WS1 - cases / statute / more - Business models & intro to companies

Question 1

4 examples of why a business would need to raise finance:

Answer 1

1. to purchase premises from which to operate, plant and machinery, stock or raw materials, computer hardware and software in order to be able to manufacture and sell goods, or provide a service;
2. to employ staff to make the goods and/or provide the services to customers;
3. to obtain the advice of professional advisers from time to time, particularly accountants; and
4. to expand and grow, which it may do by acquiring other businesses, carrying out marketing activities e.g. advertising and investing in new premises and equipment.

Question 2

4 ways a business may raise finance

Answer 2

1. Injection of capital from business owners;
2. Capital contribution from outside investors in exchange for future profits (equity finance for example: generating capital through selling shares)
3. Raising capital through debt (borrowing): bank loans; corporate bonds;

Question 3

6 key considerations when forming a business

Answer 3

1. Costs - how much to establish business model;
2. Risk - will participants in business model have personal liability for debts of the business?;
3. Structure - Is the organisational structure clear and to the client’s wishes?
4. Formalities - any legal formalities that must be followed in running the business? Consider flexibility of the business model regarding formalities;
5. Privacy - to what extent is information about the business required to be publicly disclosed?
6. Finance - how can the business raise capital?

Question 4

Key characteristics of a sole trader

Answer 4

a. ) No set up costs;
b. ) No formalities, the sole trader can start trading straight away.
c. ) A sole trader is not a separate legal entity
i. ) Contracts are formed between the individual themselves and third parties.
d. ) Unlimited personal liability – the sole trader’s personal assets such as their home and cars are potentially liable to be sold to meet the debts of the business.
e. ) No formal structure - the individual can choose how they wish to run their business.
f. ) Privacy – Complete privacy. No Companies House filing or procedural requirements for running the business.

Question 5

Northern Sales (1963) Ltd v Ministry of National Revenue [1973]

This case concerns…

Answer 5

…the existence of partnerships.

• If there is an agreement to share profits & losses the existence of partnership is more likely.

Question 6

Walker v Hirsch [1884]

This case found that a partnership is less likely to be found if…

Answer 6

…a person is being ‘held out’ as an alleged partner.

A clerk lent money to the partnership, was paid a fixed salary and took 1/8th of the profits and of the losses, but was never held out as a partner. No partnership was found to exist.

Question 7

The 4 key provisions of the Partnership Act 1890 are sections…

Answer 7

These are applicable if not formal partnership has been drawn up by a solicitor.

1. Section 24 (1) - Profits and Losses:
2. Section 24(6) - Remuneration
3. Section 24(8) - Decision Making
4. Section 25 Expulsion

Question 8

Section 24 (1) of the PA [1890] governs…

Answer 8

Profits and losses: Partners are entitled to share equally in the profits of the business, and must share equally in the losses of the business, even where the parties have contributed to the capital unequally. There should therefore be an express provision in the agreement setting out a profit sharing ratio, otherwise both profits and losses are shared equally.

Question 9

Section 24(6) of the PA [1890] governs…

Answer 9

Remuneration: Partners are not entitled to a salary.

Question 10

Section 24(8) of the PA [1890] governs…

Answer 10

Decisions making: Decisions arising during the ordinary course of the business are decided by a majority, except for any change to the nature of the partnership business which requires unanimity.

Question 11

Section 25 of the PA [1890] governs…

Answer 11

Expulsion: A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this.

Question 12

Section 19 of the PA [1890] governs…

Answer 12

Variation from the default provision of the PA [1890].

The partners’ mutual rights and obligations can be varied at any time by their unanimous consent.

Question 13

A typical partnership agreement will deal with which 5 key details:

Answer 13

1. Profit sharing ratio
2. Salaries
3. Decision making – eg are certain partners able to make decisions on particular issues alone or in small committees?
4. What happens when a partner leaves the partnership
5. How new partners may be appointed and how partners may be removed.

Question 14

What are the two types of partners & their features in a Limited Partnership?

Answer 14

1. Limited partners:
   These partners have limited liability. These limited partners must not be involved in the management of the business (they are often called ‘sleeping partners’ eg passive investors). If they do become involved in management, they lose their limited status and become general partners with unlimited personal liability.
2. General partners
   who run the business and have unlimited liability (as in a traditional partnership).

Question 15

What legislation governs Limited Partnerships?

Answer 15

Limited Partnership Act 1907

Question 16

Key characteristics of a Limited Partnership

Answer 16

1. There must be at least 1 limited partner and 1 general partner;
2. The limited partner must NOT be involved in the management of the business. They are ‘sleeping partners’ or passive investors. If they do, they lose limited status and become general partners with unlimited personal liability.
3. They’re governed by the Limited Partnership Act 1907
4. They must be registered at Companies House but do not have to file accounts (good privacy)

Question 17

Factors which may determine if a partnership exists:

Answer 17

a. Are profits shared and or losses?
i. ) NB: Evidence of profit sharing may be prima facie evidence of partnership, but not necessarily conclusive.
b. Are loans made from one party to another?
c. Is property jointly shared?

Remember:
1. No one factor alone will suffice to create a partnership – it is necessary in all cases to consider all the facts

Question 18

Formation of a partnership

Answer 18

1. Created without formalities

2. Does not need to be intention to form - two or more people working together may be considered in partnership

Question 19

Which legislation introduced & governs Limited Liability Partnerships?

