Business Structures

Question 1

What is a sole proprietorship? What are the 2 types?

Answer 1

An individual carrying on some form of business on their own account.

Sole practitioner if professional
Sole trader if not

Question 2

How is a sole proprietorship formed and what 3 things must they do?

Answer 2

Individual must register as self-employed with HMRC and chose a name that is compatible with Part 41 CA2006.

1. File their own tax returns - maintain adequate records of sales and purchases
2. Register for VAT purposes once revenue reaches a certain amount
3. Register employees with HMRC for PAYE

Question 3

What are the 4 ways a sole proprietorship can raise finance?

Answer 3

1. Invest their own money and risk losing it
2. Obtain a loan from a bank but banks are cautious
3. Seek investment from outside persons but they usually want a share of the profits
4. Adopt a different business structure

Question 4

How is a sole proprietorship dissolved?

Answer 4

Inform HMRC that they are no long self-employed and simply stop trading.

Any profits of the business belong to the individual

Question 5

What are 6 advantages and 3 disadvantages of a sole proprietorship?

Answer 5

Advantages:

1. Straightforward to set up
2. Subject to little regulation
3. Can hire employees
4. Easy to dissolve
5. All business’s assets belong to individual
6. Can run business privately

Disadvantages:

1. No separate legal personality - liability is personal and unlimited
2. No perpetual succession
3. Difficult to raise finance

Question 6

Which Act governs ordinary partnerships? What is the definition of a partnership?

Answer 6

Partnership Act 1890

The relationship which subsist between persons carrying on a business in common with a view of profit.

Question 7

What does s.5 PA1890 say?

When will partners not be bound?

Answer 7

All partners are agents of the firm and bind each other contractually when dealing with 3rd parties in usual ways of business or within their authority.

Not bound if partner had no authority and 3rd party knew this, or if 3rd party did not know / believe them to be a partner

Question 8

What does s.9 and s.10 PA1890 say?

Answer 8

S.9 = partners are jointly liable for the debts of the partnership incurred whilst they are partners

s.10 = each partner is vicariously liable for the wrongful acts or omissions of another partner if they were acting within ordinary course of business of the partnership or within their authority

Liability is joint and several = the claimant can sue each partner in turn or all the partners at once, until the amount of loss is recovered

Question 9

What does s.19 PA1890 say?

Answer 9

The partnership agreement can be altered if all the partners consent

Question 10

When is a partnership dissolved? (5 instances)

Answer 10

1. If all partners agree
2. If partnership agreement provides it will be dissolved on occurrence of a particular event
3. It becomes unlawful for partnership to continue
4. The court choses to dissolve following an application from a partner
5. The relationship between the partners breaks down

Question 11

What are the 4 advantages and 2 disadvantages of an ordinary partnership?

Answer 11

Advantages:

1. Pooling of skill, experience and finances
2. Sharing risks
3. Conduct is private
4. Decisions are unanimous = gives each partner a veto on all decisions

Disadvantages:

1. No perpetual succession
2. Liability is joint, several, personal, and unlimited

Question 12

What are the 2 main differences between an ordinary partnership and a limited partnership?

Answer 12

1. Created an governed by different acts - OP: formed by agreement and PA1890. LP: formed by registering docs at CH and Limited Partnership Act 1907
2. Liability of partners - OP: joint, several, personal, and unlimited. LP: can have limited partners

Question 13

What does s.1 LPA1907 say?

Answer 13

Limited partnerships must consist of 1 or more general partners and 1 or more limited partners

Question 14

What does s.8A LPA1907 say?

Answer 14

General partners are liable for all the debts and obligations of the partnership and limited partners are only liable for a specified amount (contained in the registration document)

Question 15

What does s.6 LPA1907 say?

Answer 15

Limited partners cannot take part in management or bind the firm
If they do, become liable for the firm’s debts and obligations

Question 16

What 4 things must a limited partnership do?

Answer 16

1. suffix their name ‘LP’
2. Have a UK-based principle place of business
3. File a confirmation statement
4. Partners must be registered with an anti-money laundering supervisory body

Question 17

How is a Limited Liability Partnership formed? How is it governed?

Answer 17

Under Limited Liability Partnership Act 2000 and by registering specific documents at Compnaies House.

Governed under company law unless the LLPA2000 says otherwise.

Question 18

What does s.1 LLPA200 say?

Answer 18

LLP is a body corporate with separate legal personality = responsible for its own debts and obligations

Question 19

What does s.6 LLPA2000 say about the members?

Who is vicariously liable?

Answer 19

Every member is an agent of the firm.

LLP itself can be vicariously liable for the wrongful acts and omissions of its members

Question 20

What does s.14 LLPA2000 say?

Answer 20

On winding up, every member is liable to contribute to the LLP such assets as he has agreed

Regulation 5, schedule 3, para 1 LLP Regulations 2001

Question 21

What are the 6 differences between an ordinary partnership and a LLP?

Answer 21

1. Regulating legislation - OP: PA1890. LLP: LLPA2000
2. Governed by - OP: PA1980. LLP: Company law unless LLPA2000 says otherwise
3. Formed by - OP: agreement. LLP: registering specific docs at CH
4. Has corporate personality - OP: no. LLP: yes
5. Partners are known as - OP: partners. LLP: members
6. Liability of partners - OP: joint, several, personal, and unlimited. LLP - limited, LLP is responsible for its debts and obligations

Question 22

What are the 3 key decisions when setting up a company and the 5 different types of companies?

