SQE 1 - Business law and practice

Which entities have separate legal personality?

LLP, companies and Plcs.

NOT sole traders or general partners.

Which entities have unlimited liability?

Sole Traders and GPs (partners are jointly and severally liable).

What is the liability for Plcs and companies

The liability of the shareholders is limited to the amount of unpaid shares.

Director's may be liable for breach of their duties.

Who are the owners of each entity? How many are there

Sole trader - the ST only.

General Partnership - Partners (at lease 2)

LLP - Members (at lease 2 and at least 2 must be designated members)

Company - shareholder at least 1

Plc - shareholder at least 1

Who are the managers of each entity? How many are there

Sole trader - the ST only.

General Partnership - Partners (at lease 2)

LLP - Members (at lease 2 and at least 2 must be designated members)

Company - Directors at least 1 (optional company secretary)

Plc - Director's at least 2 and a qualified secretary

Who makes the decisions for each entity?

Sole trader - the ST

General Partnership - majority vote by the partners. Can be altered in the partnership agreement.

LLP - Same for general partnership

Company - Day to day, directors. Certain decisions are reserved for shareholders

Plc - Day to day, directors. Certain decisions are reserved for shareholders

Who owns the property and assets?

Sole trader - the ST

General Partnership - members

LLP - the LLP separate legal personality

Company - the company separate legal personality

Plc - the company separate legal personality

Which type of entities require accounts. What type for they require?

Sole trader - no accounting required

General Partnership - They are produced but not audited and not published

LLP - audited accounts are published (smaller entity might be exempt from auditing)

Company - audited accounts are published (smaller entity might be exempt from auditing)

Plc - audited accounts are published (smaller entity might be exempt from auditing)

What type of security can entities grant?

Sole trader - fixed only

General Partnership - fixed only

LLP - fixed and floating

Company - fixed and floating

Plc - fixed and floating

What duties are imposed on managers by law?

Sole trader - None

General Partnership - duties under the partnership agreement (including duties implied under PA 1890. Fiduciary duties.

LLP - Duties under the members agreement. Fiduciary duties. Some statutory duties under the IA 1986

Company - statutory duties under CA 2006 and IA 1986

Plc - statutory duties under CA 2006 and IA 1986

How can each entity be terminated?

Sole trader - At will

General Partnership - by a partner giving the other partners notice which can be oral. Or death, bankruptcy, or illegality. Can be modified by the partner's agreement.

LLP - Application to the registrar for the voluntary striking off subject to conditions such as a majority of the members signing the application.

Company - Application to the registrar for the voluntary striking off if the company has not carried on activity for 3 months. Voluntary or compulsory liquidation.

Plc - Application to the registrar for the voluntary striking off if the company has not carried on activity for 3 months. Voluntary or compulsory liquidation.

What is each entities' constitution?

Sole trader - None

General Partnership - some rules under PA 1899. Often supplemented by partnership agreement

LLP - LLP Regulations 2001 - and almost all rule that apply to companies are imposed on LLPs. Often supplemented with LLP agreement.

Company - Detailed rules under CA 06. Always governed by articles of association.

Plc - Extensive rules under CA 06. Always governed by articles of association.

What are the formalities for incorporation for each entity?

Sole trader - None

General Partnership - None if the definition of partnership is met.

LLP - must file a form LL IN01 at Companies House and pay a small fee.

Company - must file a form IN01 at Companies House and pay a small fee. Memorandum of association required. Articles required unless using model articles.

Plc - must file a form IN01 at Companies House and pay a small fee. Memorandum of association required. Articles required unless using model articles.

£50,000 is the minimum allotted share capital.

What type of tax does each entity pay?

Sole trader - Income Tax

General Partnership - Income Tax

LLP - Income Tax

Company - Corporation Tax.

Plc - Corporation Tax.

How is a limited company formed?

A form IN01 is submitted to Companies House with the required fee, the memorandum and the articles (if model articles are not being adopted)

What must the certificate of incorporation state?

s 15 CA 2006

Name and registered number of the company.

date of incorporation.

whether limited or unlimited - if limited by shares or guarantee.

private or public

whether the registered office is in England and Wales

When is the deadline for registering with HMRC for corporation tax

Within 3 months of starting the company.

