The Different types of Business

Question 1

What are the primary distinctions between incorporated and unincorporated businesses regarding liability and legal status?

Answer 1

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.

Question 2

Describe the structure and liability of a sole trader business, and what are the implications of unlimited liability?

Answer 2

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.

Question 3

How does a general partnership operate under the Partnership Act 1890, and what liabilities do partners face?

Answer 3

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.

Question 4

What are the unique characteristics of limited partnerships (LPs) compared to general partnerships, including the role and restrictions of limited partners?

Answer 4

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.

Question 5

Explain the concept of separate legal personality in companies, referencing the Salomon v A Salomon & Co Ltd case.

Answer 5

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.

Question 6

What is a limited liability partnership (LLP), and how does it blend features of partnerships and limited companies?

Answer 6

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.

Question 7

What are the main characteristics and advantages of a private company limited by shares?

Answer 7

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.

Question 8

How does a public limited company (plc) differ from a private company, and what are the requirements for a company to become a plc?

Answer 8

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.

Question 9

Describe the concept of the “corporate veil” and the conditions under which courts may pierce it, as seen in Prest v Petrodel Resources Ltd.

Answer 9

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.

Question 10

What is the role of directors and shareholders in company decision-making, and how does this structure differ from partnerships?

Answer 10

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.

Question 11

What are the unique features and uses of community interest companies and charitable incorporated organisations?

Answer 11

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.

Question 12

What are joint ventures, and how do they operate legally in business?

Answer 12

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.

Question 13

Why is liability often a primary consideration when choosing a business structure?

Answer 13

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.

Question 14

How can tax considerations influence the choice of a business format?

Answer 14

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.

Question 15

What are the differences in formalities required between sole traders, partnerships, and incorporated entities like companies and LLPs?

Answer 15

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

Question 16

How does the requirement for publicity of business information vary between business types

Answer 16

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.

Question 17

Why might cost be a deciding factor in choosing a business structure, and how do costs differ between business types?

Answer 17

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.

Question 18

How does the status of a business structure impact its appeal to potential clients or partners?

Answer 18

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.

Question 19

What financing advantage do companies and LLPs have over sole traders and partnerships?

Answer 19

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.

Question 20

How can the specific needs of a business influence the choice between a company, LLP, or partnership?

Answer 20

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.

Question 21

What are the essential steps to incorporate a new company in the UK?

Answer 21

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.

Question 22

Who typically submits company registration applications, and what options are available for submitting them?

Answer 22

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.

Question 23

What information is required on the certificate of incorporation, and what significance does it hold?

Answer 23

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.

Question 24

What decisions must be made by those setting up a company in order to complete form IN01?

Answer 24

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.

Question 25

What restrictions apply to the selection of a company name, and how can applicants ensure compliance?

Answer 25

A company name must end in “Limited” or “Ltd” (or the Welsh equivalent) for private companies and must not duplicate or closely resemble existing names, prohibited words, or exceed 160 characters. Applicants can check name availability on the Companies House website and may require approval for names suggesting government connections or using sensitive words.

Question 26

What is the purpose of a registered office for a company, and what are the requirements regarding its location and changes?

Answer 26

The registered office is the official address for receiving legal and official documents. It must be publicly accessible and located in the same part of the UK as the company’s registration. Changes require a board resolution and notification to Companies House using form AD01, with documents sent to the old address still valid for 14 days after the change.

Question 27

What is the significance of the Model Articles of Association, and what options do applicants have regarding them?

Answer 27

The Model Articles of Association provide a default set of articles that govern internal company rules. Applicants may (1) adopt the Model Articles as-is, (2) adopt them with amendments, or (3) submit fully bespoke articles. If the Model Articles are adopted, no additional documentation is needed, but amended or bespoke articles must be filed with the IN01.

Question 28

How can shareholders amend the articles of association after incorporation, and what is the process for filing these changes?

Answer 28

Shareholders can amend the articles by passing a special resolution (requiring a 75% majority). The company must file the amended articles and a copy of the special resolution with Companies House within 15 days of the amendment taking effect, as per sections 26, 29, and 30 of the CA 2006.

Question 29

What is a “statement of capital,” and what details must it include on form IN01?

Answer 29

A statement of capital outlines the number of shares and their nominal value, the names and addresses of shareholders (subscribers), and share rights such as dividend entitlements, redemption rights, voting rights, and the number of votes per share.

Question 30

What role does a company secretary serve, and is it mandatory for private companies to appoint one?

Answer 30

A company secretary is responsible for administrative tasks like filing documents and maintaining board minutes, but it’s not mandatory for private companies under CA 2006. If appointed, their name and service address must be included on the IN01. Directors retain liability even if the secretary fails to fulfill their duties.

Question 31

What is the difference between a director’s residential address and service address, and under what conditions can the residential address remain private?

Answer 31

A service address is used for official correspondence, while the residential address is the director’s home address. The residential address does not appear on the public register unless used as a service address. Directors may apply to keep it private from specified public authorities and credit agencies if there’s a serious risk of violence or intimidation.

