Theory Flashcards
Define unincorporated and incorporated business entities
unincorporated: no legal seperation between person(s) and business entity (unlimited liability)
incorporated: Business and owners are legally separate (limited liability)
Sole Trader
Business has no legal existence
No regulations for structure but still needs to comply with employment law, H&S etc
May have staff but trader is responsible for the business
Any profits subject to income tax
Can use a business name, but correspondence must contain your personal name
Unlimited liability
Partnership
General (ordinary) partnership
Like sole trader, no distinct legal existence (tied to owner), no legal filing requirements bar HMRC and unlimited liability for all partners jointly
More than one business owner, each partner takes share of profit (not always equal), partnership is a contractual agreement between the partners
Limited partnership (where the partners have a mix of limited and unlimited liability)
Not common due to lack of trust
LLP: Limited liability partnership
Must be incorporated to have separate legal entity
Partnership only exists when partners commence their business activity
NOT when trading commences and not when agreement is made
What is the partnership agreement (or deed)
Written agreement setting out terms of the partnership such as:
Name and correspondence address of partners
Amount of capital provided by each partner
Interest payable on capital contributions/paid on drawings
Share of profits (or losses): Usually decided from how much has been invested, but the partners decide how profits are shared
Decision making process, how to resolve issues - Who is in charge of what (accounting, marketing etc)
What act binds partners to the firm?
PA1890 s5: Each partner is an agent of the firm and all the co-partners
Actions done in the usual course of business will bind the form and all the partners
When dealing with third parties, they will likely assume partner has authority to act unless they are given information that suggests otherwise
Trust is key
What are the duties of a partner
PA1890 s28: duties of disclosure
Partners must provide true accounts and full information on all things affecting the partnership, to all the other partners or their legal representative
PA1890 s29: Duty to account
Partners must account to the firm for any benefits obtained without consent from any transactions concerning the partnership
Eg benefits as an accountant
PA1890- s30: Duty to not compete
Where a partner competes with partnership business without the consent of the other partners
Eg you cannot charge a lower price than your partners to get a profit
The partner is liable to account to the partnership for ay profits made in the course of competing business
What are the similarities and differences between a Limited liability partnership (LLP) and a general partnership
Similarities to general partnership:
Members still; taxed the same way as partnerships i.e. income tax. No corporation tax
Still has the organizational flexibility of partnership
Most LLPs will have an agreement that is a private, members-only document
Differences
An LLP is a separate legal entity
The liability is therefore limited
An LLP has to file incorporation at companies house and final annual accounts
Limited partnerships are unincorporated but at least one person has to have unlimited liability
What are the characteristics of a corporation?
Separate legal personality/ entity
Company itself can own assets and is responsible for its liabilities
Shareholders = owners of a company
Directors = agents of a company
Directors can also be shareholders
Company has limited liability (exceptive private unlimited companies) meaning liability of its members is limited by share or by guarantee
What is a shareholder’s maximum liability
Limited by shares:
The shareholder’s maximum liability will be the consideration paid (or unpaid) on the nominal value of the shares, plus any premium
If the company winds up, the most you will lose is the amount you paid for the shares
Limited by guarantee
Not suitable for a trading company seeking a profit
More suited to non-profit organisations, where any surplus is redistributed to beneficiaries or within the company
Company has no shares or shareholders
Members of the company liable by an agreed amount (the guarantee)
What are the differences between an Ltd and Plc
The main difference concerns share capital
Ltds are prohibited from offering its shares to the public
If any shares are proposed to be transferred, all shareholders must be consulted
Plc can offer its shares to the public, these shares may also be listened on share exchange
Only Plcv can offer its shares to the public
Plc have to submit their accounts within 6 months for their year end (it’s 9 months dor Ltds)
Plc need a minimum of £50,000 issued share capital
Plcs need at least 2 directors (only ,in. Of 1 for Leeds) and a (qualified) company secretary
What are the advantages and disadvantages of being a plc
Advantages of being a plc
Easier access to capital
Much more possible to assess value of the company (market capitalisation)
Easier to make acquisitions
Possibly give company more prestigious profile
Possible disadvantages of being a plc
Much greater accountability and scrutiny of the company’s finances
Larger number of shareholders whom the cp,pamy ios accountable to
Possibility of hostile takeovers
What are the necessities for setting up a company?
The promoter
Person(s) that makes the initial step to set up a company
This includes:
Finding shareholders (investors) and directors
Seeking professional advice where necessary
Ensuring the registration/ incorporation process is taken care of
If things go wrong
If the promoter fails to make proper disclosure (eg stating that he is a director or shareholder of the company)
Company may rescind a contract for the purchase of the property
Company may choose to recover any of the promoter’s profit from such a transaction
If the promoter commits an offence in connection with the company (fraud etc) , they could face disqualification (ie not being allowed to be director or promoter) for up 15 years
Pre-incorporation contracts
If the promoter enters into a contract made by on behalf of the company before that company has been incorporated then:
The contract is not binding on the company, but
The promoter will be personally liable
What are the documents required to set up a company?