What are the naming rules for a company?

Must end in Ltd or limited.

Cannot contain sensitive words or phrases or associations with government or other bodies without permission. Must not be 'same as' unless forming part of the same group.

Must not exceed 160 characters.

What is the purpose of a company's registered office? How is a registered office changed?

Publicly available and cannot be kept private. Place where records held and meetings take place.

Form AD01 changes the address, post can be sent to the previous address for 14 days after the change.

What information regarding the director's is required on an IN01 form?

Their name and date of birth.

Their service and residential address.

Their residential address will not appear on the register unless it is also their service address.

What information regarding the shareholder's is required for the IN01?

Their name, address and details of their shareholding.

What information is required for a form IN01?

Company name

Company type

Business activity

address of the registered office

Details of share capital

Names, addresses and date of birth for directors/ secretary.

Any PSCs

What documents make up a company's constitution?

The memorandum of association, articles of association, certificate of incorporation, statement of capital, copies of court orders altering the constitution and shareholders resolutions affecting the constitution.

A company was founded in 2004, which legislation applies to it?

CA 2006. The company may still have model articles adopted under CA 1985

How can the articles of association of a company be amended

By special resolution.

The amended articles and shareholder resolution must be sent to companies house within 15 days.

The articles are effective as soon as the resolution is passed.

There is conflict between a company's articles of association the CA 2006, which prevails?

CA 2006.

How does a company register as a public company?

Must fulfil all the criteria for a company, have its name in the form of a public company and meet the minimum shareholder capital of £50,000

To convert to a Plc a limited company must pass a resolution.

The company must submit a form RR01 with the application fee and revised articles. They will then get a certificate of re-registration.

What are some post-incorporation steps required for a company?

Appoint a chairperson

Set up bank accounts.

Adopt a company seal by board resolution.

Set / amend the accounting reference date with a form AA01.

Appoint an auditor.

Prepare service contracts for employees.

Register with HMRC and PAYE.

Put insurance in place.

Adopt a shareholders' agreement.

When is a company's accounting reference date? How can this be changed.

The last day of the month in which is was incorporated.

Can be amended by passing a board resolution and a form sent to companies house. Cannot be extended to last more than 18 months.

What is the definition of a partnership under the PA 1890?

Two or more persons carrying out business for profit.

Does a general partnership have separate legal personality?

No. The partners are wholly and severally liable.

A company has a partnership agreement in place. Does this override the PA 1890?

Yes, if there is contradiction the partnership agreement will prevail.

Which aspects of the PA 1980 cannot be overridden by a partnership agreement.

ss1 and 2 - when a partnership comes into existence

ss5-18 - relationship between partners and third parties such as liability for debts.

How is a partnership started?

No formalities. Just need to be acting in accordance with the PA 1890 definition.

How long does a partnership last for?

Under the PA 1890 it continues indefinitely unless otherwise specified in the partnership agreement.

There is no partnership agreement in place. How must agreements be made.

By a majority of the partners.

Exceptions where all partners must agree are:

- changing nature of business

- introducing a new partner

- altering the partnership agreement.

Under PA 1890 how do partners share income and capital profits and losses.

Both are shared equally.

Who owns the partnership assets?

This must be set out in the partnership agreement.

How may a partner be expelled under the PA 1890.

There is no express expulsion provisions without the agreement of all partners.

How is a partnership dissolved under PA 1890?

A partner retires.

Expiry of a fixed term.

Death or bankruptcy of a partner.

Notice of disillusion.

Or something happens which makes it unlawful for the business of the firm to carry on (cannot be disapplied).

Can also apply to the court under s35 if a partner is incapable or business can only carry on at a loss.

When a partnership is sold how are the proceeds of sale distributed?

1. Creditors of firm paid in full.

2. Partners who have lent money to the firm.

3. partners paid share of partnership capital.

4. surplus shared between partners as per partnership agreement.

What is a restraint of trade clause in a partnership agreement?