Question 32

How did the Companies Act 2006 change the requirements for company articles, and how does this differ from the previous Companies Act 1985?

Answer 32

The CA 2006 replaced the Companies Act 1985, standardizing the Model Articles, which require 14 days’ notice for meetings with special resolutions. In contrast, the Companies Act 1985 (Table A) required 21 days’ notice. Companies incorporated before 2009 likely still use Table A, which remains relevant for solicitors working with older companies.

Question 33

What constitutes a company’s constitution under the Companies Act 2006?

Answer 33

A company’s constitution includes the memorandum of association, articles of association, certificate of incorporation, statement of capital, court orders, shareholder resolutions affecting the constitution, and significant shareholder agreements.

Question 34

Who qualifies as a “person with significant control” (PSC) in a company?

Answer 34

A person with significant control can be an individual, a corporate body, or a firm that holds more than 25% of the shares or voting rights, or has the right to appoint or remove a majority of the board of directors.

Question 35

What are the three thresholds for indicating a person’s level of control on the IN01 form?

Answer 35

The IN01 form requires applicants to indicate if the PSC holds:

• More than 25% but not more than 50% of shares/voting rights,
• More than 50% but less than 75% of shares/voting rights, or
• 75% or more of shares/voting rights.

Question 36

Why does Companies House collect information about persons with significant control (PSCs)?

Answer 36

Companies House gathers PSC information because such individuals often hold significant voting power, potentially influencing company decisions. This transparency helps third parties make informed choices about doing business with the company.

Question 37

How does the level of control a PSC has relate to their ability to pass or block resolutions?

Answer 37

PSCs with more than 25% of shares can block special resolutions. Those with more than 50% can block or pass ordinary resolutions but not special resolutions, while those with 75% or more can pass both ordinary and special resolutions independently.

Question 38

What is required in Part 9 of the IN01 form before submitting the application to Companies House?

Answer 38

The applicant must complete the statement of compliance in Part 9, confirming that all registration requirements under the CA 2006 have been met before submitting the application.

Question 39

What additional steps must be taken to register a public company compared to a private company?

Answer 39

In addition to private company requirements, a public company must comply with share capital requirements, use articles suited for public companies, and apply for a trading certificate with form SH50 before it can trade and borrow.

Question 40

How can a private company convert to a public company, and what documents are needed?

Answer 40

A private company can convert to a public company by passing a special resolution, changing its name, adjusting articles for public company suitability, and meeting share capital requirements. They must submit form RR01, the special resolution, revised articles, a fee, and financial documents to Companies House.

Question 41

After a company is incorporated, what initial decisions should the board of directors make regarding company operations?

Answer 41

Key initial decisions include appointing a chairperson, opening a bank account, deciding on the use of a company seal, establishing an accounting reference date, appointing auditors, approving service contracts, and ensuring necessary tax registrations.

Question 42

What purpose does the company seal serve, and how is it adopted according to the CA 2006?

Answer 42

A company seal, though not mandatory, is sometimes used to add formality to documents. It is adopted by a board resolution and can execute documents if signed by an authorised person and witnessed, as stated in section 45(1) CA 2006.

Question 43

What must a company do to change its name, and what form is required?

Answer 43

To change its name, a company must pass a special resolution or follow an internal process in the articles. Form NM01, along with the special resolution and a fee, is submitted to Companies House, where a new certificate of incorporation confirms the name change.

Question 44

Why might a company board consider issuing service contracts to directors, and what approval is needed for longer terms?

Answer 44

Service contracts outline directors’ employment terms, including duties and remuneration. If the term exceeds two years, it must be approved by an ordinary shareholder resolution to take effect.

Question 45

What is a shareholders’ agreement, what does it typically include, and why is it important in the initial stages of a company’s formation?

Answer 45

A shareholders’ agreement is a private, legally binding contract among a company’s shareholders that outlines their rights, obligations, and protections. It typically includes:

• Ownership and Voting Rights: Details of each shareholder’s percentage of ownership and their voting rights on company matters.
• Decision-Making Processes: Specifies how important decisions will be made, including requirements for majority or unanimous approval on certain issues, such as issuing new shares or changing the company’s structure.
• Profit Distribution: Sets rules on how dividends and profits will be shared among shareholders.
• Exit Strategy and Share Transfers: Defines procedures for selling or transferring shares, including any restrictions (e.g., right of first refusal for existing shareholders or conditions requiring board approval).
• Confidentiality: Outlines provisions to protect sensitive company information from being shared outside the company.
• Dispute Resolution: Establishes processes for resolving conflicts between shareholders, such as mediation or arbitration, to avoid lengthy legal battles.
• Importance at Early Stages: At the company’s formation, a shareholders’ agreement is crucial because it helps prevent misunderstandings, sets clear expectations, and protects both majority and minority shareholders’ interests. This is especially important if the company grows or encounters disagreements among shareholders, as it provides a structured approach to governance and conflict resolution. Unlike the company’s articles of association, a shareholders’ agreement is not publicly filed, allowing for confidentiality of the terms.