Business Law and Practice

What is an incorporated business and what is the most common form of a incorporated business?

It exists as a separate legal entity from its owners and managers. A feature of incorporated businesses is that their owners are generally not liable for business debts. The most common form of incorporated business is the limited company

How would you describe the articles of association of a company?

A document that specifies the regulations for a company’s operations and defines the company’s purpose. The document lays out how tasks are to be accomplished within the organisation, including which directors can vote at board meetings

What is required to be sent to Companies House in order to incorporate a private company limited by shares?

A fee, memorandum of association and IN01 form

Where do directors get their powers to manage the day to day affairs of the company from?

The articles of association

How would you describe a company’s memorandum of association?

It is a legal formality required to start a company; it has no impact on the running of the company

What is an unincorporated business?

No separate legal personality and have full personal liability for the debts of the business

What is a sole trader?

A sole trader (or sometimes known as a sole proprietor) is someone who runs an unincorporated business on their own as a self-employed person.

Does a sole trader mean that they work alone?

No a sole trader may have one or more employees, but the sole trader is the person who owns the business, benefits from the profits and bears any losses

How do sole traders earn their income?

They earn income from the money received from customers or clients and keep all the profit, once they have paid their expenses. They pay income tax as a self-employed person

Is a sole trader personally liable for all debts of the business and what are the implications of this?

Yes. This means that the sole trader’s business assets and personal assets are all treated the same for legal purposes e.g. personal bank accounts and other personal assets

What is the idea that there is no limit to the sole trader’s liability known as?

The concept of unlimited liability

What is a partnership?

A partnership exists when two or more people run and own a business together. It is formed when the definition of ‘partnership’ set out in the Partnership Act 1890 is met - a partnership is formed when two or more people are ‘carrying on a business in common with a view of profit’

Is a partnership an unincorporate business?

Yes but it differs from a sole trader because it involves more than one person running the business

What is the term ‘general partnership’ used for?

Used to distinguish from limited partnerships and limited liability partnerships

What is a default partnership agreement for the partners?

The partners may decide to enter into an agreement which disapplies some of the provisions in the PA 1890 but if they do not, the PA 1890 applies by default

Is a partnership a separate legal entity?

No. The phrase ‘partnership assets’ may be used to describe the assets which are used in the partnership business, but the partnership itself does not actually own the assets. They are owned by the partners

Are partners personally liable?

Yes they are personally liable for all the debts of the partnership. Their personal assets are at risk if there is not enough money in the business to pay creditors. The partners will divide the profits or losses of the businesses between them

How are partners taxed?

In a partnership made up solely of individuals, the partners are taxed separately as self-employed individuals, paying income tax on their share of the profits of the partnership (and if any of the partners are companies, they may be liable for corporation tax on their share of the profits instead)

What is a limited partnership?

An LP is similar to a partnership in that there must be at least one general partner who has unlimited liability for the partnership debts. However, an LP is permitted to have a limited partner whose liability is limited to the amount they initially invested in the business. This limited liability is conditional

What must a limited partner not do?

• Control or manage the LP

• Have the power to take binding decisions on behalf of the LP; or

• Remove their contribution to the LP for as long as it is in business

If the limited partner breaches any of these rules then they will lose the protection of limited liability and be treated as a general partner with unlimited liability

What must limited partnerships do before they can start trading?

They must be registered with the Registrar of Companies, who also acts as the Registrar of LPs

How is a company in the UK formed?

It is formed by registering certain documents with the Registrar of Companies in accordance with the requirements of the Companies Act 2006

What main advantage does a company have over most other forms of business medium?

The company has a separate legal personality. This means that the people who own and run the company are separate from the company itself. If somebody wishes to sue a company, the defendant will be the company itself, rather than the individuals who own and run it. The individuals who own the shares in the company will not usually be liable for its debts - their liability is limited to the amount they paid or agreed to pay for their shares. It is important to take calculated risks when in business, in order to allow a business to expand

How are decisions made in a company?