IN01 - Application Form
Memorandum of association
Articles of association
Where is the details of company formation found?
Company’s Act 2006, ss7-16
What is an off the shelf company?
Alternative to setting up a company from scratch
Some businesses create companies, then leave them dormant (non-trading)
When a company is purchased, the name is changed and the shares are transferred to the new members
Reasons for choosing an off-the-shelf company:
Saves with possible hassle of incorporating yourself
Can state that the company “was established in the year xxx” rather than when you took the company over, me making it seem more established
Why is a company name important?
Issues to think about when naming a company:
Can’t use a company name that’s already taken…
.,.. Or be too similar to another business if it is deemed to e misleading eg if you are entering the same sector as the established company
Can’t use anything offensive
Certain words deemed “sensitive” and are deemed generally prohibited
Symbols are allowed (within reason)
What is lifting the veil of incorporation?
Usually, company is a separate legal entity (Salomon v Salomon & Co Ltd)
On rare occasions, the courts can remove the veil of incorporation i.e. hold the individual member(s) if the company accountable for the company’s action
This occurs when the incorporator has abused the corporate form (eg by seeking to gain an unfair advantage)
What’s included in the companies Act 2006
Any restrictions of he company’s objects
How officers will be appointed, the power and procedures
How management decisions will be made
Procedure of company meetings
Voting right of members
How dividends will be paid
How accounts will be kept
How shares can be issued and transferred
The conditions and notice to members of winding up
How are objects of a company deemed?
Under CA 2006 (s31), companies are deemed to have unrestricted objects
No restrictions of the company to complete legal transactions
For certain companies (eg charities, social enterprises) the members may want to restrict the company’s objects
These restrictions need to be stated in the articles of association
What is the binding powers of a constitution?
The articles from a contract between the company and its shareholders
Therefore the shareholders are bound to the company - Hicjkman V Kent
The company is bound to the shareholders (regarding their rights as shareholders) - Pender v Lushington
The Shareholders are individually bound to each other - Rayfield v Hands
The articles do not bind the company or shareholder to anyone in their capacity as an outsider - Eley v Positive Life Assurance Co (1876)
How does a company amend the articles?
The articles can be amended if
It passes a special resolution (>75% of the vote required)
It complies with company legislation
The amendment is made in good faith and for the benefit as a company for a whole
Remember that the right of minority shareholders still apply
What is the entrenchment provision of the articles?
Articles can be stretched ie require more than special resolution to amend eg 80% voting of the shareholders
The entrenchment has to be agreed on incorporation, or by amendment of the articles agreed by all members of the company
Why do people purchase shares in a company?
Purchasing shares gives investors the possibility of:
Receiving dividends
Mak8ng a profitable return on the selling of shares
Influencing the company through control
How do you become a shareholder and how does a company register these shareholders?
Register of members
When A company is incorporated, the names of the first shareholders afde included in the register of members
The company needs to maintain the register with the name and address of ever shareholder, plus the extent of their shareholding (CA 2006, s113)
The company does not have to make the register public, but needs to inform CH where it is kept
There are two ways shares can be purchased
Purchasing direct from the company when shares are issued
Potential purchasers can apply to purchase shares from a company (known as making an offer)
The company signifies acceptance of the offer by sending a letter of allotment
Within two months of allotment, a share certificate must be issues (which provides evidence of the member’s ownership)
Purchasing shares from an existing shareholders
Largely occurs within public companies
When a transfer exists, the company needs to be notified of the change in shareholder so that the register of members can be updated
WIthin two months, company will issue a new share certificate and the new shareholder acquires the relevant rights (voting etc)
The purchaser only becomes amebr when their name is stated on the company register of members
No dividends or voting rights before this
What share parentage earns what rights?
With 5% Shareholding
You have the right to call a general meeting (s303 CA)
ANd the right to circulate a written statement (s314)
With 10% shareholding
You have the right to demand that the company’s accounts be audited (s476, CA2006)
With 25% shareholding
You can block any special resolution (s283, CA 2006)
This means you have the power to prevent a company’s articles from being amended (s21, CA 2006)
With 50% shareholding
You can pass and block any ordinary resolution
Wit 75% shareholding
You can pass nay special resolution
With 100% shareholding
You can pass an elective resolution
You can entrenched provision
You can basically do anything within the company
Preference vs ordinary shares
All company shareholders have the right to:
Transfer their shares to other parties (subject to any restriction in articles)
Receive all dividends declared b the company - in theory there’s no limit to the size of dividend (provided the company has equity)
Attend and vote at general meetings
Receive the company accounts
As one’s shareholding increases, this also increase level of control that you =have in the coat
This gives you the right to specific actions relating to the company
Individual shareholders may group together to pass or block certain resolutions
Preference shares
Named because they contain the right to receive a dividend before an ordinary shareholder
The dividend will be of a fixed percentage each year, providing the company chooses to offer the dividend
Can be cumulative or non-culmative
Cumulative means that if dividend is not paid one year, it carries forward the next year
Usually do not carry any voting rights, so shareholders do not java control of company in that respect
Can vote when it has to do with preference shares
If company winds up preference shareholders have priority in their return of capital
What is a debenture?