Restricts outgoing partners in their business dealings.

What are some of the partner's duties to the partnership?

- must be open regarding relevant information.

- account to firm for private profits.

- must not compete with the firm.

- bear any share of loss.

indemnify fellow partners who have borne more of their share of the loss.

When does a partner have actual authority to bind third parties?

The partners have expressly given one of the partners to enter into the transaction or they are acting in accordance with the partnership agreement.

When does a partner have implied actual authority to bind third parties?

If all partners are involved in running business without limitation it will be implied each partner has authority for example to sell the firm's products.

May also be implied by the regular course of dealings.

When will a partner acting with apparent authority bind the firm?

1. transaction relates to business of the kind carried out by the firm

2. transaction one a partner would usually have the authority to act

3. other party did not know the partner didn't have authority.

4. the other party deals with a person they know or believe to be a partner.

If any one of the tests fails then the firm will not be bound and the partner who made the contract is personally liable.

Which partnership debts is a partner liable for?

Debts incurred by the partnership when they were a partner. This continues once they have left the partnership.

They will escape liability for debts incurred once they have left the partnership

How does a partner give actual notice of their departure from the firm under s36 PA 1890?

Those who have had dealings with the firm should be directly informed.

Those who have not had dealings will be informed by a notice in the London Gazette.

They must also remove their name from all partnership letterhead / website etc.

(if reason is death or bankruptcy - no notice is required)

What is a novation agreement relating to partnerships?

When a retiring partner enters into a contract with a creditor and other parties for their debt - someone else takes over their liabilities.

How do indemnities operate in partnerships?

If an indemnity agreement is in place between the outgoing partner and the remaining partners, when the outgoing partner is sued for partnership debt, the remaining partners can cover their share.

The retired partner can still be sued but will claim back from the remaining partners.

What form is filled for a new member to join an LLP?

LL AP01 for individual member.

LLAP02 for corporate.

Must be filed within 14 days.

What form is filled for a member to leave an LLP?

LL TM01 - individual

LL TM02 - corporate.

What does 'limited liability' mean in the context of an LLP?

The liability of the members is limited to their initial contributions. However, members can be liable for misfeasance, fraudulent or wrongful trading and asked to contribute to the assets of the LLP.

In the context of an LLP, who owns the property?

The LLP itself.

What is the role of the designated members in an LLP?

- signing and filing annual accounts

- Appointing and removing auditors

- Filing annual confirmation statement

- Sending notices to the Registrar of Companies

- Winding up the LLP

What is income?

Money coming in that is recurring in nature

What is capital?

One off items such as an office increasing in value.

How is trading profit/ loss calculated?

Trading profits / loss = Chargeable receipts -deductible expenditure - capital allowances.

What is a chargeable receipt?

Money received for sale of goods and services deriving from business's trade and be income in nature.

What is a deductible expenditure?

Something income in nature incurred wholly and exclusively for trade.

What does 'wholly and exclusively for trade mean?

eg.

salaries, rent, utility bills, stock, contribution to pension schemes and income on borrowings.

What is a capital allowance?

A discount on items such as plant and machinery which are income in nature so cannot be deducted as deductible expenditure.

Give some examples of plant and machinery

Manufacturing equipment, tools, computers and other office equipment.

What is a writing down allowance (WDA)

Calculation to deal with the decreasing value of certain assets.

Written down value of an asset will be the value of the asset with 18% of this value deducted.

18% can be applied every year.

What is an annual investment allowance?

Scheme encouraging businesses to buy equiptment.

For brand new equipment the total value of the asset can be deducted (post 2023)

For second hand or refurbished equipment this is up to a value of £1m

How is start-up loss relief calculated?

When a business suffers a loss in the first four tax years the loss can be carried back and set against the taxpayer's total income in three years prior to the loss. The tax is applied against the earliest year first.

Useful if they had income from a former business.

What is carry-across relief?

Trading losses can be:

1. set against the total income from the same tax year

2. set against total income from the year before the loss

3. set against total income from same year until that is 0 with balance being set against total income from year before.