Answer 19

Limited Liability Partnership Act 2000 (LLPA 2000)

Question 20

Key distinction between an LLP, and other legal forms of doing business such as sole traders; partnerships; limited partnerships is…

Answer 20

…that an LLP has a separate legal personality – it can own property and enter into contracts on its own behalf. However, for tax purposes it is treated as a partnership and the members are taxed as partners, each being liable to pay tax on their shares of the income or gains of the LLP. This is referred to as ‘tax transparency’.

Question 21

Section 2(1)(a) LLPA 2000 states formation of an LLP requires only…

Answer 21

…two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP. A ‘person’ in this context can be a company as well as an individual.

Question 22

What are the 10 characteristics of an LLP

Answer 22

1. Has a separate legal identity
   i. ) It may own property; enter into contracts on its own behalf
2. All partners in an LLP have limited liability. Their liability to third parties is limited to the amount that they have agreed to pay under the terms of their partnership agreement.
3. For tax purposes, it is treated as a partnership and the members are taxed as partners, each being liable to pay tax on their shares of the income or gains of the LLP. This is referred to as ‘tax transparency’.
4. LLPs are registered at Companies House in the same way as companies and are required to file annual accounts and other information.
5. Members share equally in capital and profits.
6. An LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP.
7. Every member may take part in management but no member is entitled to remuneration for managing the LLP.
8. No person can become a member or assign their membership without the consent of all existing members.
9. Ordinary decision making may be by the majority of the members. Any proposed change to the nature of the business requires the consent of all the members.
10. There is no implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in a Members’ Agreement.

Question 23

LLPs may be described as a hybrid between….

Answer 23

… LLPs are in effect a hybrid between a traditional partnership (with procedural flexibility) and a company (with limited liability).

Question 24

Three key changes brought about by the Companies Act 2006 (from Companies Act 1985) are:

Answer 24

1. • The removal of the requirement for private companies to hold Annual General Meetings or submit Annual Returns (this has been replaced with a simpler annual Confirmation Statement)
2. Codification of directors’ duties so that directors of small private companies can more easily understand their obligations
3. lowing private companies to pass shareholder resolutions in writing, dispensing with the requirement for meetings of shareholders (known as General Meetings)

Question 25

4 types of company & sub-types are:

Answer 25

1. Private companies
   i. ) Private companies limited by shares (Ltd)
2. Private companies limited by guarantee
3. Unlimited company
4. Public companies
   i. ) Public companies limited by shares (Plc)
5. Publicly listed companies

Question 26

6 Principle differences between a private and public company?

Answer 26

1. Name
   As already mentioned, the name of a private company will end in ‘Limited’ or ‘Ltd’ and the name of a public company will end in ‘Public Limited Company’ or ‘Plc’.
2. Share capital
   There is no requirement for a private company to have any specified minimum amount of share capital. A private company could be incorporated with just one share of 1p. In practice many companies are incorporated with a share capital of £1, that is with one share that has a nominal value of £1.
   A public company must have a share capital with a nominal value of at least £50,000 (or the euro equivalent), of which at least one quarter must be paid up (this means paid at the time of purchase) (s 586 and s 763 CA 2006).
3. Number of directors
   A private company need only have one director, and a public company must have a minimum of two directors (s 154 CA 2006).
4. Company secretary
   A private company may choose to have a company secretary but it is not obliged to have one (s 270(1) CA 2006). If a private company does not have a company secretary, the directors (or any person the directors authorise) may do anything that the secretary is required or authorised to do (s 270(3)(b) CA 2006).
   A public company must have a company secretary (s 271 CA 2006), and the person appointed to that post must have the requisite knowledge and experience and hold one of the qualifications specified in s 273(2) CA 2006.
5. Annual general meetings
   - A public company is required to have one annual general meeting (AGM) each year (s 336 CA 2006).
   - Private companies are no longer required to hold an AGM, although they may do so if they wish.
   An AGM provides members who are not directors with an opportunity to question directors, particularly on the issue of a company’s finances.
6. Regulation
   Public companies are potentially able to offer their shares to the public. For this reason they are subject to a higher level of regulation than private companies. As well as the requirements of the CA 2006, further legislation governs public companies.

Question 27

Two constitutional documents required under Companies Act 1985

Answer 27

1. Articles of Association
2. Memorandum

Under s 17 CA 2006 the memorandum no longer forms part of the company’s constitution - it is only required as part of the procedure to register a company at Companies House.

Question 28

Describe the features & purpose of the memorandum of a company under the Companies Act 1985

Answer 28

1. Formed part of constitution
2. Companies could set out constitutional restrictions
3. were required to include an objects clause setting out the purposes for which the company has been formed.
   i. ) Acting outside of this purpose was described as acting ultra vires or outside the company’s capacity.

Question 29

A company acting ultra vires under the Companies Act 1985 describes what?

Answer 29

A company acting outside its purpose, as set out in the object clause of its memorandum, setting out the purpose for which the company had been created.

Question 30

If a company was incorporated under CA [1985] what happens to its memorandum & object clauses?

Answer 30

Any older company incorporated under the CA 1985, s 28 CA 2006 provides that any provisions in a memorandum must be treated as provisions of the company’s Articles.

Therefore, the objects clause of an older company continues in force, operating as a limitation on that company’s capacity unless and until the Articles of that company are amended to remove its objects clause.

Question 31

What’s the main constitutional document set out in the Companies Act (CA) [2006] and what is that document’s purpose?

Answer 31

All companies must have articles of association (Articles) (s 18 CA 2006). Under CA 2006, the Articles form the main constitutional document of a company. The purpose of the Articles is to regulate the relationship between the shareholders, the directors and the company.