Business Flashcards
Sole proprietorship - characteristics
Sole proprietorship
Suitable for one person, responsible for an unlimited amount of debt, liability and organization, but also gets all profits. No relevant legislation that governs sole proprietors.
Not a separate legal personality.
No costs and funding is limited to the person’s funds. Will close on bankruptcy or the death of the owner.
Is an asset of the owner and can be freely transferred.
Tax:
Personal tax: The owner is responsible for all taxes and personally taxed on all profits, subject to personal allowance (basic deduction against general income) regardless of where profit is paid.
CGT + relief: The owner pays capital gains subject to personal allowance. Business relief on inheritance tax for 100% value of the business and 50% of land, buildings or machinery used in business for the last 2 years before death. Pension relief claimable by owner.
Partnership - characteristics
Minimum two people with equal shares of profits and participation in management, unless something else is agreed in the partnership agreement. Governed by the Partnership Act of 1890.
Not a separate legal personality and partners are responsible for an unlimited amount of debt, liability and organization.
No costs and funding is limited to the partners personal financial resources. There are no ongoing e.g. filing requirements.
The general partners are the owners of the business and will be entitled to equal participation in management subject to a separate agreement.
Dissolves upon bankruptcy, death of a partner, as opposed to an LLP. A general partnership cannot be transferred without an agreement between the partners. One partner cannot transfer their share, as this would be the end of the existing partnership.
Tax:
Personal tax: Each partner is personally taxed on their profit share based on their personal allowance, regardless of whether profit is retained by partners or the business.
CGT: Each partner pays capital gains on any capital gains. Business relief on inheritance tax for 100% value of the business and 50% of land, buildings or machinery the deceased used in business for the last 2 years before death. Pension relief claimable by partner on private pension contributions.
LLP - characteristics
At least two people with equal shares of profits and participation in management unless something else is agreed in the LLP agreement.
Limited liability: The LLP is a separate legal person from its members. Partners are only responsible for debt limited to the initial capital they each contributed. Suitable for larger businesses involving 2+ people. Governed by LLP Act 2000.
Costly, with filing requirements and registration fees. Capital can be provided from the members personal finances and an LLP can also borrow money at its own account.
Specific statutory procedure must be followed on incorporation and to bring the LLP to an end.
The LLP is unaffected by the bankruptcy, death etc. of one of its members. This is in contrast to a partnership. The business of an LLP is an asset and cannot be transferred except for by the members themselves. A member can transfer their share in an LLP to a third party as long as there are no restrictions in the LLP agreement.
Tax
Personal tax: Each person is personally taxed on their profit share, based on personal allowance, regardless of whether profit is retained by a partner or the business.
CGT + relief: Each member pays capital gains on any capital gains. Business relief on inheritance tax for 100% value of the members interest in the LLP business and 50% of land, buildings or machinery deceased used in business for the last 2 years before dearh. Pension relief claimable by an LLP member on private pension contributions.
Ltd. characteristics
larger businesses with need to raise capital.
Limited: can be limited by shares (PCLBS) or guarantee (PCLBG). Private company without share capital used for charitable, social and non-trading purposes.
Liability: A company is a separate legal entity, protecting shareholders and members from business failure. Members liability is generally limited to the initial capital distribution (could be 1 GBP).
No minimum capital or paid shares and no minimum members
Minimum 1 director, no company secretary (sole director may act)
Annual General Meeting is required if created before 1 October 2007
May pass written resolution.
Business commences after receipt of incorporation in business registry.
Costly and time consuming to establish with initial and ongoing registration fees and costly filing requirements. Governed by the Companies Act 2006.
Members are the owners of the business and subject to any other agreement, members are automatically entitled to be directors.
Shareholders resolutions can be passed as general meetings and written resolutions, in contrast to public companies.
Funds: Can come from members’ private funds or a PCLBS can borrow money and raise capital through sale of shares (not to the public).