4. set against total income from tax year before the loss until that is 0 with balance of loss being set against total income from the year of the loss.

How can a loss be set-off against capital gains?

Applies when the taxpayer has claimed across relief but not all loss has been absorbed. Can then set against chargeable gains.

How can a loss be set-off using carry-forward relief?

Taxpayer can carry forward their trading losses indefinitely until loss is exhausted.

What is the cap on these reliefs?

Subject to a cap of the greater of £50,000 or 25% of taxpayer's income.

Why does VAT usually not cost trading businesses anything?

It re-coups the VAT it has paid from VAT it charges so the consumer takes the burden.

Who pays income tax?

Individuals, partners, PRs and trustees.

When does the tax year run?

6th April to 5th April

How is income tax calculated?

Step 1 - calculate total income

Step 2 - deduct any allowable reliefs to get net income.

Step 3 - deduct any personal allowances

Step 4 - separate NSNDI, savings income and dividends income and calculate on the applicable rate.

Step 5 - add together the amount of tax to get income tax liability.

What is included in total income?

Trading income.

Property income

Savings and investment income

Employment and pensions income

What income is exempt from income tax?

Interest on damages for PI, interest on savings certificates, state benefits, premium bonds and ISAs.

What are allowable reliefs?

Interest payable on qualifying loans:

- to buy a share in a partnership

- to invest in a close company

- to loan to a PR to pay inheritance tax.

What is a personal allowance?

Sum deducted from net income to obtain taxable income.

currently £12,570.

What happens to personal allowance once a person earns over £100,000

The allowance is reduced by £1 for every £2 over £100k

At what income will a person have no personal allowance?

Once they earn £125,000

What is a marriage allowance?

When a person doesn't use all their personal allowance they can transfer £1,260 to their spouse, Not available if recipient is a higher or additional rate tax payer.

What is a PSA?

Can be set against savings income.

For a basic rate taxpayer the first 1k is tax free.

For higher rate taxpayer first £500 tax free.

No allowance for additional rate taxpayer.

What is dividend allowance?

First £1k tax free. Available to all taxpayers.

What order are NSNDI, savings income and dividend income taxed in?

NSNDI first.

savings second

dividend third.

What happens to capital contributions when a partnership comes to an end?

The contributions are returned to the partners in the amounts they initially contributed.

How long must records of board decisions at board meetings be kept for?

10 years

How long must records of shareholders' decisions be kept for?

10 years

When is the change in a company's name effective?

What form is used?

When he registrar issues the certificate of incorporation on change of name.

Form NM01

When should the register of members be updated on the transfer of shares?

Immediately. CH should be updated yearly in the confirmation statement.

When should share certificates be issued on the transfer/ allotment of shares?

Within 2 months of the transfer or allotment.

When and where should a PSC register be updated?

Internally, immediately. At companies house within 14 days.

When is the change in a company's accounting reference date effective? What form is used to make the change?

Effective when received by CH. Form AA01

When is a change in a company's articles effective?

On the passing of the relevant shareholder resolution. New articles must be sent to CH within 15 days along with the special resolution adopting the new articles.

When should CH be informed of an appointment or removal of a director? What form is used?

Form AP01/TM01.

CH notified within 14 days.

What two key decisions are passed by special resolutions?

Changing the articles and changing the name of the company

What notice is required for a board meeting?

Reasonable notice to other directors - MA 9.

What is reasonable depends on the facts.

What is quorum for a director's meeting?

2 unless there is only one director.

What are the rules surrounding a director who is interested in a transaction being counted in the quorum for a meeting.

MA 14. A director may not count if the meeting is concerned with an actual or proposed transaction the director is interested in.

The director can pass other resolutions at the meeting (such as the decision to call a general meeting)

When must a director declare their interest in an actual or proposed transaction?

At the meeting in accordance with s177 of CA 2006.

A director can be counted in quorum if MA 14 is dissapplied but must disclose their interest to comply with their director's duties.

If any doubt always declare.

How is voting carried out at a board meeting? There is a tie, who has the casting vote?

By a show of hands. Each director has one vote.

Voting passed by a simple majority. The chair has the casting vote.