Different business models

Question 1

Sole traders

Answer 1

• no set up costs, no formalities, can start trading straight away
• not a separate legal entity; contracts are formed between individuals and third parties
• unlimited personal liability; personal assets such as house and car are liable to be sold to meet debts of the business
• no formal structure
• no Companies House filing or procedural requirements
• complete privacy; no publicly filed accounts

Question 2

Partnerships

Answer 2

• no set up costs; no formalities, can trade straight away
• partnerships can be formed without formal agreement or even intention
• not a separate legal entity; contracts are formed between partners and third parties as individuals
• unlimited personal liability
• no Companies House filing or procedural requirements
• complete privacy
• governed by provisions of the Partnership Act 1890

Question 3

Formation of partnerships

Answer 3

• can be created without formalities
• s 2 PA 1890, rules for determining if a partnership exists: whether profits and/or losses are shared, whether a loan is made from one partner to another, whether property is held jointly
• evidence of profit shared will be prima facie evidence of partnership but not necessarily conclusive
• a loan of money does not itself create a partnership

Question 4

Partnership Agreements

Answer 4

• advisable to have one drawn up otherwise will be governed by default provisions of PA 1890. These are:
• Section 24(1): partners entitled to share equally in profits and must share equally in losses, even where they have contributed to capital unequally
• Section 24(6): partners not entitled to a salary
• Section 24(8): decisions arising during ordinary course of business are decided by a majority
• Section 25: a partner cannot be expelled by a majority vote
• Partnership Agreements can be varied at any time with unanimous consent

Question 5

Limited Partnership (LP)

Answer 5

Has two types of partners: Limited Partners (limited liability and must not be involved in management of the business. If they do become involved in management, they lose their limited status) and General Partners (run the business and have unlimited liability)

• governed by Limited Partnership Act 1907
• must be registered at Companies House but no requirement to file accounts
• not commonly used for general business but popular for investment vehicles

Question 6

Limited Liability Partnership (LLP)

Answer 6

• introduced by Limited Liability Partnership Act 2000
• has a separate legal personality: can own property and enter into contracts on its own behalf
• treated as a partnership for tax purposes, members are taxed as partners on shares of their income or gain from the LLP; known as ‘tax transparency’
• registered at Companies House
• required to file annual accounts and other info
• many law and accountancy firms are LLPs
• flexible organisational structure should be decided between partners in a Members Agreement

Question 7

LLP: In absence of a Members Agreement

Answer 7

Limited Liability Partnerships Regulations 200:

• members share equally in capital and profits
• LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of business of the LLP
• every member may partake in management but no member is entitled to remuneration
• no person can become a member or assign their membership without consent from all existing members
• ordinary decision making may be the majority of members. Proposed changes to the nature of the business requires consent of all members
• no implied power of expulsion of a member by majority unless stated in Members Agreement

Question 8

Companies

Answer 8

• separate legal entity
• limited liability
• governed by CA 2006
• formal procedural requirements that can be onerous

Question 9

Private companies limited by shares

Answer 9

• no minimum share capital requirements
• prohibited from offering shares to public
• can be formed by one person
• only needs 1 director

Question 10

Private companies limited by guarantee

Answer 10

• no share capital
• liability of members limited to amount they agreed to contribute in the event of winding up
• membership not transferrable
• end ‘Ltd’

Question 11

Public limited company

Answer 11

• name ends ‘Plc’
• can offer shares to the public on stock exchanges
• subject to more onerous regulatory requirements
• must have share capital with a nominal value of at least £50,000 of which at least 1/4 must be paid up
• minimum of 2 directors
• must have a company secretary and person appointed must have requisite knowledge and experience
• required to have one AGM per year

Question 12

Constitutional documents of a company

Answer 12

• Memorandum

- Articles of Association

Question 13

Legal effect of the Articles

Answer 13

• binding as though they were a contract

Question 14

Incorporation from scratch

Answer 14

• application made to the Registrar of Companies to have new company registered at Companies House
• traditionally slower method but now possible to incorporate online
• s9 CA 2006 the following must be supplied to the Registrar:
• memorandum
• articles
• required fee
• an application form (INOI) stating proposed name, whether liability is limited, where situated, private/public, registered address, statement of capital and initial shareholdings, statement of proposed offices, statement of compliance to CA 2006
• once the Registrar has approved the application, the company is sent a certificate of incorporation authenticated by Registrar’s official seal
• company becomes separate legal entity from date stated on certificate

Question 15

Incorporation from shelf company purchase

Answer 15

• set up in advance by a company registration agent or law stationer. Many solicitors also operate an in house service that sets up shelf companies
• can be done quickly
• available all the time on every day of the year, whereas incorporation from scratch only available during Companies House opening hours
• clients will make changes
• purchasing of shelf company has traditionally been seen as cheaper but it may be that once legal fees are factored in, it is not materially different