Answer 22

3 key decisions:

1. Public or private?
2. Share capital? (public must)
3. Limited or unlimited liability? (public = limited)

5 different types of company:

1. Public company limited by shares
2. Private company limited by shares
3. Private company limited by guarantee
4. Private unlimited company with share capital
5. Private unlimited company without share capital

Question 23

What are the 2 major differences between a public and private company? What are 7 other differences?

Answer 23

Part 20 CA2006 sets out 2 major differences:

1. s.755 CA2006 = Private limited companies cannot offer securities to the public at large (public companies can)
2. s.76 CA2006 = Public companies must be issued a trading certificate before engaging in any business (only issued if have the minimum share capital)

Other differences:

1. Required to have a share capital: public = yes (£50,000), private = no
2. Liability of members: public = limited, private = unlimited or limited
3. Offer shares on a stock exchange: public = yes, private = no
4. Min. no. of directors: public = 2, private = 1
5. Suffix: public = plc (public limited company), private = ltd (limited)
6. Company secretary: public = must have, private = optional
7. Classified as micro-entity, small, or medium-sized: public = no, private = yes

Question 24

What is a listed company? What is a quoted company? What is a traded company?

Answer 24

A listed company = has a class of securities listed on the UK’s Official List

A quoted company = has share capital (i) included on the Official list, or (ii) is officially listed in an EEA state, or (iii) is dealing on the NYSE or NASDAQ
If none of these apply the company is unquoted

A traded company = shares carry rights to vote at general meetings, and are trading on a regulated market in an EEA state by or with consent of the company

Question 25

When is the liability of members limited? What is it limited to if the company is limited by shares? What about limited by guarantee?

Answer 25

Liability of members is limited if limited by its constitution Limited by shares = when owned by shareholders S.3 CA2006; S.74 IA1986 = liability is limited to the amount unpaid on their shares If fully paid = no liability to contribute upon liquidation Limited by guarantee = when no share capital S.3 CA2006; S.74 IA1986 = liability is limited to the amount they have agreed to contribute in the event of winding up (stated on incorporation) Usually £1 and usual business structure for not for profit companies

Question 26

What does it mean if a company is unlimited? Can members become liable?

Answer 26

Unlimited = company itself that is sued not the members because companies have a corporate personality Members can become liable during liquidation if creditors petition for a winding up order - liquidator can require the members to contribute to the company’s assets No limit on the amount the creditor can claim (subject to the debt owed)

Question 27

What are the 2 ways to classify a company's size? Why are both significant?

Answer 27

1. determined by turnover, balance sheet total, and number of employees Significant because certain statutory regulations don't apply to small companies e.g. no need to audit accounts 2. determined by size of market capitalisation e.g. FTSE 100, 250, and 350 Significant because certain laws and governance principles only apply to such companies

Question 28

What is a CIC? How is it formed? What is the community interest test? Which law are they subject to? What report must they produce? Can they register as a charity?

Answer 28

Community Interest Company = companies that combine a commercial purpose with social, charitable, or community-focused activities Register documents with CIC Regulator who will allow incorporation if a reasonable person would consider the business's activities are for the benefit of the community = 'community interest test' Generally subject to CA2006 Must produce an annual 'community interest company report' = shows how business activities benefited the community Cannot register as a charity

Question 29

What is a CIO? What is the difference between companies registered as a CIO and those that aren't?

Answer 29

Charitable incorporated organisation (CIO) Charitable companies that are not CIOs are subject to general company law and additional rules relating to charities Deal with 2 regulators = the Charity Commission and CH If CIO = regulated by Charities Act 2011 and accompanying subordinate legislation Deal with 1 regulator = the Charity Commission

Question 30

How can a company re-register?

Answer 30

Part 7 CA2006 allows for most forms of re-registration except from limited by guarantee to limited by shares S.90 CA2006 = private to public = pass a special resolution, deliver specific documents to CH. and comply with public company conditions e.g. minimum share capital s. 97 CA2006 = public to private limited = pass a special resolution and deliver specific docs to CH s. 102(1) CA2006 = private limited to unlimited = all members assent to the re-registration and deliver specific docs to CH s. 105(1) CA2006 = unlimited private to limited = pass a special resolution and deliver specific docs to CH s. 109(1) CA2006 = public to unlimited private with a share cap = all members assent to the re-registration and deliver specific docs to CH May need to change name and articles to comply with the requirements of its new status Re-registration fee is payable and a new certificate of incorporation issued

Question 31

What is a mutual organisation? How is one set up? What are the 2 specialist structures?

Answer 31

An organisation that is owned by, and run for, the benefit of its members, who are actively and directly involved in the business Can be set up using standard business structures e.g. partnership, company Two specialist structures can be registered with the FCA under the Co-operative and Community Benefit Societies Act 2014: 1. co-operative societies = run for the benefit of those members who use its services; and 2. community benefit societies = run for the benefit of the community, and not just its members Other types = building societies