Summary
Summary SQE2 Business Notes
- Module
- SQE2
- Institution
- University Of Law (ULaw)
Used these notes to achieve 70% on SQE2 first time.
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Business Law & PracticeTypes of Business Mediums
Sole Trader:
- Simplest way to set up and run a business;
- Ownership and Control rests with a single individual;
- Inherently risky, as individual not separate from business, therefore sole personal liability for
business, debts, contractual obligations and any claims against;
- Own all assets of the business (can dispose of as they wish);
- May employ staff and trade under a business name;
- Unlikely to be suitable for businesses requiring more than little external investment:
- Being unincorporated limits borrowing; and
- Prevents business raising equity finance by issuing shares.
- Minimal regulation – No requirement for a formal constitution for the business, no need to register or
file accounts and returns with Companies House;
- Treated as self-employed – Must register and make an annual self-assessment tax return (profits
treated as personal income subject to income tax and NI contributions);
- If running a business where there is a risk of personal injury to third parties, it is vital you are insured
against these risks.
Advantages:
- Control: Sole traders maintain full control of their business;
- Profit Retention: Sole traders retain all profits of their business;
- Private Data: Information about sole traders is kept private;
- Registering: No dues or fees to register
- Cost: Inexpensive to set up.
Disadvantages:
- Liability: Subject to unlimited liability – Risk of losing home, savings etc.; the proprietor can be made
personally bankrupt if the business is unsuccessful.
- Finance: Difficulty raising finance;
- Reverse Economies of Scale: Cannot take advantages of economies of scale like limited
companies and larger corporations;
- Decision Making: No aid in decisions – Success and failure dependent upon individual;
- Life of Business: Business won’t usually continue in event of sole trader’s retirement/
death
Partnership:
- Simple way for two or more legal persons to set up and run a business;
- An unincorporated business that exists when two or more people ‘carry on’ business in common with a
view of profit (as defined in s.1 Partnership Act 1890).
- Can arise without any formal agreement – Typically is an agreement;
- Partners usually draw up a legally binding partnership inc. amount of capital contributed by
each partner, way profits will be shared etc.;
- Has no separate legal personality;
- Partners share profits, risks, costs and business responsibilities – Personally reliable for debts and
liabilities;
- Partnership accounts will have to be drafted and approved to calculate and divide the profit/loss
between partners in accordance with the partnership agreement;
- Can hire employees;
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, - Partners usually raise money for business from own assets, and/or with loans (being unincorporated
limits borrowing in practice, and not being a company with a share capital prevents raising of equity
finance by issuing shares);
- Each partner self-employed and pays tax on their share of the profits;
- The partnership itself, and partners, must make annual self-assessment returns;
- Partnership must keep records showing business income and expenses;
- Legal persons other than individuals (e.g. Ltd. companies or LLPs) can also be partners;
- Without partnership agreement, default rules are set out in Partnership Act 1890; it is often desirable to
have a formal partnership agreement.
- No public disclosure required.
Advantages:
- Capital: Partners fund business with start up capital – The more partners, the more money can be put
into the business, allowing flexibility and growth potential (plus more potential profit);
- Flexibility: Easy to form, manage and run – Less strictly regulated than companies, as partners have the
only say in the way the business is run;
- Shared Responsibility: Partners can share responsibility of the running of the business,
allowing them to make most of abilities;
- Decision Making: Partners share decision making and can aid each other when necessary – More
partners means more business ideas and solutions to business issues.
Disadvantages:
- Disagreements: Can arise when partners have differing views regarding the business, potentially leading
to harming the business and/or the relationships of those involved;
- Agreement: Due to being jointly run, is necessary that all the partners agree with the things that are
being done – In some circumstances, therefore, there are less freedoms with regards business
management (still more flexibility than limited companies);
- Liability: Ordinary partnerships are subject to unlimited liability – Each partner shares the
liability and financial risks of the business;
- Taxation: Partners must pay tax in the same way as sole traders – Self assessment tax return each
year. Must also register as self-employed with HMRC. If the Partnership brings in more than a
certain level, they are subject to greater levels of personal taxation than they would in a limited
company;
- Profit Sharing: Profit shared equally, potentially leading to inconsistency.
