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An individual client has asked for advice upon a new start up business. The client has£60,000 capital to invest in the business. The client’s key concerns are flexibility for raising
further finance, low personal risk and confidentiality in relation to the business and finances.
The client also has a friend who is interested in running the business with him but has no
money to invest.
Which would be the best business medium for him?
A private limited company
A public limited company
A limited liability partnership
A limited partnership
A sole trader
Correct
A private limited company has limited disclosure obligations, the liability for the
shareholders is limited to the paid up share capital and funding can be obtained
through the use of equity or debt finance and there is an ability to appoint directors
to run the company on a day to day basis.
A 17 year old sixth form student has just inherited £100,000. She is a talented baker wishes to
start a business selling cakes she makes. To do so, she needs to raise more money and has a
potential investor waiting. She wants to retain 75% of profits herself. Her recipes are unique
and she wants to protect them.
A 17 year old sixth form student has just inherited £100,000. She is a talented baker wishes to
start a business selling cakes she makes. To do so, she needs to raise more money and has a
potential investor waiting. She wants to retain 75% of profits herself. Her recipes are unique
and she wants to protect them.
She has little knowledge of business structures and has undertaken some rather patchy
research. She has written out the following list to consider. Which option is best for the
student?
She should not set up a company because the contracts with suppliers and purchasers will be
in the company’s name and she will lose control of the terms.
She should set up a partnership with the investor and enter a partnership agreement to
determine distribution of profit because she lacks the legal authority to be a director of a
company.
She should not set up a company because there are obligations to file documents and her
unique recipes would not be protected.
She should set up a company and the investor can buy shares in the company and then enter a
shareholder agreement to determine distribution of profit.
She should set up a sole tradership because she can do so immediately, it provides for more
privacy and she has the money to start the business.
Correct
Correct. This is the best option with the least risk. Risk should be the most important
consideration for anyone forming a new business.
She should “not set up a partnership” because if the partnership business fails the
partners are jointly and severally liable for all debts.
There is no obligation on a company to reveal unique recipes.
, That the company is a separate legal entity and enters contracts is a key advantage.
Sole traderships are the most private form of business but otherwise are the most
risky.
Last year a man and a woman qualified as accountants and began trading together. The man
invested 60% of the capital. The woman invested 40% of the capital. They have no formal
agreements in place.
Which one of the following statements is correct?
They are in a partnership business together and either may give notice to dissolve it at any
point.
They are in a partnership business together and clients must enter into a contract with the
partnership.
They are in a partnership business together and profits will be split 60% to the man and 40%
to the woman.
They are not in a partnership business together because it has not been properly formed and
there is no partnership agreement.
They are not in a partnership business together and the man is liable for 60% of the debts.
Correct
Correct. They are in a partnership at will and it may be dissolved by either partner
giving notice – s 32(c) PA 1890.
While the other answer options might sound plausible, they are each incorrect.
There is a partnership at will here and it does not require a partnership agreement.
Clients enter contracts with the partners as the partnership is not a separate legal
entity.
Without a partnership agreement, profits (and losses) are split equally – s 24(1) PA
1890.
There is a partnership at will and the man and woman are jointly and severally liable
for all debts - s 24(1) PA 1890.
A man and a woman wish to form a business together. The man is experienced in running
businesses and the woman has recently won the lottery and is looking to invest. The woman
may want to run the business in the future.
Which of the following statements best describes what the man and woman should do?
They should set up a Limited Partnership because it is a separate legal entity and they will not
be liable for any debts.
They should set up a Limited Liability Partnership because as a separate legal entity it is
taxed as a business.
They should set up a Limited Liability Partnership because it is a separate legal entity and the
man and the woman could never be liable for any debts.
They should set up a Limited Liability Partnership because both the man and woman would
be entitled to manage the business.
They should set up a Limited Partnership because the woman would always be a Limited
Partner with limited liability.
Correct
Correct. This reflects Article 7(3) of Limited Liability Partnerships Regs 2001.
, If a Limited Partnership is set up and the woman becomes involved in management,
she loses status as a limited partner with limited liability.
Limited Partnerships are not separate legal entities and general partners are
personally liable for debts.
Members of an LLP may become personally liable for debts.
Members of an LLP are taxed as partners would be.
A husband and wife are thinking of forming their own new private limited company together.
