SQE 1 - Business Law & Practice
Welcome to the Business Law & Practice guide. This textbook is designed to help you grasp the
essential principles of business law and practice needed to succeed in the SQE 1 exam. It offers
in-depth coverage of key areas such as business formation, management, financing, and
insolvency, ensuring you are fully prepared for both the FLK1. Each chapter includes sample
questions to reinforce your learning and assess your understanding, helping you achieve
mastery in this critical subject area.
Chapter 1 The Different Types of Business (2)
Chapter 2 Company Decision- making, the Company’s Officers and Shareholders (11)
Chapter 3 Directors (24)
Chapter 4 Equity Finance (34)
Chapter 5 Debt Finance (42)
Chapter 6 Partnership (51)
Chapter 7 Trading: Calculating Profits and Paying VAT (62)
Chapter 8 Insolvency (68)
Chapter 9 Income Tax (79)
Chapter 10 Capital Gains Tax (91)
Chapter 11 Corporation Tax (101)
Chapter 12 Partnerships and Companies: Accounts and Regulation (108)
Exam specification:
Candidates must apply core legal principles effectively, as a newly qualified solicitor, to client-
based and ethical issues in areas such as:
• Starting and managing a business (company, partnership, LLP, sole trader)
• Compliance with legal requirements in business decisions
• Stakeholder rights, obligations, and powers
• Business financing and taxation
• Business termination, corporate insolvency, and personal bankruptcy
Candidates must act with honesty and integrity, adhering to the Solicitors' Code of Conduct and
relevant regulations. Questions will cover a range of these topics, reflecting real-world practice
scenarios.
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, 1 - The Different Types of Business
Introduction
Businesses are integral to daily life. Nearly all goods and services we use are created,
transported, or sold by businesses. Most food products are grown, processed, and sold by
businesses as well. Businesses generate economic wealth for the UK, so it is no surprise that
most solicitors encounter businesses in their practice.
Corporate lawyers expect to spend their careers advising businesses and need a thorough
understanding of business law. However, business law knowledge is also valuable in other legal
areas. For instance, in divorce cases where a spouse allegedly hides assets via complex
company structures, or in fraud cases requiring comprehension of allegations and defenses,
understanding business law is crucial. Even solicitors not intending to represent businesses
benefit from a solid foundation in this area.
A client establishing a business has various options available. This chapter examines the main
business structures and the factors influencing a client’s choice. It also explains how to set up a
company and explores its constitution.
Types of Business
Incorporated and Unincorporated Businesses
An incorporated business is a separate legal entity from its owners and managers. It is created
by meeting legal incorporation requirements, and its owners are generally not personally liable
for the business’s debts. The most common incorporated business is the limited company.
In contrast, unincorporated businesses lack a separate legal identity, meaning owners are fully
liable for business debts. This section discusses unincorporated businesses (sole traders,
partnerships, and limited partnerships) before moving on to incorporated entities.
Sole Traders
A sole trader runs an unincorporated business independently. This is the most common
business structure in the UK, encompassing a wide range of trades and professions. Sole
traders may employ staff, but they are the business owner, benefiting from profits and bearing
all losses.
Sole traders earn income from customers and pay taxes as self-employed individuals. They are
personally liable for business debts, meaning their personal and business assets are treated as
one. If a sole trader cannot pay debts, creditors can claim their personal assets, potentially
leading to bankruptcy.
This unlimited liability ceases when the sole trader retires or dies, though assets or the business
itself can be sold. Sole traders operate under general laws, such as tax and sales legislation,
rather than a specific regulatory framework.
Partnerships
A partnership involves two or more people running a business together, defined by the
Partnership Act 1890 (PA 1890) as “carrying on a business in common with a view of profit.”
Partnerships are unincorporated but differ from sole traders by having multiple owners.
Partnerships range from small businesses to complex international firms. The PA 1890 provides
a default agreement for partnerships unless partners agree otherwise.
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,A partnership is not a separate legal entity, and assets are owned by the partners. Partners
share profits or losses and are personally liable for debts, risking personal assets if the business
cannot pay creditors. Partners are taxed as self-employed individuals.