The decisions are made either by the company’s directors or by the company’s shareholders (or by someone to whom the directors have delegated certain decisions)

What is the difference between directors and shareholders?

The directors of a company run the company. The shareholders of the company are the individuals who provide the money (in return for shares) to allow the company to operate. Shareholders tend to get involved only in the more important decisions affecting the company during general meetings, whereas directors collectively make decisions at board meetings

What is a public limited company (‘plc’)?

It is a company limited by shares which has complied with the requirements of the CA 2006 to enable it to be registered as a plc

What are the requirements for a company to be a public company?

1. The constitution, which is the set rules which govern the company, must state that it is a public company;

2. The words ‘public limited company’ or the abbreviation ‘plc’ must be included at the end of the company’s name; and

3. The company’s owners must invest a specified minimum amount of money for use by the company; the allotted share capital of the company must be at least the ‘authorised minimum’, currently £50,000 (ss 761 and 763 CA 2006). Each allotted share must also be paid up to at least a quarter of its nominal value, plus the whole of any premium on it (s 586 CA 2006)

What are the main advantages to being a public company?

• They are more prestigious and can raise money by offering shares to the public, unlike private companies, which are prohibited from doing so (s 755 CA 2006)

• Public companies can apply to join the stock market in the UK. The stock markets allow companies to raise large sums of money by enabling investors to buy the company’s shares quickly and easily. It is not possible to start a company as a publicly traded company; this is only an option if the business reaches a certain size, reputation or level of growth

• Private companies generally subject to less regulation than public companies because they do not offer shares to the public at large; instead they raise finance either from people who already know the company or specialist investors who understand the risks involved

• Public traded companies are more regulated than unlisted public companies and private companies to protect the public, who can easily invest in a company which is listed on the stock market and are at risk if the company does not perform well financially

How do you become a public company?

Companies can be registered as a public company on original incorporation, or they can register as a private company and then re-register as a public company

What is a limited liability partnership (LLP)?

It is formed under the Limited Liability Partnerships Act 2000. An LLP can be likened to a cross between a partnership and a limited company. Like a company, it has a separate legal personality distinct from its owners. It also offers its owners protection from liability for the LLP’s debts, like a limited company. However, the LLP is run with the informality and flexibility given by a partnership, and the partners are taxed as if the business were a partnership rather than a company. Many law firms are run as LLPs

How is an LLP formed?

It can be formed by two or more members carrying on a lawful business with a view of profit. They are formed by filing a series of documents with the Registrar of Companies at Companies House and paying the applicable fee. Once the LLP is successfully registered, the Registrar will issue a certificate of incorporation. The LLP legally comes into existence on the date of incorporation on the certificate

Does an LLP need to have an express partnership agreement?

No, the Limited Liability Partnerships Regulations 2001 provide a default contract for partners who have not agreed all or any of the terms of their partnership

What is a company limited by guarantee?

Usually used for organisations that are not seeking to make a profit, such as a professional society. Instead of buying shares, the shareholders guarantee the company’s debts up to a specified amount, usually £1

Why is an unlimited company rare?

Most people who are happy to run a business with unlimited liability for its debts will choose to run it as a sole trader or partnership

What is a community interest company?

A formed of limited liability company intended for businesses that wish to use their profits and assets for the public good and not for private profit

What is a charitable incorporated organisations?

It provides the advantages of a corporate structure, such as reduced risk of personal liability, without the burden of dual regulation by both the Registrar of Companies and the Charity Commission

What is an overseas company?

A company who wishes to operate in the UK and set up a regular physical presence here. The law governing this is set out in the Overseas Companies Regulations 2009

What is a joint venture?

A commercial enterprise undertaken jointly, by two or more parties. The parties retain their own identity but generally pool their resources for a specific purpose. Sometimes the joint venture will be governed merely by a contract between the parties and sometimes the parties may set up a corporate structure which they will jointly control. So a joint venture is not a separate type of business medium in itself, but rather a description of a joint commercial arrangement which could take many forms

What is a company established by Act of Parliament or Royal Charter?

