Some examples from this set of practice questions
1.
What are the two forms a business can be run?
Answer: 1. Incorporated business – must undergo formal registration process before they can legally exist. They have a separate legal entity from that of their owners. Established under the Company Act 2006 (CA). 2. Unincorporated business – require few, or even no, administrative steps to be taken to be formed under the law. Usually treated as being the same legal entity as its owners, which no separate legal status.
2.
What are the most common types of incorporated business and unincorporated business?
Answer: o Most common forms of incorporated business are the company and the limited liability partnership (LLP). o Most common forms of unincorporated business are the sole trader and partnership.
3.
What are the 4 main types of business?
Answer: 1. Sole Trader 2. Partnership 3. Limited Liability Partnership 4. Company
4.
What are the basic concepts of a sole trader?
Answer: • Someone who runs a business on their own as a self-employed person. A sole trader can operate in any trade or profession. o E.g. dog walker or lawyer. • A professional, such as a lawyer, are usually known as a ‘sole practitioner’. • The business will still be sole trader where there are employees/independent contractors if the sole trader owns the business alone.
5.
What are the basic concepts of a partnership?
Answer: • Partnerships are mainly governed by the Partnership Act 1890 (PA). • s1 PA – a partnership is legally formed when two or more persons carry on a business with a view to making profit. • The business can be in any trade/profession and may have employees or independent contractors. • Not a separate legal entity from owners. • Low formality and cheap • Privacy: no need to disclose information
6.
What are the basic concepts of a limited liability partnership?
Answer: • Hybrid between partnership and limited company. • Formed under the Limited Liability Partnerships Act 2000 (LLPA) which was introduced after partners became increasing concerned about their potential unlimited liability o E.g. large firm of solicitors and accountants when high profile claims for negligence saw awards more than £100 million and partners made up the shortfall with their personal assets when their insurance was insufficient, leading to considerable lobbying of the Government, in turn, leading the LLPA. • Governing statues: CA and LLP Regulations 2001. NB: not the same as a limited partnership (LP).
7.
What are the basic concepts of a company?
Answer: • There is a division of responsibility which imposes a degree of formality that a sole trader or partner do not have: o Directors – run the company on a daily basis, known collectively as ‘the Board’. o Members (shareholders) – are the owners of the company who are usually only involved in the more important decisions affecting the company. • In smaller private companies, it is highly likely directors and shareholders are the same people however it is essential for a legal purpose to distinguish who carries out what action. • Most importantly a company has a separate legal entity separate from the shareholders and directors. • This separate legal personality means the shareholders only have ‘limited liability’ for the debts of the company. • Provided that they have paid in full for their share, the shareholders have no further liability to contribute to assets of the company should it experience difficulties in paying creditors. • This concept was developed over many years and finally confirmed by the House of Lords in possibly the most famous case in company law, Saloman v Saloman 1897 – consider why this was developed. • As enterprise developed (particularly during the industrial revolution) it became clear that one of the main factors hindering entrepreneurial risk-taking by wealthy individual was the risk of the business failing. • If it did so, the whole of the individual’s wealth was at risk of being used to meet the debts of the failed business. • Wealthy people were not prepared to risk their entire fortunes, but they were prepared to risk certain, limited amount. • It was (and still is) perceived that it is important to encourage new enterprises (which inevitably involve an element of risk) for the benefit of the economy and society generally. • New business creates jobs and new jobs create revenue and so on. • However, a balance must be struck between protecting the personal assets of those who set up a new business and protecting those people go on to have dealings with it, such as customers, creditors and employees.
8.
How do you set up as a sole trader?
Answer: • No formal steps need to be taken to set up as a sole trader. • Related legal matters: o Must register by HM Revenue and Customs for tax purposes. o Legal requirements where a sole trader chooses to trader under another name. o Planning permission for alterations to premises and/or other specific licences e.g. liquor licence for restaurant. o Entering into a lease for business premises. o Entering into contracts with employees and suppliers. • Method of financing: Debt.
9.
How to set up a Partnership?
Answer: • No legal formalities to create a partnership • May be created through oral agreement, implications as a result of actions or more formally through written Partnership Agreement or Deed, which is recommended for clarity, certainty and evidential reasons s24-25 PA. • In the absence of a Partnership Agreement, the obligations of the partners will be determined by the provisions of the PA which may not be desirable.
10.
How to set up an LLP?
Answer: • Many larger LLPs are professional firms which converted from a partnership for protection against personal liability. • LLPs can be formed only by two or more members carrying on a lawful business with a view of profit. They therefore cannot be set up by an individual or by non-profit organisations. • Start-up documents and expenses: o A series of documents with the Registar of Companies at Companies House. o Registration fee - £40, or £10 when using Companies House software, or £100 for same day registration otherwise 5-day turnaround. o Incorporation form LL IN10. o No memorandum or articles, but should draft a partnership agreement (Reg-7 8) • Dated certificate will be issued once the LLP is registered. • Individual members of the LLP must register with the HMRC as self-employed. • Disclosures under the LLPA: o Registered office o Accounts o Members
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