Types of Business Medium

Question 1

Which of the following need to be registered at Companies House?

a. Partnership
b. Sole Trader
c. Limited Liability Partnership
d. Private Limited Company

Answer 1

Limited Liability Partnership and Private Limited Company

Question 2

Which of the following statements are true?

a) If a sole trader’s business fails, the sole trader is personally liable and their personal assets are at risk.

b) If a partnership business fails, the partners are personally liable for the firm’s debts and their personal assets are at risk.

c) If a company limited by shares is wound up (ie shut down), the liability of the shareholders will be limited to any amount unpaid
on their shares.

Answer 2

All of them

Question 3

Name the infamous case in which the principle of separate legal personality was enshrined.

Answer 3

Salomon v A Salomon and Co Ltd [1897]

Question 4

In a private company limited by shares, the directors own the shares and the members/shareholders are responsible for managing the company on a day-to-day basis. True or false?

Answer 4

False, other way around

Question 5

In a private company limited by shares, it is not possible for the directors and members/shareholders to be the same people. True or false?

Answer 5

False

Question 6

Which two are unincorporated businesses?

Answer 6

Sole Trader and Partnership

Question 7

What is a sole trader?

Answer 7

A self-employed person who is the sole owner of their unincorporated business

Question 8

What does unlimited liability mean?

Answer 8

A business owner would be fully responsible for all debts and liabilities

Question 9

What is an advantage and a disadvantage of sole trader?

Answer 9

Advantage - No formalities or legal processes required to set up a business, and not costs of forming a company.
Disadvantage - Unlimited liability

Question 10

What is a partnership?

Answer 10

An unincorporated business of two or more people

Question 11

Is a formal partnership agreement a requirement for partnerships?

Answer 11

No, but it is advisable

Question 12

Can a company exist without being registered at companies house?

Answer 12

No, all companies must be registered with companies house

Question 13

What are the two hallmarks of a company?

Answer 13

Separate legal entity and limited liability

Question 14

What is a separate legal entity?

Answer 14

A company who is a legal person, separate from its members and shareholders.

Question 15

What are shareholders?

Answer 15

Own shares of the company. Also referred to as members.

Question 16

What are directors?

Answer 16

They have general management over the company on a day-to-day basis.

Question 17

How can liability be limited?

Answer 17

Limited by shares or by guarantee (guarantee usually for non-profits)

Question 18

What does limited by shares mean?

Answer 18

The liability of shareholders is limited to any amount unpaid on their shares. If someone owns buys and pays for 100 £1 shares, they would not be liable. But if someone buys 100 £1 shares but only pays for 50, they would be liable for £50

Question 19

Advantages of incorporation?

Answer 19

1. Separate legal entity
2. Limited liability
3. Perceived as more prestigious

Question 20

Disadvantages of incorporation?

Answer 20

1. Formalities and expenses
2. Public information (in companies house)

Question 21

Differences between private limited company and public limited company?

Answer 21

Public limited company has:
- Certificate of incorporation stating that it is a public limited company
- May be limited by shares only (private by shares and guarantee)
- General public can subscribe to shares
- Minimum capital requirements are £50k (compared to £0 in private)

Question 22

Do members of a limited liability partnership have limited liability?

Answer 22

Yes

Question 23

What is a key disadvantage of an LLP?

Answer 23

Not as well recognized internationally as limited companies.

Question 24

A client wishes to set up business on their own, providing light gardening services. The client is keen to keep things as straightforward as possible and to minimise costs. They do not foresee a substantial capital outlay and they have no plans to take on employees or to
borrow money.

Which of the following best describes the type of business medium the client should choose for their business and why?

A. A private limited company. This is because there is little administrative burden in setting up and running a private limited company.

B. A sole trader. Although the client would benefit from limited liability, their needs are straightforward and their investment and
overheads would not be substantial. The additional burdens of starting and running a limited company would not be justified.

C. A limited company in any event. The benefits of separate personality and limited liability are so great that they outweigh all other considerations.

D. A private limited company. The client will be able to separate ownership and control and grant floating charges over the company’s assets when they wish to expand the business.

E. A public limited company. It will give the client better flexibility to expand and will enable shares to be offered to the public.

Answer 24

B. A sole trader. Although the client would benefit from limited liability, their needs are straightforward and their investment and
overheads would not be substantial. The additional burdens of starting and running a limited company would not be justified.

Question 25

A client wishes to start up a manufacturing business with a long-standing friend and business associate. The pair plan to buy premises, employ several staff, expand very quickly and trade internationally. In the medium term, the pair will need to borrow considerable funds.

Which of the following best describes the type of business medium the client and their friend should choose?

A. A private limited company.

B. A partnership.

C. A public limited company.

D. A limited liability partnership.

E. A private company, limited by guarantee.

Answer 25

A. A private limited company.

Question 26

A client holds 10k £1 ordinary shares in a private limited company, representing a 5% shareholding. The shares are fully paid and the
company is being wound up, with substantial debts.

How much will the client be required to contribute on winding-up?

A. The client will not be required to contribute on winding-up.

B. The client will be required to contribute 5% of the company’s outstanding debt.

C. The client will be required to contribute £10k.

D. The client’s liability will be unlimited.

E. The client will be required to contribute towards the costs of winding-up.

Answer 26

A. The client will not be required to contribute on winding-up.

Question 27

A client is a sole trader whose business is in financial difficulty. However, they have substantial personal assets and are keen to
ascertain their liability for the debts of the business.

Which of the following best describes the client’s liability?

A. The business is a separate legal person, and the client will be able to keep their personal assets separate.

B. The client will be personally liable for the debts of the business.

C. The client’s liability will be limited to the amount they contributed to the business.

D. The client will be jointly and severally liable for the debts of the business.

E. The client will not be liable as the business has not been registered at Companies House.

Answer 27

B. The client will be personally liable for the debts of the business.

Question 28

A client is looking to set up a manufacturing business with two friends who are both experienced executives. They plan to expand
quickly, have substantial borrowings and appoint over 50 employees. The client is happy not to be involved in the day-to-day
management of the business, but he wants to make sure that his liability is limited to his investment. The client may also wish to sell his
share in the business on his retirement in a few years’ time.

Which of the following best describes the type of business medium the client and his two friends should choose?

A. A private company, limited by shares.
B. A partnership.
C. A public limited company.
D. A limited liability partnership.
E. A private company, limited by guarantee.

Answer 28

A. A private company, limited by shares.