Historically, trading companies were sometimes established by special Act of Parliament, often to establish railways and public utilities in the UK

Why is liability an important consideration when setting up a new business?

Because the owners need to consider how much they could personally lose if the business has debts or liabilities

What is the positions of shareholders regarding company debts?

Shareholders generally have limited liability for the company’s debts

What is the position of partners regarding partnership debts?

Partners are personally liable for partnership debts and may risk their personal assets

What factors affect how important liability is when choosing a business structure?

The nature of the business and the types of liabilities it is likely to face

What is a major liability that a law firm may face?

A claim for professional negligence

How are professional negligence claims by law firms usually dealt with?

They will usually be covered by professional indemnity insurance, allowing law firms to historically operate as partnerships despite personal liability. However, many have now switched to the less risky medium of an LLP

Why is tax an important consideration when choosing a business medium?

Because the amount of tax the business and its owners will have to pay can affect how much money the owners ultimately receive

What should be considered about tax when choosing a business structure?

Whether an incorporated or unincorporated structure is more tax advantageous depends on the financial circumstances of the business and its owners

Can a person run a business as a sole trader without realising which business medium they are using?

Yes. A business can be run as a sole trader without the owner even realising which business medium they are using, because no formalities are required to set up a sole trader business.

Can people run a business as a partnership without realising which business medium they are using?

Yes. A business can be run as a partnership without the owners even realising which business medium they are using, because no formalities are required to set up a partnership.

Are there formalities required to set up a sole trader or partnership?

No. No formalities are required to set up a business as a sole trader or partnership.

How does setting up a company or LLP compare with setting up as a sole trader or partnership?

Setting up a company or LLP is more time-consuming and costly than operating as a sole trader or partnership

What is advisable for partners in a general partnership?

It is advisable for partners in a general partnership to enter into a written partnership agreement

What happens if partners do not enter into a written partnership agreement?

The Partnership Act 1890 will apply by default.

Why is it better for partners to enter into a written partnership agreement?

It is better to actively decide what terms govern the relationship between the partners, rather than allowing the Partnership Act 1890 to determine the terms of the partnership agreement by default.

What is an advantage of an unincorporate business over companies in terms of formalities?

Unincorporate business:

• There are no formal requirements once it has been established, and no legal documents have to be prepared.

• Sole traders and partnerships have freedom over decision-making in their businesses

Companies:

• Companies will have to complete minutes of meetings, maintain certain registers and file certain documents with Companies House which is time-consuming and will often involve professional costs

• Companies are subject to the detailed requirements and strict rules of the CA 2006, which governs how they make decisions and what decisions they are allowed to make

What information must sole traders and partnerships disclose?

The identity of the sole trader or all of the partners, and an address for service of documents

What information must Companies and LLP’s reveal?

Certain financial information, information regarding their directors, their shareholders and many of the significant decisions it has made by filing documents with the Registrar of Companies and keeping various company registers open for inspection on payment of a fee

Does it cost to set up a sole trader or partnership?

It can be set up without any legal or administrative cost, as these businesses trade straight away, although many partners will wish to enter into a partnership agreement

Does it cost to form a company or an LLP?

Yes, there is charge and the individuals setting up a company or LLP will often require legal advice

Why would a business or individual prefer to trade with a company than a partnership or sole trader?

They are used to companies being the business medium of choice for large, successful businesses. They might also feel reassured by the amount of information which is publicly available to those considering doing business with the company

Why are companies more desirable clients for lenders?

Both companies and LLPs can offer an additional form of security for loans, the floating charge, which is a charge over all of the business’s assets and is not available to partnerships or sole traders

Which business medium is best in this circumstance?