Specific statutory procedure must be followed on incorporation and to bring an Ltd to an end. The Ltd is unaffected by the bankruptcy death etc of one of its members. The business of an ltd. is an asset and cannot be transferred except for the transfer of shares by members, subject to any restrictions in the articles of association.
Tax:
The Company pays corporation tax on profits.
Members are personally taxed on dividends, based on their dividend allowance. Each partner pays capital gains on any capital gains arising from sale of shares.
Business relief on inheritance tax for 100% value of the deceased share and 50% of land, buildings or machinery deceased used in business for the last 2 years before death. Pension relief claimable by members of the company and private pension contributions subject to annual lifetime allowance.
Business relief tax inheritance
Business relief on inheritance tax for 100% value of the deceased share and 50% of land, buildings or machinery deceased used in business for the last 2 years before death.
Pbl. characteristics
Whilst a private company is suitable for a small group of investors, a public company can have an unlimited number of shareholders and the shares can be traded on the stock exchange.
Minimum 50 000 GBP in share capital and 25 % paid shares
Must have at least 1 member and minimum 2 directors
Shares and debentures are tradable
Company secretary and annual general meetings (AGM) are required
Shareholders resolutions can be passed as general meetings OBS but not as written resolutions for public companies.
Business commences after application is sent to the Companies House and the company receiving certificate of registration.
Company secretary: requirement for public companies + must satisfy certain requirements (a sole director can be both company secretary and director), “nice to have” for private companies
Unlimited companies - characteristics
cannot use Ltd. Shareholders are liable
Company house filing requirements when setting up a company
MoA with initial subscribers names. shows intent to create company
Form IN01 application to register
AoA model articles: rules for administration, between company and members
Unamended: no need to send
Amended: only send amendments
Bespoke/very revised: incorporate model + amendments in one doc and send
Bespoke: send
Factors to be considered for incorporation are: name, company must have a registered office in the UK, at least one share issued.
Incorporated by registration process administered by the Registrar of Companies (Companies House). A Promoter takes on this role and is personally liable for agreements entered into before incorporation.
After registration requirements are met: the Registrar of Companies issues a certification of incorporation and the company becomes a separate legal person. Initial subscribers are the first members of the company.
Is SHA sent to C H?
No, private agreement between members. AoA prevails over SHA
Can AoA be amended?
Special resolution, amendments and the resolution adopting the amendments must be sent to C H within 15 days after amendment. OBS if the amendments contain an entrenchment (e.g. pre-emption rights can only be amended by 90% of shareholder) a notice of restriction of the companies articles must me sent to C H with the amended articles + the resolution adopting the articles. No prescription fee is needed.
AoA cannot include articles that cannot be amended. Will always be amendable by agreement between all shareholders.
Amendment take effect immediately after the resolution is passed. Exception if the amendment is to add, remove or alter the Company’s objective as they will only enter into force upon registration.
Change name company
Special resolution. Shareholders resolution with the new name + a notice is sent to C H who issues a new certificate of incorporation. no prescription fee.
Entrenchment
Companies are free to impose stricter requirements than special resolutions to amend articles = entrenchments: provisions in articles that can only be amended or repealed of certain conditions or procedures are met. e.g. a provision regarding pre–emption rights can only be amended på 90% of the shareholders. requires a special resolution, notice or restriction, the amended AoA + the resolution adopting the amendments must be sent to C H.
When must a company register for tax?
3 months after starting business with HMRC
Annual confirmation statement - requirements
Annual confirmation statement using Form CS01 with the Registrar of Companies every 12 months to confirm changes or events.
Criminal liability is not filed within 14 days after the end of a review period.
Who can execute doc for Ltd?
