The Different Types of Businesses

Question 1

What are the two main categories in which businesses can be run?

Answer 1

Incorporated or unincorporated form

Question 2

What is a key distinction between unincorporated and incorporated businesses regarding legal formalities?

Answer 2

Unincorporated businesses require few or no administrative steps to be formed under the law whereas incorporated businesses must undergo a formal registration process before legally exisiting.

Question 3

How do the legal entities of incorporated and unincorporated businesses differ?

Answer 3

Incorporated businesses are legal entities with a separate existance from their owners, while unincorporated businesses are typically treated as the same legal entity as their owners, lacking separate legal status

Question 4

What are the most common forms of unincorporated business in the UK?

Answer 4

Sole Trader and Partnership

Question 5

Name three common forms of incorporated business in the UK

Answer 5

Private Limited Company, Public Limited Company and the Limited Liability Partnership

Question 6

What is a sole trader and how is it characterised?

Answer 6

A sole trader is an individual who runs a business on their own as a self employed person. They can operate in any trade or profession, and no formal steps are required to set up, but registration with HMRC for tax purposes is necessary.

Question 7

What percentage of sole traders work entirely alone, and how is the business status determined if there are employees?

Answer 7

Over 90% of sole traders work alone, but the business remains a “sole trader” even if there are employees, as long as the sole trader owns the business alone

Question 8

How does a sole trader earn income, and what is their tax status?

Answer 8

A sole trader earns income from customers or clients and keeps all the profit. They pay income tax as self-employed individuals

Question 9

Explain the concept of ‘unlimited liability’ in the context of a sole trader

Answer 9

In law, a sole trader is personally liable for all business debts, with no legal seperation between business and personal assets. If the business fails, the sole trader’s personal assets, including savings, house and car may be used to repay debts which could lead to bankcruptcy

Question 10

What happens to a sole trader’s business when they retire or pass away?

Answer 10

When a sole trader retired or dies the business ceases to exist. However, individual assets may be sold if buyers are found to

Question 11

List the characteristics that define a sole trader

Answer 11

A sole trader is an individual who alone has the right to make all business decisions, owns all business assets, is responsible for paying income tax on profits and has unlimited liability for business debts

Question 12

Is there a specific legislation governing a business run by a sole trader?

Answer 12

No, there is no single piece of legislation governing a sole traders business. The law governing their activities is found in various pieces of legislation applicable to individual or businesses generally

Question 13

What is a partnership, and how does it differ from a sole trader?

Answer 13

A partnership occurs when two or more persons run and own a business together, in contrast to a sole trader where one person runs and owns the business alone

Question 14

How many partnerships are there in the UK, and can you provide an example?

Answer 14

According to DBT figures, there are approximately 353,000 partnerships in the UK. An example is Slaughter & May, a City law firm, with about 110 partners and over 1,000 employees

Question 15

What primarily governs partnerships, and when is a partnership legally formed?

Answer 15

Partnerships are primarily governed by the Partnership Act 1890. Under Section 1 of this Act, a partnership is legally formed when two or more persons carry on a business with a view to making a profit. The partnership operates on the basis of a contract, which can be written or oral.

Question 16

Are there formalities, such as registration, required to form a partnership?

Answer 16

No, there are no formalities required for forming a partnership. It can be established without registration with a public body. However, each partner must register with HMRC for tax purposes.

Question 17

How are profits or losses divided in a partnership, and how are partners taxed?

Answer 17

Partners divide profits or losses, and in partnerships composed solely of individuals, partners are taxed separately as self-employed individuals, paying income tax on their share of the profits.

Question 18

What is the legal status of a partnership, and what does unlimited liability mean for partners?

Answer 18

A partnership has no separate legal status, and partners have unlimited liability for the debts of the partnership. This implies that creditors can pursue personal assets of partners if the partnership fails

Question 19

How is the liability among partners described, and what happens when a partner dies or retires?

Answer 19

The liability is joint and several among partners, giving creditors the choice to seek the full amount of a debt from any individual partner or from all partners together. When a partner dies or retires, they are usually bought out by remaining partners, or the partnership ends if not agreed otherwise

Question 20

Summarise the key characteristics of a partnership

Answer 20

A partnership involves two or more persons who, based on a contract, share decision-making, ownership of assets, profits, and unlimited liability for the debts of the business

Question 21

What is a limited partnership (LP), and how is it different from a regular partnership?