Amal and Dev are surveyors and wish to set up their own practice. They will need to invest a large proportion of their savings into the new business. They are not concerned about information about their business being in the public domain. In terms of tax, it does not matter whether they set up a company or trade as a partnership. They will not need to borrow much money to start trading. They intend to take out professional indemnity
insurance, and do not anticipate facing any significant liabilities which will not be covered by their insurance. They both dislike paperwork

After considering your advice, Amal and Dev decide to set up a partnership. Whilst they are investing large sums of money into the business, they think the risk of facing any large liabilities is minimal, and the most likely liability, a claim for professional negligence, will be covered by insurance. For this reason, they do not feel that they need the benefit of limited liability for the business’s debts. They would prefer to start a partnership and enjoy the benefits of having little paperwork to deal with rather than start a company unnecessarily.

How do you incorporate a new company?

The applicant must complete Companies House form IN01 and submit it, along with a document called a memorandum of association, and possibly the company’s articles of association, to Companies House with the applicable fee

Who must complete the identity verification requirement?

It is compulsory for directors, people with significant control and anyone who files at Companies House

What is the purpose of identity verification?

It is designed to improve the trust in the information on the Companies House register, to reduce the risk of fraud and to improve the accuracy and transparency of information on the register

Who will make the application?

Applications can be made online, by post or through software provided by Companies House. Some individuals make this own applications to Companies, and are likely to do so by post or online. Many applicants ask their solicitors, accountant or a company formation agent to apply on their behalf

What happens if they find that an individual is disqualified?

You can check the Disqualified Directors’ Register to confirm that the proposed directors have not been disqualified from being directors. If they are disqualified, under ECCTA 2023, Companies House can now reject the form notifying Companies House of their appointment

When will the company come into existence?

The company comes into existence upon the certificate of incorporation being issued (ss 15(4) and 16(2) CA 2006)

What must the certificate of incorporation state?

Under s 15 CA 2006:

• The name and registered number of the company

• The date of its incorporation

• Whether it is a limited or unlimited company and, if it is limited, whether it is limited by shares or by guarantee

• Whether it is a private or public company

• Whether the company’s registered office is situated in England and Wales (or in Wales), in Scotland or in Northern Ireland

The certificate of incorporation is conclusive evidence that the requirements of the CA 2006 as to registration have been complied with and that the company is registered under the CA 2006

Must all companies be registered with HMRC for corporation tax?

Yes. All companies must be registered with HMRC for corporation tax.

When is a company automatically registered for corporation tax?

When the company is formed following an online application, it will be registered for corporation tax automatically.

When must a company make a separate application to HMRC for corporation tax?

If the company was formed using an application made by post, through a formation agent, or using third-party software, a separate application to HMRC is required.

When must a company make a separate application to HMRC for corporation tax if required?

The application must be made within three months of the company starting to do business.

What are the restrictions on the words that can be used in the company name?

• Private companies must end in Limited or Ltd

• Public companies must end in plc or public limited company

• The company name must not be the same as an existing company

• A company’s name can be deemed the same as an existing company’s name even if the names are not identical (e.g. £ is the same as pound)

When can an applicant register a ‘same as’ name?

If the proposed new company will be part of the same group as the company or Limited Liability Partnership with the existing name and the applicant has written confirmation that the company or LLP has no objection to the applicant using the name

What names are prohibited or can only be used with permission?

• A company may not use a name which would constitute a criminal offence or be offensive

• The approval of the Secretary of State is needed to register a company which suggests a connection with a government department or authority

• Certain sensitive words or expressions must be approved by the Secretary of State before they can be used in the company name or trading name e.g. words which refer to certain geographical areas or regulated professions

• Certain letters, characters, signs, symbols and punctuation

• The name of the company cannot exceed 160 characters, including spaces

When can Companies House reject an application to register a name?

Where it is believed that the name:

• Is intended to facilitate fraud

• Is comprised of or contains a computer code; or

• Is likely to give the false impression the company is connected to a foreign government or an international organisation whose members include two or more countries or territories

What happens if a company fails to change its name within 28 days of being directed to do so?