Although partners typically work within the business, some may act as "sleeping partners," only
involved in major decisions.
Limited Partnerships
Limited partnerships (LPs) feature both general partners with unlimited liability and limited
partners whose liability is restricted to their initial investment. However, limited partners lose
this protection if they manage the business, make binding decisions, or withdraw their
contribution prematurely.
Governed by the Limited Partnerships Act 1907, LPs were designed to encourage
entrepreneurship by reducing unlimited liability risks. While they are less common today, LPs
remain relevant in specialized financial contexts, such as investment and venture capital funds.
Unlike general partnerships, LPs must register with the Registrar of Companies before trading.
Companies
Companies can be private or public and may be limited by shares or by guarantee. This section
focuses on private companies limited by shares and unlisted public companies limited by
shares.
Private Companies Limited by Shares
A company is created by registering specific documents with the Registrar of Companies under
the Companies Act 2006 (CA 2006). Unlike sole traders and partnerships, companies require
formal steps before trading.
Companies range in size, from small businesses with a few employees to multinational
corporations. A key advantage of companies is their separate legal personality, which shields
shareholders from personal liability for company debts. This protection facilitates risk-taking,
enabling business growth.
Separate Legal Personality
The landmark case Salomon v A Salomon and Co Ltd [1897] established the principle of
separate legal personality. The court held that a legally incorporated company is an
independent entity, even if controlled by a single individual. Attempts to "pierce the corporate
veil," or hold individuals personally liable for company debts, are rare and generally limited to
cases of deliberate evasion of legal obligations, as clarified in Prest v Petrodel Resources
Limited [2013].
Decision-Making
A company’s legal personality requires human decision-makers. Directors handle day-to-day
operations, while shareholders focus on significant decisions. When making decisions,
directors and shareholders must act within their respective roles.
Public Companies Limited by Shares
Public limited companies (plcs) must meet additional requirements, such as a minimum share
capital of £50,000 and the inclusion of "plc" in their name. Plcs can raise funds by offering
shares to the public, unlike private companies.
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, Public companies often seek stock market listing to raise substantial capital. Listed companies
are subject to stricter regulations to protect public investors. While private companies enjoy
less regulatory oversight, public listing is an option for businesses that achieve sufficient size
and reputation.
Limited Liability Partnerships
Limited liability partnerships (LLPs) combine elements of partnerships and companies.
Governed by the Limited Liability Partnerships Act 2000, LLPs have separate legal personality
and limited liability like companies, but maintain the flexibility of partnerships. LLP members
are taxed as self-employed individuals.
LLPs are formed by filing documents with the Registrar of Companies and are widely used,
particularly in professional services.
Other Business Structures
Other business mediums include companies limited by guarantee, unlimited companies,
community interest companies, charitable incorporated organizations, and overseas
companies. While these structures serve specific purposes, they are less commonly
encountered. Joint ventures, involving shared commercial enterprises, can take various forms
but are not a distinct business structure.
What Type of Business is Best?
When deciding the ideal business format, a prospective business owner must consider various
factors such as liability, tax implications, formalities, privacy, cost, status, and financing
options. These factors often determine whether a business is best structured as a sole trader,
partnership, company, or limited liability partnership (LLP).
1. Liability
• Sole traders and partnerships expose owners to unlimited liability, meaning they are
personally responsible for all business debts.
• Companies and LLPs provide limited liability, protecting personal assets from
business debts. This feature is critical in high-risk industries but may not be as
significant in professions like law or surveying, where professional indemnity insurance
often covers potential liabilities.
2. Tax
• Tax treatment varies between incorporated and unincorporated businesses.
• The financial benefits depend on the profits earned and how income is distributed to
the owners. Sole traders and partnerships pay income tax on profits, while companies
are subject to corporation tax.
3. Formalities
• Sole traders and partnerships are simpler to establish with minimal formalities.
• Setting up a company or LLP involves filing forms and fees with Companies House,
alongside maintaining statutory records and complying with governance rules under the
Companies Act 2006.
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