Business Structures

Question 1

What is sole proprietorship?

Answer 1

A sole proprietor is a sole individual carrying on some form of business activity on their own account (such individuals are also known as ‘self-employed’ or as ‘independent contractors’)

Question 2

What is the difference between a sole practitioner and a sole trader?

Answer 2

A sole trader is a sole proprietor who is not a professional. A sole proprietor who is a professional (such as a lawyer or an accountant) is known as a sole practitioner.

Question 3

Explain the advantages and disadvantages of running a business through a sole proprietorship.

Answer 3

ADVANTAGES:
- it is easy to set up
- it is subject to much less regulation than other forms of business
- it is required to disclose much less information than other business, so can be run with more privacy; and
- it is easy to dissolve

DISADVANTAGES:
- sole proprietors may find it difficult to raise finance, and so may have to use their own money;
- the liability of the sole proprietor is personal and unlimited

Question 4

How can a sole proprietor raise finance?

Answer 4

• they could invest their own money in the business
• they could obtain a loan
• they could seek investment from outside parties

Question 5

What are the three types of partnership that can be created?

Answer 5

• the partnership (often known as the ‘ordinary’ or ‘general’ partnership
• the limited partnership
• the limited liability partnership

Question 6

Explain what ss. 5 and 10 of PA 1890 state

Answer 6

Section 5 of PA 1890 states that every partner is an agent of the firm and his other partners for the purpose of the business of the partnership. In other words, a partner can bind the firm’s and his co-partners to an agreement with a third party.

Section 10 of PA 1890 states that each partner is vicariously liable for the wrongful acts or omissions of another partner, as long as the partner was acting within ordinary business of the partnership or within his authority.

Question 7

How does a limited partnership differ to an ordinary partnership?

Answer 7

They differ in two ways:

• First, an ordinary partnership is created and governed by PA 1890, whereas a limited partnership is created and governed by the Limited Partnerships Act 1907
• Second, in an ordinary partnership, each partner’s liability is personal and unlimited, as well as being joint and several. Conversely, a limited partnership can have limited partners, whose liability will be limited to an amount as specified in the registration document. Note, however, that a limited partnership mut have one partner (known as a general partner), whose liability will be unlimited.

Question 8

Explain the differences between an LLP and an ordinary partnership

Answer 8

Regulating legislation:
- Ordinary: PA 1890
- LLP: LLPA 2000 and accompanying subordinate legislation

Governed by which area of law:
- Ordinary: Partnership law
- LLP: Company law, unless LLPA 2000 states otherwise

Formation:
- Ordinary: Formed via an agreement b/w the partners
- LLP: Formed by registering specified documents with Companies House

Has corporate personality:
- Ordinary: No
- LLP: Yes

Partners are known as:
- Ordinary: Partners
- LLP: Members

Liability of the partners:
- Ordinary: Personal and unlimited
- LLP: The LLP is liable for its debts and liabilities, and the members’ liability is limited

Question 9

What are the five types of company that can be created under the CA 2006?

Answer 9

• public company limited by shares
• private company limited by shares
• private company limited by guarantee
• private unlimited company with a share capital
• private unlimited company without a share capital

Question 10

What are the differences between a public and private comapny?

Answer 10

Required to have a share capital
- Public: Yes
- Private: No

Liability of members:
- Public: Must be limited
- Private: Limited or unlimited

Can offer to sell securities to the public at large:
- Public: Yes
- Private: No

Can trade securities on a stock exchange:
- Public: Yes
- Private: No

Minimum capital requirement:
- Public: Yes (£50,000)
- Private: No minimum capital requirement

Minimum number of directors:
- Public: Two
- Private: One

Suffix
- Public: ‘plc’ or ‘public limited company
- Private: ‘Ltd’ or ‘Limited’

Required to appoint a CoSec:
- Public: Yes
- Private: No (unless articles provide otherwise)

Can be classed as a micro-entity, small or medium-sized:
- Public: No
- Private: Yes

Question 11

In a limited company, to what extent is the members’ liability limited?

Answer 11

In a limited company, the method by which members’ liability is limited will depend on whether the company is a company limited by guarantee or a company limited by shares.

• In a company limited by shares, the liability of the members of such companies is limited to the amount that is unpaid on their shares
• In a company limited by guarantee, the liability of the members is limited to the amount they have undertaken to contribute in the event of its being wound up. This amount will be stated in the statement of guarantee that was submitted to Companies House when the company was incorporated (and may also be stated in the company’s articles).

Question 12

What is the difference between a quoted company and a listed company?

Answer 12

• A listed company is a company that has a class of its securities listed on the UK’s official list
• A quoted company is a company whose share capital
  (i) has been included on the official list
  (ii) is officially listed in an EEA state, or
  (iii) is admitted to dealing on the NYSE or NASDAQ

Question 13

How does the CA 2006 classify in terms of size?

Answer 13

CA 2006 determines company size by reference to (i) turnover; (ii) balance sheet total and (iii) number of employees.

Turnover:
- Micro (s. 384A - >£623K)
- Small (s. 382(3) - >£10.2M)
- Medium (s. 465(3) - >£36M)
- Large (any other company)

Balance sheet total:
- Micro (s. 384A - >£316K)
- Small (s. 382(3) - > £5.1M)
- Medium (s. 465(3) - > £18M)
- Large (any other company)

No. of employees:
- Micro (s. 384A - >10)
- Small (s. 382(3) - > 50)
- Medium (s. 465(3) > 250)
- Large (any other company)

In a company’s first financial year, it need only satisfy at least two criteria out of three.

In subsequent years, a company that is classified as a certain size will continue to be classified as that size unless it fails to satisfy at least two criteria in two consecutive financial years.

Question 14

How can a private company re-register as public, and vice versa?

Answer 14

A private company can re-register as public by passing a special resolution, delivering specified documents to Companies House and complying with certain conditions placed upon public companies.

A public company can re-register as private by passing a special resolution and delivering specified documents to Companies House.