Companies House can choose a new name for the company e.g. changing the company name to its registered company number. Companies House also has the power to suppress a name from the register while a company responds to a direction to change its name

Can companies trade using a different name from their registered name?

Yes they can, this is known as a trading name or a business name. There is no need to register business/trading names

What happens if a company or trading name is too similar to another company’s trademark and the owner of the trademark makes a complaint?

The company name or trading name may have to be changed so it is wise to carry out a trademark search on the Intellectual Property Office’s website before registering a new company or changing the company’s name. The owner of the trademark could also bring a claim for trademark infringement

What is a registered office?

The company will need a registered office (s 86 CA 2006) and will need to insert the address of the registered office on the IN01. The registered office will be the address too which correspondence from Companies House will be sent, and also any official documents such as court documents. The registered office address is publicly available and cannot be kept private. If a company’s registered office address does not meet the requirements, Companies House is permitted to change the registered office of the company and both the company and its directors are guilty of an offence, which is punishable by a fine.

Must the company also give an appropriate email address for correspondence?

Yes, an email address is an ‘appropriate email address’ if, in the ordinary course of events, emails sent to it by the registrar would be expected to come to the attention of a person acting on behalf of the company

What information about the company’s directors must be included on the IN01?

The applicant must include the name and date of birth of the director(s). For security, only the month and year of birth will be shown on the public register

What is the minimum number of directors a company must have?

Every company must have at least one director. A public company must have at least two directors (s 154 CA 2006).

Must a company have a natural person as a director?

Yes. Every company must have at least one director who is a natural person (a human being) (s 155(1) CA 2006).

What is the minimum age for an individual director?

A director who is an individual must be 16 or over (s 157 CA 2006).

What is a director’s service address?

It is the address to which official documents for the director must be sent.

What address information must be provided for each director on the IN01?

Both the director’s service address and residential address must be provided

What address do directors usually use as their service address?

Directors will usually use the company’s registered office as their service address rather than their residential (home) address.

Will a director’s residential address appear on the public register?

No, unless the director chooses to use their residential address as their service address

Who can access a director’s residential address even if it is not on the public register?

It is shared with specified public authorities (SPAs) and credit reference agencies (CRAs).

When can a director apply to keep their residential address private from SPAs and CRAs?

If they do not want their residential address available to SPAs or CRAs, they can apply for it to be kept private, but there must be a serious risk of violence or intimidation to the director or a member of their family.

Give an example of when there might be a serious risk of violence or intimidation to a director.

Where the company is engaged in controversial activities, such as animal testing.

What must a director provide when applying to keep their residential address private?

They must provide evidence of the serious risk of violence or intimidation, such as a police incident number relating to a previous incident.

What new power does Companies House have under the ECCTA 2023 regarding residential addresses?

Companies House has the power to suppress a residential address from public disclosure where the residential address has been used as the registered office address.

When can the Registrar of Companies change a director’s registered service address under ECCTA 2023?

If the registered service address is not a valid service address under s 1141 CA 2006.

What is a valid service address under s 1141 CA 2006?

An address at which documents may be effectively served on the director.

What must private companies do if they choose to have a company secretary?

Their name and a service address must be inserted on the IN01. The company secretary can also be a director. The company secretary will be responsible for administrative tasks such as filing documents at Companies House and keeping board minutes

What are the company’s first shareholders called?

The subscribers. And their name(s), address(es) and details of their shareholding(s) need to be entered on the IN01. It is common practice for companies to be incorporated with two shareholders but companies can be incorporated with only one shareholder with no maximum number of shareholders

What information must an applicant provide about the shares (known as a statement of capital) on the IN01?

• The number of shares of each type the company has and their total nominal value - known as the company’s share capital; and

• The names and addresses of all shareholders - known as subscribers

• The applicant must also give information about what rights each type of share gives the shareholder - known as ‘prescribed particulars’ and must include:

  • What share of dividends they receive

  • Whether they can exchange (‘redeem’) their shares for money;

  • Whether they can vote on certain company matters; and

  • How many votes their shares entitle them to