44 CA 2006: common seal
Two authorized signatures,
director + 1 witness who attests the signature,
every director of the company and the company secretary
Types of shares
Ordinary (no special rights or restrictions),
Preference shares (right to payment of any dividend declared by the company in priority to other shares),
Redeemable shares (can be brought back after a certain period),
Cumulative preference shares (carries a right that if the company cannot pay the dividend in one year, it will be carried to successive years)
Allotment of shares in private and public companies
Allotting shares is a part of the process and means to allocate shares to particular applicants. Allotment can happen at incorporation or during the lifetime of the company to e.g. raise investments or introduce new shareholders. If a director allotts shares without authority he may be held personally liable.
Registration of allotment of shares:
**Must be registered within two months of the allotment,
Return of allotment notice to be made to the Registrar of Companies within 1 month of the issue of shares. **
Class of shares:
1 class of shares: If a company is formed on or after 1 October 2009 and only has one class of shares, the directors are free to allot more, unless articles of association say otherwise.
If the company was established BEFORE 1 October 2009, allotment must be done by an ordinary resolution.
1+ class of shares: authority to allot can be granted in the articles of associations or by an ordinary resolution. OBS an ordinary resolution can be enough, even though the result in practice is to amend the articles of association. In practice, most companies require a special resolution.
Pre-emption
The statutory right for existing shareholders to first buy any new shares issued. Applies only to ordinary shares.
It does not automatically apply to the transfer of shares - this must be regulated in the Articles of Association.
Exclusion can also be included in the articles of association.
Share buy-back
Company buying back shares from members to limit the number of shares and for the member to exit.
Listed company: a buyback can enhance the value of shares and eliminate threat of control from certain shareholders.
Limited company: the general rule is that a company cannot buy-back shares cf. CA 2006.
Register of members
Register of members: must be kept by public companies, except private companies where it is optional. Must contain previous members for up to 10 years from the date the members ceased to be one and include name, reg date, ceased to be member-date, number and class of shares, amount paid for shares.
PCS register
PSC Register: register of people with significant control. Significant control:
Directly or indirectly holds MORE than 25% of shares OR voting rights (25% is not enough, must me 26%)
Holds the right to remove or appoint the majority of board members (1 director is not enough)
Holds the right to exercise or is actually exercising significant control or influence
AGM deadlines + who required for
Annual general meeting AGM
Public companies + private companies incorporated before 1 October 2007.
21 days notice must be sent to all members and directors (styremedlemmer)
Unanimity is required to call an AGM with a shorter notice
GM deadlines
Called at the discretion of the directors at any time s. 302. Must be held 28 days after the issue of directors’ call.
Members can call a meeting if the deadline is not met.
Can be called by directors after members of at least 5% of the share capital or 5% of voting rights of the company doesn’t have share capital. Must be held 21 days after the request.
14 days notice must be sent to all members and directors. Members can call a meeting if the deadline is not met.
Special notice: 28 days e.g. for removing director
If required by 90% of members of a private company or 95% of a public company, meetings can be called with shorter notices.
The notice must contain a date, time, location, resolutions to be passed, business to be transacted, text of the resolution (if one is to be passed) and the right to appoint a proxy.
At least 1 person must be present at the GM for private companies and at least 2 (subject to articles) for a public company
Voting rights GM
Poll or hand. 2+ members can request poll regardless of there shares. Cannot be restricted in AoA.
GM + resolutions filing requirement
special resolutions + some ordinary must be sent to C H within 15 days after being passed. copies of minues + resolutions must be kept by company for 10 years
Appoint and remove directors - process
Appoint: ordinary resolution or board member vote
Remove: ordinary resolution, with 28 days special notice.
give notice to CH 14 days after changes + update internal register for directors.
if appointing 2+ at the same time - unanimous vote by members before vote.