Answer 21

A limited partnership (LP) is a form of unincorporated business established under the Limited Partnerships Act 1907. Similar to a partnership, an LP requires at least one general partner with unlimited liability, but it can also have limited partners whose liability is restricted to their initial investment. Limited liability for limited partners is contingent on certain conditions, and if breached, they may lose this protection and be treated as general partners

Question 22

What was the original purpose of limited partnerships, and why did their popularity decline over time?

Answer 22

Limited partnerships were created over 100 years ago to encourage entrepreneurs by mitigating some effects of unlimited liability present in regular partnerships. However, their popularity declined over time as limited companies became the preferred business format due to offering greater protection against unlimited liability.

Question 23

Why has there been an increase in the use of limited partnerships recently?

Answer 23

Limited partnerships have seen a resurgence, particularly in specialist financial businesses like investment and venture capital funds. They are flexible, lightly regulated, potentially offer tax benefits, and may not require public disclosure of financial information. Additionally, they are used for joint ventures and collaborations.

Question 24

What is the registration requirement for limited partnerships, and how does the registration process work?

Answer 24

Limited partnerships must be registered with the Registrar of Companies under the Limited Partnerships Act 1907 before commencing trading. The registration involves completing an application form (Form LP5), signed by all partners, and submitting it with the applicable fee (currently £20 for a paper application). Once successfully registered, a certificate of registration is issued, marking the LP’s official existence.

Question 25

How can limited partnerships be recognised, and what distinguishes them from other business structures?

Answer 25

Limited partnerships are recognisable by the use of ‘limited partnership’ or ‘LP’ (or their Welsh equivalents) at the end of their names. This distinguishes them from other business structures

Question 26

What is the difference between a limited partnership (LP) and a limited liability partnership (LLP)?

Answer 26

A limited partnership (LP) operates under the Limited Partnerships Act 1907, allowing for both general and limited partners with different liability structures. In contrast, a limited liability partnership (LLP) follows the Limited Liability Partnerships Act 2000, providing a different business structure with limited liability for all partners

Question 27

What is the Private Fund LP (PFLP), and who can establish it?

Answer 27

Introduced since April 2017, the Private Fund LP (PFLP) is a special form of LP available exclusively to private investment funds that do not deal with the public. It offers financial and administrative benefits compared to a regular LP.

Question 28

What reforms are being proposed for limited partnerships, and why?

Answer 28

The Economic Crime and Corporate Transparency Bill 2022 is proposing reforms for limited partnerships to address concerns of abuse for money laundering purposes. The Danske Bank scandal, involving the use of limited partnerships to launder money, has prompted the need for stricter regulations, including enhanced registration, annual confirmation statements, and Registrar powers to strike off non-operational LPs.

Question 29

What is contractual co-operation in business, and how does it differ from more formal structures?

Answer 29

Contractual co-operation is a less formal form of association between two or more parties running a business together based on a co-operation agreement. It could involve sharing costs and resources, and it is less formal than partnerships or other business structures

Question 30

What are examples of businesses that might use a co-operation agreement?

Answer 30

Parties might enter into a co-operation agreement, for example, to explore and develop oil and gas fields, engage in property development, or conduct research and development for new products. Such agreements are sometimes referred to as joint ventures

Question 31

What advantages does a co-operation agreement offer over more formal business structures?

Answer 31

Contractual co-operation provides less formality in running the business, and the terms of the agreement can be kept confidential. This flexibility is particularly beneficial in businesses like joint ventures.

Question 32

What are some disadvantages of contractual co-operation?

Answer 32

Disadvantages of contractual co-operation include a lack of identity, organisational structure, and the risk of the business unintentionally becoming a partnership, subject to the criteria under s 1 of the Partnership Act 1890

Question 33

From where does the law governing contractual co-operation arrangements originate?

Answer 33

The law governing contractual co-operation flows from the co-operation agreement itself and is also influenced by common law principles

Question 34

What is a company, and how is it formed in the UK?

Answer 34

A company is a business entity formed in the UK by registering certain documents with the Registrar of Companies under the Companies Act 2006. Unlike partnerships or sole traders, companies require specific steps to be taken before they can start trading.

Question 35

How many companies are currently registered in the UK, and can you provide an example of a large company?

Answer 35

There are approximately 4.6 million registered companies in the UK, with a total annual turnover exceeding £4.1 trillion. An example of a large company is Shell, a British-Dutch oil and gas company, worth £176 billion.