They want to name it SmallCo in due course. The plan is for only the husband to run
SmallCo on a daily basis. The wife will invest 75%, and the husband the remainder in
ordinary shares. They plan to adopt the relevant Model Articles.
Which of the following statements best describes the position of SmallCo?
There needs to be another director appointed. Only the wife is a person of significant control.
The wife can pass a resolution to change the name of the company.
There does not need to be another director appointed. Only the wife is a person of significant
control. The wife cannot pass a resolution to change the name of the company herself.
There does not need to be another director appointed. Only the wife is a person of significant
control. The wife can pass a resolution to change the name of the company.
There needs to be another director appointed. Both the wife and husband are persons of
significant control. The wife cannot pass a resolution to change the name of the company
herself.
There does not need to be another director appointed. Both the wife and husband are persons
of significant control. The wife can pass a resolution to change the name of the company.
Correct
Correct. This reflects that a private company only requires one director, that a PSC
has over 25% shares and that a special resolution is required to change the name
(require minimum 75% votes).
A company entered into a contract with an office equipment supplier to purchase 3
projectors. The contract was signed by the sole director on behalf of the company. The
director and his wife are the shareholders of the company. The supplier delivered the
projectors as agreed but the company failed to pay the purchase price.
Which statement best describes what legal action the supplier can take?
The supplier can sue the sole director for the purchase price.
The supplier can sue the company and the director for the purchase price.
The supplier can sue the company and the shareholders for the purchase price.
The supplier can sue the shareholders for the purchase price.
The supplier can sue the company for the purchase price.
Correct
Correct. The director signed the contract as agent for the company.
Therefore, only the company is liable for the purchase price.
A company has one director. The shareholders are the directors and his two sons. Which
statement best describes the position of the director?
The director is the trustee and the company is the beneficiary.
, The director is the beneficiary and the company is the trustee.
The director is the agent of the company and the company is the principal.
The director is the agent of the company and the shareholders.
The director is the principal and the company is his agent.
Correct
Correct.
A holding company owns 100% of the shares in its subsidiary company. Both companies are
incorporated in England and Wales with the same director. The subsidiary company employs
workers to maintain railways whilst the holding company focuses only on tendering for
contracts for these projects. Unfortunately, a worker is badly injured whilst operating a
machine laying new railway tracks. An inquiry finds that the cause of the injury is inadequate
health and safety and training provided by the subsidiary to its workers. Consequently, the
subsidiary loses a key contract but the director continues to allow the subsidiary to trade,
despite a period of serious losses and damaging publicity. The subsidiary enters insolvent
liquidation and is wound up. The worker now seeks to bring a claim against the holding
company as compensation for his injuries.
Which option best describes what the Court will decide?
The Court will make the holding company liable because the holding company owes the
employee a duty of care which it has breached.
The Court will make the director liable to contribute to the subsidiary’s assets on the ground
of wrongful trading.
The Court will make the holding company liable because the holding company and
subsidiary are in the same group of companies.
The Court will make the holding company liable because the subsidiary was a sham.
The Court will make the director liable to contribute to the subsidiary’s assets on the ground
of fraudulent trading.
Correct
Correct.
This answer reflects s 214(1) IA 1986 because his conduct as director is causative of the
subsidiary’s liquidation and he trades on despite heavy losses beyond the point of no return,
see Re Hydrodam [1994] 2 BCLC 180. Consequently the Court will order him to contribute
to the assets of the subsidiary (the worker will have to claim against these along with the
creditors).
While the other answer options might sound plausible, they are each incorrect.
Following Prest v Petrodel [2013] UKSC 34, the veil may be pierced if a company was
interposed by its governing mind to avoid his legal obligation. Piercing the veil on the ground
of “sham” no longer exists and in any event there is no evidence that the subsidiary here is a
“sham” because businesses may organise their affairs into company groups to isolate
liabilities accordingly (Adams v Cape Industries PLC [1990] Ch 433).
Being in the same company group is not a ground by itself to pierce the veil – see Adams v
Cape Industries PLC [1990] Ch 433. Each company is a separate legal entity with its own
liabilities, even if it is a wholly owned subsidiary in a group.
A duty of care is only imposed upon the holding company to the subsidiary’s employees in
exceptional circumstances where the holding company has control over the subsidiary’s
health and safety policy. See Chandler v Cape [2012] EWHC Civ 525. There is no
evidence of that here as the holding company is only concerned with tendering for contracts
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