Business Law and Practice FLK 1

what are the advantages of limited liability?

-Shareholders experience the benefits - no personal liability and a separate legal identity?
-confidence to expand
-gain access to a wider range of borrowing possibilities

what is a shareholders liability limited to in limited liability businesses?

their capital contribution (their shareholding)

what are the benefits of being a sole trader or a general partnership?

- Cheap and easy to set up
- Privacy - dont have to file annual accounts
- flexible in decision making

what are the cons to being a sole trader?

limited scale
unlimited liability

what acts governs general partnerships?

The Partnership Act 1890

How are sole traders taxed?

Almost always subject to income tax. they may also have to pay capital gains tax ('CGT') or inheritance tax ('IHT'), depending on their circumstances and the nature of their trade.

If they make chargeable supplies exceeding £85,000 in any period of 12 months, sole traders will also be required to register for VAT

how are companies taxed?

Pay corporation tax and shareholders personally pay income tax on their dividends

how are LLP's taxed?

Same as partnerships.

Members will be taxed as individuals i.e. liable to income tax or capital gains tax on their share of the income or gains of the LLP.

- So the LLP is NOT taxed, the partners are.

How are all partnerships taxed?

Like sole traders - will be taxed as individuals i.e. liable to income tax or capital gains tax on their share of the income or gains of the Partnership.

Why do companies and LLP's find it easier to raise capital (borrow)?

they are deemed more secure, able to grant floating charges over assets.

can a partnership or a sole trader grant a floating charge over assets?

No

why are floating charges considered good by lenders?

represents additional security on a loan over and above a fixed charge

can a limited partnership create a floating charge?

No

Under the Companies Act 2006 how many directors does a private company need to form?

at least one

Under the Companies Act 2006 how many directors does a public company need to form?

at least two

what is a limited partner?

They have limited liability but can have no management power.

Formation of Limited Partnership

Needs at least one general partner and at least one limited partner.
Documents filed at Companies House:
Don't always need to file accounts
Must file records

does a limited partnership need to be registered with companies house?

yes

does a limited liabilty partnership need to be registed at companies house?

yes

formation of a limitied liability partnership

documents filed at companies house
all partners are not personally liable
Must file records and accounts at CH

what is needed to form a partnership?

1. two or more people
2. carrying on a business in common
3. with the intention to profit

can a company enter into a partnership?

yes

what are the formalities needed to form a partnership?

none

what does not create a partnership?

Share of losses
Joint ownership of property
sharing of gross returns
a written agreement stating there is a partnership if the facts do no suggest a partnership

A and B decide to start fixing cars together as a hobby, they do it at cost because of their love of cars. They decide to share any losses 50/50 and record this in writing.

C needs her car fixed and contacts A and B because she heard from someone else about a renovation the pair recently did. B and A really want to do the renovation as they think it will bring them some interesting cars to fix up in the future. A and B say that C just needs to pay for the price of the parts and C says that she will once the car is finished.

A and B realise that the parts are very expensive so B decides to take out a loan from a bank to buy them. B and A then install them, but the process goes badly wrong and the parts are damaged. C was willing to pay for the price of the parts but seeing as they were broken and the car is still not fixed decides to take the car to a real dealership instead.

Who can the bank go after for the loan?

Only B - whilst partners are joint and severally liable, on the facts, there is no intention to profit so there is no partnership. A and B do the restorations at cost. The fact that they have agreed to share losses is not enough to show a partnership, this is different to an agreement to share profit which is prima facie evidence of partnership.
Therefore, since B took out the loan only B is liable for it from the perspective of the bank.

Do partners need to contribute money to the partnership?

No

What is the legal limit for partners in partnerships?

there is no limit

Can rules in the partnership act be overwritten by the terms of a partnership agreement?

Yes

What does the Partnership Act say about the authority of Partners is a partnership?

Partners are agents of the partnership and each other. If they have authority to make a decision and intend it to bind the firm it can bind both the firm and the other partners.

What are the two types of authority mentioned in the Partnership Act which a partner can act under?

Actual or Implied Actual
Apparent/Ostensible

What is actual authority under the Partnership Act?

Where there is express agreement from the partners to allow a partner to make certain decisions for the firm

What is implied actual authority?

Authority is presumed where the partners have allowed another partner to act in a way regularly prior to this even if it was not expressly allowed.

What is apparent or ostensible authority under the partnership act?

where a partnership is bound because a partner who made the decision was carrying on in the usual way of business of the kind carried on by the firm

when is a firm not bound by apparent authority?

1. When the partner had no authority to act:

2. The person the partner dealt with knew they had no authority
or
did not know or believe that the person they were dealing with was a partner.

What is the test for 'carrying on in the usual way of business of the kind carried on by the firm'?

Objective test -
1. would a reasonable person think a decision of that kind would relate to the business of the partnership. LOOK AT THE SCOPE OF THE BUSINESS.
2. Is it a transaction that a partner in the firm would reasonably have authority to enter into.

