Types of Business Organisations

Question 1

Who is a sole trader/proprietor and what are their three duties?

Answer 1

Someone who trades alone and bears full responsibility for the actions of the business.
1) Liable for taxation as an individual.
2) Can be difficult to raise money as it relies on the actions and good health of the owner.
3) Liability is unlimited so any property can be seized to pay debts.

Question 2

What is a partnership and what are the five requirements?

Answer 2

A relationship between people carrying on a business with the common view of making a profit, they are cheap and simple to form.
1) Must be at least two members.
2) Partners enter a contractually binding agreements which they negotiate themselves.
3) Business must be carried on in common
5) Can be created for the purpose of a single venture.
6) Business must be carried on with a view to profit.

Question 3

What is a limited liability partnership and what four things can it do?

Answer 3

A separate legal entity where shareholders liability is limited to the amount they paid for shares.
1) Can hold property.
2) Can create floating charges over property.
3) Can enter into contracts in its own name.
4) Can sue/be sued.

Question 4

What six steps are involved in creating an LLP?

Answer 4

1) Signatures of at least two people.
2) Name of the LLP which must end in LLP.
3) Location of registered office.
4) Address of the LLP.
5) Names and addresses of members and statements of who is a designated member.
6) Statement of compliance

Question 5

What are the rules of membership in an LLP?

Answer 5

Must be at least two members, there is no maximum membership, if membership falls below two for more then six months then remaining member will lose their limited liability and assume personal liability for any liabilities incurred.

Question 6

Who is a designated member in an LLP?

Answer 6

Partner who is responsible for all of the acts and duties of the LLP and files its accounts with the Registar of Companies.

Question 7

In what four ways can a member cease to be a member?

Answer 7

1) Death.
2) Dissolution.
3) Agreement with other members.
4) Reasonable notice.

Question 8

What are the five essential filing requirements of an LLP?

Answer 8

1) Accounts.
2) Annual returns.
3) Changes in general membership.
4) Changes in designated membership.
5) Changes to the registered office.

Question 9

What is the relationship between members and the LLP?

Answer 9

Members are agents of the LLP and so enter into contracts on behalf of the LLP, LLP won’t be liable where third party is aware of the lack of authority or doesn’t know/believe the partner is a member of the LLP.

Question 10

What is the relationship between members in an LLP?

Answer 10

There is a flexible and consensual nature of internal regulation provided through mutual rights and duties which are governed by the agreement between the members.

Question 11

What four ways are creditors protected in an LLP?

Answer 11

Members have limited liability but there are no controls on withdrawal of capital by members so creditors aren’t protected by the doctrine of capital maintenance.
1) Requirement for audited accounts.
2) Rules relating to fraud and misconduct.
3) Actions to recover money from members in relation to fraud and wrongful trading.
4) Power to disqualify members.

Question 12

How is an LLP taxed?

Answer 12

Not taxed as a separate entity from its members so members are treated as partners in a standard partnership for the purpose of tax.

Question 13

What is the insolvency and winding up process of an LLP?

Answer 13

When an LLP is wound up every present and past member who has agreed to be liable to contribute to the assets of the LLP in the event of liquidation. Insolvency Act 1986 allows liquidator to recover withdrawn assets if they were withdrawn up to two years prior to winding up, or where it can be shown the member knew when they withdrew the LLP was unable to/became unable to pay its debt.

Question 14

What are the three advantages of an LLP?

Answer 14

1) Limited liability protection.
2) Flexible management structure.
3) Tax passes through LLP to members so avoids double taxation through corporation tax.

Question 15

What are the four disadvantages of an LLP?

Answer 15

1) Difficult to raise capital as investors may be hesitant due to asset protection.
2) Complexity of laws.
3) Personal relationships affect business.
4) Limited life - must be dissolved if one partner leaves or dies.

Question 16

What is a limited partnership?

Answer 16

Partners aren’t liable beyond their capital contribution but at least one partner must assume unlimited liability for debts. Limited partners can’t manage the business.

Question 17

What is an illegal partnership?