Question 36

What economic activities can businesses run as companies engage in?

Answer 36

Businesses run as companies are involved in diverse economic activities, from manufacturing and online dating services to banking, insurance, cheeseburger sales, app development, and running retirement homes

Question 37

When were law firms first allowed to become companies, and what legislation enabled this?

Answer 37

Under the Legal Services Act 2007 (known as the ‘Tesco Law’), law firms were allowed to become companies. This provision came into force in October 2011, marking a significant change in the legal profession

Question 38

What is the most important effect of running a business through a company?

Answer 38

The most crucial effect is that a company has a separate legal personality, distinct from its owners and those who run it on a day-to-day basis. It is recognised as a legal entity with its own rights and obligations

Question 39

Who makes decisions affecting a company’s business, and what is the division of responsibilities?

Answer 39

Decisions affecting a company are made either by its directors or shareholders. Directors run the company daily, while shareholders, also known as members, are owners who typically participate in more significant decisions. This division creates a formal structure absent in sole traders or partnerships.

Question 40

How is a company usually formed under the Companies Act 2006, and what is the registration process?

Answer 40

A company is formed by filing documents with the Registrar of Companies at Companies House and paying a fee (currently £40 for paper, £12 for electronic submission, or £10 using Companies House software). The registration is typically done electronically, and a certificate of incorporation is issued once the process is complete.

Question 41

What tax is specific to companies, and who ultimately shares in the company’s profits?

Answer 41

Companies are subject to corporation tax, unlike sole traders and partnerships. The members (shareholders) are the ones who share in the profits made by the company. Companies must register with HMRC for corporation tax purposes and usually as employers for PAYE and National Insurance.

Question 42

What is an unlimited company, and how is it defined under the Companies Act 2006 (CA 2006)?

Answer 42

An unlimited company, as defined in s 3(4) of the CA 2006, is a company with no limit on the liability of its members (owners). If owners choose to operate through an unlimited company, they may need to use both the company’s assets and their personal assets to settle the company’s debts, similar to the principles observed in sole traders and partnerships

Question 43

How common are unlimited companies in practice, and can you provide an example?

Answer 43

Unlimited companies are rare, with approximately 11,000 in existence. An example was Land Rover, a car manufacturer, which was a private unlimited company until 2013 when it was owned by the Indian conglomerate Tata. Notably, the financial details of unlimited companies do not have to be made public

Question 44

What advantage might an unlimited company offer, and why are they not commonly chosen?

Answer 44

An advantage of an unlimited company is that its finances do not have to be made public. However, entrepreneurs typically opt for sole trader or partnership structures if they wish to assume unlimited liability for the business’s debts. As a result, the study book does not specifically delve into unlimited companies further.

Question 45

Where can additional information on unlimited companies be obtained?

Answer 45

Further information on unlimited companies can be obtained from the Companies House website: www.gov.uk/government/organisations/companies-house.

Question 46

What is a limited company, and how is the liability of its members defined under the Companies Act 2006 (CA 2006)?

Answer 46

A limited company, as defined in CA 2006, s 3(1), is a company in which the liability of its members (owners) is limited by its constitution. The constitution outlines the rules governing the company’s operation and allows owners to limit their liability for the company’s debts.

Question 47

Why is limiting liability for the debts of a company considered a significant advantage?

Answer 47

Limiting liability is crucial because it protects owners from personal financial responsibility for the company’s debts. Comparing two toy businesses, one run as a partnership and the other as a limited company, demonstrates the potential advantage. Partners in a partnership face unlimited liability, while members of a limited company have liability limited to their agreed share value.

Question 48

Why is the concept of limiting liability through a limited company popular in the business world?

Answer 48

The ability for owners to limit their liability for business debts by using a limited company is a significant advantage, explaining its popularity in the business world. Virtually all companies are run as limited companies due to the protection it offers to owners

Question 49

What are the two ways in which a limited company may limit the liability of its members, and what is the legal basis for this?

Answer 49

A limited company may limit the liability of its members in two ways: (a) by shares, and (b) by guarantee (CA 2006, s 3(1))

Question 50

Which type of limited company is less common, and for what purposes is it typically used?

Answer 50

A company limited by guarantee is less common, with approximately 130,000 in existence. It is usually employed by organizations not seeking profit, such as charities, members’ clubs, professional societies, and property management companies.