Debentures are the written documents setting out terms of a loan (rate of interest, schedule of repayments etc)
Usually higher interest than a bank loan
Can be secured or unsecured
As with shares can be transferred (debentures for plcs can be delta on the stock exchange)
Some debentures of the right to convert to shares on maturity
As an investment, offers a consistent rate of return, therefore less risky purchasing shares
Eg seat at royal albert hall - attraction and loan
What is a charge?
A charge is a contractual agreement in the form of security (on certain assets) for a loan
The borrower agrees to follow the rights over assets to be transferred to the lender, on the basis that if the loan is unpaid, the lender can dispose of the assets and secure the return of he loan
Charges are valuable way of ensuring that loans are secured on tangible assets
What is a fixed charge?
The charge is fixed to particular asset
Asset may be real property or personal property
Real property consists of items such as property or land
While a charge rests over real property the borrower cannot dispose or significantly alter the asset
Personal property includes equipment, chattels etc
Requires the burrower to assign ownership of the property with the lender
This means, in the event of non payment, the land has the power to dispose of the property
Fixed charges are more attractive to the lender, as the control they have over the property represents the best form of security
Charge remains until the loan is fully repaid
Lenders with fixed charges rank higher preferential creditors and floating charge lenders
What is a floating charge?
WIth floating charges, the change may apply to a group of assets
Eg inventory and milk. It is unable for tesco to inform the lender for every mlk sold
The borrower is free to trade in the goods/ assets subject to the floating charge
In the event of non-payment, the charge crystallises over certain assets
Everything is frozen, so tesco can no longer sell the milk
The lender then has the ability to dispose of them
What is the process for registration of charges?
CA 2006 - s 870
A charge must be registered within 21 days of its creation
The register will then issue a certification of registration, including details of its particulars (CA 2006, s 869)
If a charge is not registered it will be invalid
What is a director and who can be a director?
See part 10 of CA 2006
Responsible for the management of the company
Agent of the company
Can bind the company by their acts without personal liability (CA 2006, s40)
Anyone not under 16 years of age (CA 2006, s157)
But certain [people may be disqualified (CDDA 1986) or the articles may prohibit certain people from being directors
Can have a corporate directors i.e. a company can be a director, nut there must be at least one living person as a director (CA 2006, s 155)
Board of director meetings
The board generally meet at board meetings (CA 2006 s 248) but decisions can be made remotely
Has overall responsibility for managing the affairs of the company
Certain decisions have to be taken by the board e.g. approving annual accounts, recommending a dividend to shareholders
Name and explain the different types of directors?
Managing director (executive director)
Sales director (executive director)
Finance director (executive director)
Alternate director
Acting in place of a director who is not able to attend the meeting)
‘De Facto’ directors
Person acting as director although not appointed as one
Shadow director
The board acts under his decisions
Non- executive director
Executive director vs non-executive director?
Executive director:
Those that have management responsibilities within the company (such as managing director, operations director, finance director etc)
May work full time at a company but not a;lways (eg corporate directors)
If they do work, will have contract of employment, meaning they are employees of the company
Non-executive director:
Not employed by the company
Don’t receive a salary (but may be paid a fee per board meeting, for example)
Role is to check company is being managed properly and ensure high standards of financial integrity
Share the same liabilities as executive directors
What is a shadow director?
A shadow director instructs the other directors of the company on how to act
Can be a natural or corporate person
A parent company may be shadow director for its subsidiary
A management consultant for a major creditor could also be considered a SD, but not those who give advice in professional capacity (eg an accountant)
Eg if i were to start a business and my dad advises me, he is a shadow director
What is a De-facto director?
Those who are not formally appointed as a director (so they won’t be listed in Companies House) but they fulfil the role of a director
Can be difficult to determine whether someone is acting as director from their tasks and responsibilities in the company
If judged to be a director, will be subject to the same duties and liabilities
What is an alternate director?
If a director is unable to attend a board meeting, they ,ay eb allowed to appoint someone to attend and vote on their behalf
It depends on what the articles allow
Usually the alternate director is a fellow director rather than an outsider
What is the process of appointing a director?
First directors of a company stated in incorporation documents -= no appointment necessary
Procedure for appointing new directors should be stated in articles
Usually directors are appointed by directors or by simple majority at a general meeting
Normally for public companies, the appointment is for a set number of years
Then there is a vote to re-appoint at the next AGM
For public companies, appointment of directors is to be voted on individually at general, meeting (CA2006, s160)
What is the directors authority to act?
Company can only act through agents
When a director(s) enters into a contact on behalf of the company, it will be binding on the company
Authority can be explicit or implied (eg an MD)
Directs may also have apparent authority