What can a third party presume a partner has authority to enter into?

buying and selling firm goods
receiving debts payments to the firm
hiring employees
employing solicitors

A leasee and a partner regularly communicate on the topic of the leasee's property which the partnership owns. The Partner normally handles parts of the business but there is no express agreement about the partner's abilities. The leasee serves notice to end the lease on the partner. Has the partnership been notified?

Yes.

If the partner acts with no authority is the partnership liable for the transaction?

No, the single partner is liable for breach of warranty of authority

How many partners must approve of adding a new partner to a partnership?

All

Where the partnership agreement is silent can the partners expel another partner?

No

What debts is a new partner liable for in a partnership?

All debts incurred after they join the partnership.

If a partner retires from a partnership, would they be liable for any debts?

Yes, they remain liable for debts incurred whilst they were still a partner.

How can a retired partner escape liability to the firm if a third party calls in debts?

through a 'hold harmless agreement'

How can a retired partner escape liability to the third party if a third party calls in debts?

through a novation

What is the effect of a hold harm agreement?

Although a third party can pursue a retired partner for a debt that partner can then be compensated by the firm.

how should a partner give notice of their retirement?

Notice needs to be giving to existing creditor
New creditors should be notified in the London Gazette

Why should a retired partner remove their name from the firms notices and stationary?

In case they are still held liable for 'holding out' as a partner

When is personal property deemed partnership property?

when the partner who owns the property intends it to be, either expressly or implied

what is partnership property?

property originally brought into the partnership or acquired for partnership purposes in the course of the partnership business.

Can partnership property be used for anything else?

no

can a creditor for an individual partner (not a creditor of the firm) seek possession of partnership property?

No but they can get an order to charge the partner's interest in the firm

Unless specified how are profits and capital shared?

equally

Do partners have a right to profit or capital before dissolution of a partnership?

No, it would have to be agreed, the distribution can be assigned to someone else but they also cannot force dissolution or get anything until it is dissolved.

What are the documents needed to register a company under the CA 1985?

The Memorandum of Association and the Articles of Association, which outline the company's structure and rules.

What are the constitutional document/s of a registered company CA 2006?

The articles of association only

What resolution is needed to change the articles of association?

special resolution and amended articles filed at companies house

what happens if an article is entrenched?

They can only be amended or repealed if specific conditions are met, or if procedures more restrictive than a special resolution are complied with.

Can always be amended by the agreement of all of the members, or by a court order

what is the legal effect of the articles of association?

Show a contract between the company and its members in their capacity as members and with respect to their rights and obligations.

Process of incorporation of a private company

delivered to companies house:

memorandum of association

Articles of association

Fee

Application form

what is in an application form for registering a company?

Private or public

name and registered office

limited by shares or guarantee

capital statement and initial shareholding

Names of Company officers

compliance statement

When is a company legally alive?

On the date the certificate of incorporation is issued

Process for changing a company name (relevant if using a shelf company)

Special resolution and form sent to companies house

Fee

requirements for company name

not offensice,

end in limited or ltd

and must be unique, not similar to existing names.

when is a new company name effective?

From the date on which the new certificate of incorporation on change of name is issued by the Registrar of Companies

What are the post incorporation steps for a company?

Elect chairperson

Accounting reference date

Auditor

Tax registrations

Shareholders agreement (if wanted)

Roles of a chairperson under the model articles?

casting vote if board is tied

how are board resolutions passed?

simple majority (unless agreed otherwise)

one director one vote

what is needed for a written resolution of a board decision?

how are partnership assets divided where there is no debt or it has been paid?

first for partner loans

second for partner contributions

divided in proportion to profits

how are partners taxed?

income tax on share of profit DOES NOT MATTER IF DISTRIBUTED OR NOT

Formation of LLP requirements

name ending in LLP

registered office location and address

names and addresses of members

details of persons with significant control

How many members does an LLP need to be registed?

2

How long can an LLP retain limited status with only 1 member?

6 months

Admitting new members to partnerships and LLP need?

Unanimous consent of the members (unless written agreement otherwise)

how many days to notify companies house where there is a change in membership?

14 days for appointment and outgoing

Who is a person with significant control?

direct or indirect right to 25% assets on winding up

25% of rights to vote

right to appoint or remove the majority of those entitled to make agreements

Otherwise has the right to exercise or actually exercise control

who is liable for personal and wrongful trading in an LLP?

the person responsible

How much time after notice in the LG (posted by CH registrar) will an LLP be struck off?

3 months

what is needed to set up a public trading company?

nominal share capital 50,000

trading certificate

Minimum 2 directors

company secretary

when must accounts be filed for a private company?

9 months from the accounting reference date

Some small companies don’t need an auditor

when must accounts be filed for a public company?

6 months from accounting date

Need an Auditor

how should a promoter protect themselves from being personally liable for a contract before a business is set up?

don’t execute the contract until after

novation agreement

Assign benefit in exchange for indemnity

use a shelf company

which decisions need shareholder approval?