Answer 17

Formed to carry out illegal purposes, Courts don’t recognise partner rights and innocent parties can recover against them.

Question 18

What are the four characteristics of a Partnership?

Answer 18

1) Individual partners are recognised and not the firm.
2) Each partner has unlimited liability for debts, taxes, and actions of other members.
3) Each partner’s interest is non-transferrable.
4) Each partner can take part in the management.

Question 19

What are the three types of partners?

Answer 19

1) Managing partner.
2) Dormant partner.
3) Salaried partner.

Question 20

What are the three duties of partners?

Answer 20

1) Duty to disclosure.
2) Duty to account.
3) Duty to not compete.

Question 21

What are the five rights of partners?

Answer 21

1) To share equally capital and profits.
2) To compensate for any liabilities/payments in the business.
3) To take part in the management.
4) To have access to the firm’s books.
5) To prevent the admission of a new partner of any change in the nature of the partnership.

Question 22

What are the two types of property in a partnership?

Answer 22

1) Partnership property.
2) Personal property.

Question 23

What is the authority of partners to bind the firm?

Answer 23

Each partner can bind other partners and make them liable for business transactions

Question 24

What are the three exceptions to a limit on partners’ power to bind the firm?

Answer 24

1) Other partners give prior approval for partner to exceed their authority.
2) Other partners ratify the agreement afterwards.
3) Where there was no approval but partner acted within their implied powers.

Question 25

What six things can every partner do (excl. limited partners)?

Answer 25

1) Sell the firm’s goods.
2) Buy goods normally required for the firm.
3) Engage employees.
4) Receive payments of debts due to partnership.
5) Pay debts owed and draw cheques to do so.
6) Employ a solicitor to act in defence of the firm.

Question 26

What are partners’ liability for debts/contracts.

Answer 26

Have joint liability so even though partners are collectively liable a person who took action against a partner can’t take action against other partners even when they haven’t recovered all the debt owed.

Question 27

What are partners’ liability for torts?

Answer 27

Joint and several, there is no bar on taking further action against other partners to recover payments. Partnership is liable when the tort was committed during the normal course of business or there was express approval from all partners, if not then partner is personally liable.

Question 28

What are the five things relating to the liability of incoming/ongoing partners?

Answer 28

1) Incoming partners are not liable for anything done before they joined.
2) Where a new partner assumes responsibilities from a discharged partner they inherit all of their liabilities (novation).
3) Creditors can reject novation and hold retired partner liable.
4) Retired partners are liable for any contract entered into while they were in the partnership.
5) A retired partner must give notice to customers and advertise their retirement in the London Gazette to avoid liability for future contracts.

Question 29

What is the capacity of individuals to join a partnership?

Answer 29

Any partnership entered by a minor is voidable during minority and for a reasonable time after majority. Third parties can’t recover against minors. Mental incapacity provides grounds for dissolution but doesn’t prevent entrance to partnership.

Question 30

What are the four steps of forming a partnership?

Answer 30

1) Partnership agreement.
2) Alteration of partnership agreement.
3) Business name.
4) Arbitration clauses.

Question 31

What are the five grounds for dissolution and winding up?

Answer 31

1) Expiry of fixed term/completion of gal.
2) Notice by one partner.
3) Death/bankruptcy of one partner.
4) Partners’ shares are subject to charge order.
5) Illegality.

Question 32

What six situations can the Court order a dissolution?

Answer 32

1) Partner becomes a patient.
2) Partner suffers a permanent incapacity.
3) Partner engages in harmful activity to the business.
4) Partner consistently breaches the partnership agreement.
5) Business can only be carried at a loss.
6) It is just and equitable to do so

Question 33

In what order are proceeds paid upon dissolution?

Answer 33

1) Payment of debts to third parties.
2) Payment to partners’ advances made beyond their capital contribution.
3) Paying original capital contributed by partners.

Question 34

What happens when a partner goes bankrupt?

Answer 34

Partnership assets are used to pay the debt, when one partner is insolvent then debt falls on all solvent partners.