Unit 1 Business mediums

Question 1

Type of Business - Incorporated and unincorporated businesses

Answer 1

Incorporated = exists as a separate legal entity from its owners and managers - not liable for business debts.

Unincorporated = (sole traders, partnerships and limited partnerships) are businesses run by individuals who have not set up a separate legal entity to run the business and who have full personal liability for the debts of the business.

Question 2

Type of Business - Sole traders

Answer 2

Someone who runs an unincorporated business on their own as a self- employed person.

Can have employees but the sole trader is the person who owns the business, benefits from the profits and bears any losses.

Personally liable.

Unlimited liability.

When the sole trader retires or dies, the business ceases.

Question 3

Type of Business - Partnership

Answer 3

Partnership Act 1890 (‘PA 1890’) - partnership is formed when two or more people are ‘carrying on a business in common with a view of profit’.

PA1890 provides a default partnership agreement.

Personally liable. Not separate legal entity.

Taxed separately as self- employed individuals, paying income tax on their share of the profits of the partnership.

Question 4

Type of Business - Limited partnerships

Answer 4

At least one general partner who has unlimited liability for the partnership debts.
Permitted to have a limited partner whose liability is limited to the amount they initially invested in the business.

The limited partner must not:
* control or manage the LP;
* have the power to take binding decisions on behalf of the LP; or
* remove their contribution to the LP for as long as it is in business.

The Limited Partnerships Act 1907 (LPA 1907).

LPs must be registered with the Registrar of Companies before they can start trading.

Question 5

Type of Business - Companies

Answer 5

Companies can be private or public, and can be limited by shares or by guarantee.

Private companies limited by shares:
- separate legal personality
- decisions made either by directors or shareholders
- directors run company

Public companies limited by shares:
Requirements:
1. the constitution must state that it is a public company;
2. the words ‘public limited company’ or the abbreviation ‘plc’ (or the Welsh equivalent, for a Welsh company) must be included at the end of the company’s name; and
3. the company’s owners must invest a specified minimum amount of money for use by the company: the allotted share capital of the company must be at least the ‘authorised minimum’, currently £50,000. Each allotted share must also be paid up to at least a quarter of its nominal value, plus the whole of any premium on it (s 586 CA 2006).
- Can join stock market but more regulation

Question 6

Type of Business - Limited liability partnerships

Answer 6

Limited Liability Partnerships Act 2000 (‘LLPA 2000’).

Separate legal personality.

Can be formed by two or more members carrying on a lawful business with a view of profit.
Formed by filing a series of documents with the Registrar of Companies at Companies House and paying the applicable fee. Registrar issues certificate of incorporation.

Act gives default contract.

Individual members of the LLP must register with HMRC as self- employed.

Question 7

Type of Business - Which type is best?

Answer 7

Consider factors below:
*Liability
*Tax
*Formalities
No formalities required for sole trader or partnership, can happen without realising.
Some have no strict rules and requirements like under CA 2006
*Publicity of information
Sole traders and partnerships must disclose the identity of the sole trader or all of the partners, and an address for service of documents.
Companies and LLPs must reveal certain information to the public at large, including certain financial information.
*Cost
Sole traders and partnerships can be set up without any legal or administrative cost.
*Status
*Finance
Companies and LLPs can offer an additional form of security for loans, the floating charge, which is a charge over all of the business’s assets and is not available to partnerships or sole traders – desirable for banks.

Question 8

The Limited Company - how to register

Answer 8

Private companies limited by shares.

Must complete Companies House form IN01 and submit it, along with a document called a memorandum of association, and possibly the company’s articles of association, to Companies House with the applicable fee.

Question 9

The Limited Company - name

Answer 9

Company name:
* Required ending - ltd/limited/welch equivalent
* Must not be same/similar to another company
* Prohibited/restricted names:
- would constitute a criminal offence or be offensive e.g. swear words.
- the approval of the Secretary of State is needed to register a company which suggests a connection with a government department or authority.
- certain sensitive words or expressions must be approved by the Secretary of State e.g. words which refer to geographical areas, such as ‘British’.
and
- cannot exceed 160 characters, including spaces

Can trade using a different name from their registered name.

Question 10

The Limited Company - requirements

Answer 10

Company needs a registered office.

Every company must have at least one director (and public companies must have two or more).
At least one director who is a natural person, that is, a human being.
Must be 16+.

Need to provide a statement of capital = info on shares.

Also info on what rights each type of shares give.

Question 11

The company’s constitution

Answer 11

= articles of association, certification of incorporation, statement of capital etc.

Model articles = set of standard articles. Apply by default.

Companies incorporated before 1 Oct 2009 likely to have table A articles from companies act. Similar to current model articles.

Question 12

The company’s constitution - amending the articles

Answer 12

By special resolution. Passed by a majority of at least 75% of shareholders.

Must file at companies house:
- Copy of amended articles within 15 days of them taking effect.
- Copy of special resolution within 15 days after it is passed.

Question 13

People with significant control

Answer 13

Control is deemed significant if the person:
* holds more than 25% of the shares in the company; or
* holds more than 25% of the voting rights in the company; or
* holds the right to appoint or remove a majority of the board of directors of the company.

Must be registered at companies house.

Question 14

Registering as a public company

Answer 14

Same requirements as private company.

Before it commences trading, it must obtain a trading certificate as proof that it can trade and borrow, and crucially, that it has met the allotted share capital requirements.

Question 15

Converting to a public company

Answer 15

Must pass a special resolution approving the re- registration of the company.

Question 16

Model Articles for private companies limited by shares

Answer 16

2.The liability of the members is limited to the amount, if any, unpaid on the shares held by them.

3. Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.

4.—(1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.
(2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.

7.—(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
(2) If—
(a) the company only has one director, and
(b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

14.—(1) If a proposed decision of the directors is concerned with an actual or proposed transaction or arrangement with the company in which a director is interested, that director is not to be counted as participating in the decision-making process for quorum or voting purposes

Question 17

s74(1) and s74(2)(d) of the Insolvency Act 1986

Answer 17

Liability as contributories of present and past members.

(1)When a company is wound up, every present and past member is liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributories among themselves.

(2)This is subject as follows—
(d) in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member