How many directors must companies have?
private: 1
public 2
Limitation to directors powers
Unless it is approved by an ordinary resolution (at a GM), a director cannot
enter into agreements where a director or another party connected to such acquires a substantial non-cash asset (exceeds 10% of the company’s asset value) or that the company acquires a substantial non-cash asset from such a person
Make a loan to a director or provide guarantee or security in connection with a loan made by any person to such director (unless the value is less than 10 000 GBP or the transaction is in the ordinary course of business)
If a transaction is made by ordinary resolution, a memorandum setting out details of the relevant transactions must be made available to members and made available for inspection at the Registrants company office no later than 15 days after the transaction.
directors powers: Third party dealing with a company is presumed/not bound to investigate
Directors have the power to bind the company, as long as the third party has dealt with the company “in good faith”. A person dealing with the company is
(i) not bound to enquire about limitations in the powers of directors,
(ii) presumed to have acted in good faith,
(iii) not regarded as acting in bad faith only by knowing that an act is beyond the powers of the director under the company’s constitution.
Directors main types of powers (categories)
Types of powers: actual, implied or apparent and ostensible (as it appears to third parties).
At common law, the directors acting with “actual or implied authority” binds the company, and a third party can rely on the apparent or ostensible authority of a director, provided that the third party does not have knowledge of the lack of authority and that there are no “suspicious circumstances”.
If a director exceeds his powers when dealing with third parties, the company will still be bound if the director acted “within his or her apparent or ostensible authority”.
Freeman: a person that was never appointed as managing director engaged architects to design a plan which then collapsed. The architects sued the company for payment and the company was not heard with the argument that the directors was never appointed, as the directors actions were within his “ostensible authority”.
Board meetings call + vote
alles by any directors subject to notice and decided on majority.
Minority shareholder protection - types
S. 33: a member can rely on the “statutory contract of membership” and if their rights were infringed, pursue a claim against the company to enforce those rights.
Shareholders agreements: Shareholders agreements typically impose obligations on parties that are outside the scope of the articles of association.
Derivative claims: the claimant in a wrong committed against a company is the company itself. The power to pursue litigation is generally at the power of the directors, hence if the directors are the wrongdoers, they could refuse to allow a company to pursue a claim against themselves.
- Common law: a claim brought by a member of the company on the behalf of a company in respect of a cause of action vested in the company, seeking relief for the company. Derivative claims are justified by the rule against claiming reflective loss: a member cannot bring a claim for the reduction on a share value that results from a loss caused to the company by a wrongdoer, to prevent “double recovery”.
- Statutory: s. 260: a claim brought by a member of the company on the behalf of a company in respect of a cause of action vested in the company
Can only be brought for actions or omissions involving a director of a company (incl. Former or shadow directors).
The cause of action can have arisen either before or after the person sought to be a member of the company.
Protection of shareholders against unfair prejudice (most commonly used): s. 994 where a member may apply to the court by petition on the grounds that (i) a company’s affairs have been conducted in a manner that is unfairly unjust tp members (including himself), or (ii) that an actual or proposed act or omission of the company is or would be so prejudicial.
Just and equal winding up:
Winding up: placing company in liquidation + dissolution
Courts can wind up if it is just and equitable to do so, including: there has been a loss of the company’s substratum (it can no longer fulfill its purpose), deadlock, serious mismanagement, a member is excluded from management despite genuine expectation of participation.
Protection of shareholders against unfair prejudice
Protection of shareholders against unfair prejudice (most commonly used): s. 994 where a member may apply to the court by petition on the grounds that (i) a company’s affairs have been conducted in a manner that is unfairly unjust tp members (including himself), or (ii) that an actual or proposed act or omission of the company is or would be so prejudicial.
Formalities financing company - registration requirement
Formalities: a security may need registration at the Companies House to be enforceable against third parties. CA 2006 s. 859A: nearly all charges and mortgages must be registered at the Registrar of Companies within 21 days after the creation of the charge. If a charge is not registered or registered outside of the deadline, the charge will be void against liquidators, administrators and creditors. Prospective lenders should always search the Company Registry.
Priority of charges if the company is subject to insolvency proceedings: fixed security interests have priority over floating, regardless of whether the floating charge was established first.
