explain the concept of separate legal personality in companies, referencing the Salomon v A Salomon & Co Ltd case.
Separate legal personality means a company is treated as its own legal entity, distinct from its owners. This protects shareholders from personal liability, limiting their risk to their investment. The landmark case Salomon v A Salomon & Co Ltd established this principle, affirming that legally incorporated companies must be regarded as independent “persons” with their own rights and liabilities, a foundation for modern corporate law.
What is a limited liability partnership (LLP), and how does it blend features of partnerships and limited companies?
An LLP, governed by the Limited Liability Partnerships Act 2000, combines a partnership’s operational flexibility with the liability protection of a limited company. It has a separate legal personality, protecting partners from personal liability for LLP debts. Forming an LLP requires filing documentation with the Registrar of Companies. LLPs are taxed like partnerships, making them popular in law and accounting firms for balancing flexibility with risk protection.
What are the main characteristics and advantages of a private company limited by shares?
A private company limited by shares, registered under the Companies Act 2006, is a separate legal entity where shareholders have limited liability for debts. This setup encourages risk-taking, as personal assets are shielded. Private companies cannot offer shares to the public, raising funds from investors familiar with the company. They have fewer regulations compared to public companies, making them suitable for small to medium-sized enterprises.
How does a public limited company (plc) differ from a private company, and what are the requirements for a company to become a plc?
A plc is a public company that can raise capital by offering shares to the public, following stricter regulations to protect public investors. To qualify as a plc under the Companies Act 2006, it must include “plc” in its name, state its public status in its constitution, and meet a minimum share capital of £50,000, with at least 25% of shares paid up. This status provides prestige and access to capital markets, though fewer than a quarter of UK public companies are publicly traded.
Describe the concept of the “corporate veil” and the conditions under which courts may pierce it, as seen in Prest v Petrodel Resources Ltd.
The corporate veil separates a company’s legal personality from its owners, protecting personal assets from company liabilities. However, courts may pierce the corporate veil in rare cases, such as in Prest v Petrodel Resources Ltd, if an individual uses the company to evade an existing legal obligation. This approach ensures the company’s separate legal status is not abused to bypass legal responsibilities.
What is the role of directors and shareholders in company decision-making, and how does this structure differ from partnerships?
In companies, directors handle day-to-day decisions, while shareholders make strategic, high-level decisions, creating formal layers of governance. In partnerships, all partners generally participate directly in management, often informally. Directors’ decisions occur in board meetings, while shareholders decide in general meetings, adding structure that partnerships typically lack.
What are the unique features and uses of community interest companies and charitable incorporated organisations?
Community interest companies are limited liability companies designed to serve the public good, not for private profit. Charitable incorporated organisations also offer limited liability, focusing on charitable activities without dual regulation by both Companies House and the Charity Commission, streamlining operations for charitable objectives.
What are joint ventures, and how do they operate legally in business?
Joint ventures involve two or more parties collaborating on a specific project or commercial objective, pooling resources while maintaining distinct identities. Legally, a joint venture may be governed by a contract or a jointly controlled corporate structure, as seen in projects like Google Earth, where Google and NASA cooperated.
Why is liability often a primary consideration when choosing a business structure?
Liability affects the owner’s personal financial risk. In companies, shareholders benefit from limited liability, meaning they are not personally liable for company debts. In contrast, partners in partnerships are personally liable, risking their personal assets if the business incurs debt. The nature of the business can influence this concern, as some liabilities, like professional negligence, may be covered by insurance.
How can tax considerations influence the choice of a business format?
Tax is significant since most businesses aim to maximize owner profits. The choice between an incorporated and unincorporated structure depends on the financial circumstances of the business and owners, as each type of business structure may offer different tax advantages depending on income levels and profit distribution.
What are the differences in formalities required between sole traders, partnerships, and incorporated entities like companies and LLPs?
Sole traders and partnerships require no formal setup and can begin trading immediately. However, companies and LLPs require more time, legal advice, and expenses for setup. Post-setup, companies face ongoing requirements such as maintaining statutory registers, filing documents, and often undergoing audits, while unincorporated businesses have minimal administrative obligations outside tax formalities
How does the requirement for publicity of business information vary between business types
Sole traders and partnerships only need to disclose the identity of the owner(s) and an address for document service. However, companies and LLPs must disclose extensive information publicly, including details about directors, shareholders, and certain major decisions. Those who prioritize privacy often opt for sole proprietorship or partnership structures to avoid these publicity requirements.
How do the costs and administrative requirements of starting and running a sole trader or partnership compare to those of a company or LLP?
Sole traders and partnerships can start without legal or administrative costs, while forming a company or LLP requires a fee and often legal advice.
Running a company or LLP is typically more expensive due to ongoing legal and administrative requirements, making them costlier than unincorporated options for administrative compliance.
How does the status of a business structure impact its appeal to potential clients or partners?
Many prefer to work with companies over sole traders or partnerships, associating companies with larger, reputable businesses. Additionally, companies provide extensive public information, reassuring those considering business partnerships or transactions. This status and transparency make companies a preferred choice in the market.
What financing advantage do companies and LLPs have over sole traders and partnerships?
Companies and LLPs can offer a floating charge, which is a security interest over the business’s assets as a whole. This added security makes them more attractive clients for lenders, such as banks, compared to sole traders and partnerships, which lack this financing option.
How can the specific needs of a business influence the choice between a company, LLP, or partnership?
The choice of business structure depends on priority factors like liability, privacy, and financing. For example, a client concerned about incurring debts may favor limited liability in a company or LLP, while someone prioritizing privacy may choose a partnership. Each structure offers distinct benefits depending on the owner’s risk tolerance, privacy needs, and operational goals.
What are the essential steps to incorporate a new company in the UK?
To incorporate a company, the applicant must complete Companies House form IN01, submit a memorandum of association, possibly the articles of association, and pay the applicable fee. Applications can be submitted electronically or on paper to Companies House in Cardiff, Edinburgh, or Belfast, depending on the company’s registration location.
Who typically submits company registration applications, and what options are available for submitting them?
Individuals may submit their own applications by post or online, though most applicants use solicitors, accountants, or company formation agents. Company formation agents can submit electronic applications via authorised software, offering various packages ranging from basic registration to comprehensive services.
What information is required on the certificate of incorporation, and what significance does it hold?
The certificate of incorporation must include the company’s name, registered number, incorporation date, type (limited or unlimited), and registered office location. It serves as conclusive evidence that the registration requirements under the Companies Act 2006 (CA 2006) have been fulfilled.
What decisions must be made by those setting up a company in order to complete form IN01?
The applicant must decide on the company name (with specific rules about name restrictions), registered office address, first directors, directors’ service and residential addresses, company secretary (if any), first shareholders (subscribers), and details for the statement of capital regarding shares and shareholder rights.