Question 51

Provide examples of companies limited by guarantee

Answer 51

Examples of companies limited by guarantee include Bupa (healthcare), Network Rail (railway infrastructure), and Oxfam (charity). These companies guarantee a specified sum to creditors in the event of winding up, limiting members’ liability to that sum, typically £1

Question 52

What advantage does a company limited by guarantee offer to non-profit organisations?

Answer 52

A company limited by guarantee is useful for non-profit organizations as it allows them to limit members’ liability without requiring substantial contributions. This type of company also facilitates easier changes in ownership compared to a company limited by shares

Question 53

Which type of limited company is the most usual form, and what are the two forms it takes?

Answer 53

The most common form is a company limited by shares. It takes two forms: a private company limited by shares and a public company limited by shares. The book predominantly deals with companies limited by shares.

Question 54

What is the most common type of company, and can you provide an example of a notable private limited company?

Answer 54

The most common type of company is a private limited company. An example is Iceland Foods Ltd, which owns the supermarket chain Iceland, with an annual turnover of £3.5 billion and over 30,000 staff.

Question 55

How is a private limited company defined under the Companies Act 2006 (CA 2006), and what restrictions exist on raising money for such a company?

Answer 55

A private company is defined by s 4(1) of the CA 2006 as any company that is not a public company. Private limited companies can raise money only from a restricted circle of owner-investors and are prohibited from raising money from the public by issuing securities. They are identifiable by the use of ‘limited’ or ‘ltd’ in their names.

Question 56

What is the definition of a public company under the CA 2006, and how does it differ from a private company?

Answer 56

A public company is defined by s 4(2) of the CA 2006 and can raise money from the public. It is distinguishable by the inclusion of ‘public limited company’ or ‘plc’ in its name. Public companies have approximately 5,800 in existence in the UK, including large companies like BP and HSBC

Question 57

What is the significant advantage of being a public company, and what obligations does it come with?

Answer 57

The main advantage is the ability to raise money from the public. To achieve public company status, the constitution must state it is public, the name must include ‘public limited company’ or ‘plc’, and a minimum investment by owners is required. Publicly-traded companies may apply to join a stock market, subjecting them to additional regulations.

Question 58

What is the purpose of the Main Market, and how does a company join it?

Answer 58

The Main Market is the principal stock market for publicly-traded companies, involving significant regulations. Companies like Vodafone and Tesco have joined. A process called ‘flotation’ or ‘IPO’ is required, and listed companies must comply with ongoing requirements, making them known as ‘listed companies’.

Question 59

What is AIM, and how does it differ from the Main Market?

Answer 59

AIM (Alternative Investment Market) is the London Stock Exchange’s alternative market for smaller, ambitious public companies. It is a separate market from the Main Market, with approximately 640 UK companies quoted on AIM. It targets growth and is subject to the AIM Rules, offering flexibility compared to the Main Market

Question 60

What are some legal differences between public and private companies under the Companies Act 2006 (CA 2006)?

Answer 60

Legal differences include restrictions on a private company offering shares to the public (s 755 of CA 2006), the requirement of at least two directors for a public company (s 154 of CA 2006), and generally, private companies are less regulated than public ones, especially if they do not seek public investment.

Question 61

What provisions in the CA 2006 apply specifically to publicly-traded companies, and how does the regulation differ for unlisted public companies and those listed on the Main Market or AIM?

Answer 61

Provisions in the CA 2006 apply differently to publicly-traded companies and unlisted public companies. Unlisted public companies are less regulated since they haven’t joined a stock market. Regulations vary between companies listed on the Main Market and those on AIM, with the former being more tightly regulated to protect public investors

Question 62

What practical differences exist between private and public companies in terms of ownership and management?

Answer 62

In private companies, a single shareholder can manage the business as a single director. In public companies, there are often more shareholders and directors. Publicly-traded public companies, like BT plc, listed on the London Stock Exchange’s Main Market, may have many shareholders (e.g., BT has around 780,000) and multiple directors (e.g., BT has 11), illustrating increased complexity in governance.

Question 63

What is a Community Interest Company (CIC), and what makes it different from other types of companies?

Answer 63

A CIC is a limited liability company formed for businesses aiming to use profits and assets for public good rather than private profit. Approximately 26,000 CICs exist, exemplified by Dizzy CIC, Madlug CIC, and Gaydio CIC. Governed by the Companies (Audit, Investigations and Community Enterprise) Act 2004, it must meet a community interest test throughout its existence.