Limited Liability Partnership:
- A body corporate with a separate legal personality;
- Set up under Limited Liabilities Partnership Act 2000;
- Members of an LLP enjoy limited liability;
- Members make business decisions;
- Liability limited to the amount of money invested in the business and to any personal guarantees they
have given to raise the finance
- Each member takes an equal share of the profits, unless Members’ agreement specifies otherwise;
- Each non-corporate member must register as self-employed;
- LLP and members must make annual self-assessment returns;
- Non-corporate members pay income tax and NI on profits;
- Must register and file accounts and annual returns at Companies House;
- At least 2 members must be ‘designated members’ who hold additional responsibilities e.g.
appointment of auditors, signing off and filing of accounts at Companies House;
- More freedom than companies over arranging internal affairs e.g. way decisions are made, way profit
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, distributed to members etc.
Limited Company:
- Most common legal form in use for running a business;
- ‘Incorporated’ to form an entity with a separate legal personality;
- Under Companies Act 2006 a company is required to have 2 constitutional documents:
- A Memorandum; and
- Articles of Association
- Owned by its members (investors), who enjoy limited liability (company’s finances are separate
from personal finances of their owners);
- Creditors of the business may only pursue the company’s assets to settle debts;
- There are two mechanisms for company membership:
(i) Company Limited by Shares: Members each own one or more shares in the company and
are known as shareholders (limited liability);
(ii) Company Limited by Guarantee: Members of the company give a guarantee to pay a set sum
if the company should go into liquidation.
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, - In a Company Limited by Shares, one share = one vote (depending on type of share);
- In a Company Limited by Guarantee, one member = one vote;
- Day-to-day management normally separate from its ownership and undertaken by a director or board of
directors (core principle: act in the interest of the company and its members);
- Directors may also be members;
- A company must have at least one director (public companies must have two), and at least one
director must be a real person;
- A Company Limited by Guarantee raises finance from members, loans or profits;
- A Company Limited by Shares can also raise capital from shareholders (issuing of shares) – Profits
distributed to shareholders, apart from allocations to working capital;
- Have greater capacity to finance themselves with loans than unincorporated businesses, as they can use
their assets as security for loans, creating a ‘charge’ over their assets; fixed and floating charges.
- Subject to stricter regulatory requirements than unincorporated forms – greater accountability and
transparency;
- Accountability to shareholders and public;
- Director’s responsibility to maintain company’s public records – inc. annual accounts and annual return
about the company (filed at Companies House);
- Directors must notify Companies House of changes in the structure and management of
the business;
- If company has taxable income or profits, it must tell HMRC and is liable to corporation
tax;
- Companies liable to corporation tax must make annual returns to HMRC;
- A Company Limited by Shares can be a Private Limited Company (Ltd) or a Public Limited
Company (Plc):
• Plc: Permitted to offer shares for sale to public; Usually begin life as Ltd companies; Must
have at least 2 directors; Must have issued shares to public to value of at least £50,000; Stricter
regulation than private companies to ensure transparency and protection for public investor;
May become a Listed company by floating shares on a stock exchange, creating wider market
for its shares (subject to even greater regulation).
• Ltd.: Most common legal form used; Range from business with a single shareholder
director to large companies which have attracted large investment of private equity
capital.
Advantages:
- Limited Liability: Provision of financial security – Shareholders only liable for company
debts according to the levels of their own investment and no more;
- Separate Entity: Limited company deemed to be a separate legal entity from its owners –
Company will exist beyond life of its members (ensuring security for employees and other
members;
- Taxation & Tax Advantages: Only taxed on their profits (19%), and not subject to higher tax rates
placed on sole traders/partnerships/LLPs (non-corporate members pay tax and NI on profits) which
can reach 40%. If forming and running a limited company, you are recommended to pay yourself at
minimum wage levels - Allows
you to take advantage of the £12,500 personal allowance (required to earn over this before paying income
tax). When considering income tax rates are 20% up to
£50,000 and 40% over £50,000, advantage of paying yourself dividends instead of in the form of a pay
packet, as tax on dividends is 7.5% (basic rate tax payers, higher rate is 32.5%);
- Employee Shareholders: In some instances, employees can purchase shareholders and become
shareholders of the company – Providing extra motivation beyond salary.
Disadvantages:
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