Question 64

What is a Charitable Incorporated Organisation (CIO), and how does it differ from other charitable entities?

Answer 64

Introduced by the Charities Act 2006, a CIO is designed for charities, offering a corporate structure without dual regulation. With approximately 28,500 CIOs in existence, it is regulated solely by the Charities Commission, avoiding obligations under company law. Existing charities can convert to CIOs, reducing personal liability risk.

Question 65

What is a UK Societas, and why was it introduced?

Answer 65

The UK Societas is a temporary corporate form introduced due to Brexit. About 25 UK Societates were converted from UK-registered European public companies (Societas Europaea). Intended as a transitional form, there is no set deadline for its transformation, and it cannot be established anew.

Question 66

What is the process for a foreign company to operate in the UK under the UK establishment by overseas company method?

Answer 66

Overseas companies establishing a physical presence in the UK must register details under the Overseas Companies Regulations 2009. Approximately 13,500 companies have a UK establishment, and registration involves submitting the OSIN01 form, company documents, and fees (£20 normal, £100 same-day service).

Question 67

What are Company formed by special Act of Parliament and Company formed by royal charter, and why are they rare?

Answer 67

Historically, these methods were used to establish trading companies, especially for railways and utilities. Only 41 companies formed by special Act of Parliament still exist, while about 850 companies formed by royal charter remain. However, such methods are rare today due to the simplicity and efficiency of registration under the CA 2006.

Question 68

What is a Limited Liability Partnership (LLP), and how does it combine features of a partnership and a limited company?

Answer 68

An LLP, formed under the Limited Liability Partnerships Act 2000, is a business structure with a distinct legal personality, offering liability protection similar to a limited company. It combines the informality and flexibility of a partnership with owners taxed as in a partnership. There are approximately 52,000 LLPs in the UK, often chosen by professional firms. Examples include DLA Piper International LLP and Allen & Overy LLP.

Question 69

Who can form a Limited Liability Partnership, and what is the process for its formation?

Answer 69

LLPs can only be formed by two or more members engaged in a lawful business for profit. Individual and non-profit organization formation is not allowed. Formation involves submitting documents to the Registrar of Companies at Companies House with a fee (£40 in paper, £10 electronically, or £100 for same-day registration). Once registered, an LLP legally exists on the incorporation date

Question 70

How are individual members of an LLP treated for tax purposes, and where can further details on LLPs be found?

Answer 70

Individual members of an LLP must register with HMRC as self-employed. Chapter 18 provides additional information on LLPs, and details on their taxation are available in Section 25.6. It’s crucial not to confuse LLPs with ‘limited partnerships’ (LP) governed by the Limited Partnerships Act 1907.

Question 71

What is UKEIG, and why does it exist after Brexit?

Answer 71

UKEIG is something new that came after the UK left the EU. Before, there was a similar thing called EEIG for UK businesses in the EU. EEIG helped businesses from different countries work together without aiming for profits. About 280 EEIGs in the UK turned into UKEIGs because of changes in rules. UKEIGs are temporary, and there’s no rush to pick a permanent way to do things. Right now, you can’t start a UKEIG from scratch

Question 72

Why were EEIGs used, and how are they different from making money ventures like joint ventures or mergers?

Answer 72

EEIGs were used to help businesses in different EU countries team up and do things together. Unlike businesses focused on making money, EEIGs were only for non-profit goals. After Brexit, they became UKEIGs, keeping the collaborative spirit but adjusting to new rules.

Question 73

How many EEIGs were in the UK before Brexit, and what changed them into UKEIGs?

Answer 73

Before Brexit, around 280 EEIGs were based in the UK. New rules, called the European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018, made these EEIGs become UKEIGs. UKEIGs are like a temporary solution, and there’s no hurry to choose a permanent way. Right now, starting a UKEIG from scratch isn’t possible.

Question 74

What factors determine whether an entrepreneur can set up a specific type of business?

Answer 74

Partnership and LLP Ownership:
Partnerships and LLPs require at least two owners.
Sole traders or limited companies are suitable for sole business owners.
Public Company Director Requirement:
Public companies must have at least two directors.
Restrictions on Involvement:
Age Restriction: Individuals under 16 cannot usually be directors under s 157 of the CA 2006.
Disqualifications: Undischarged bankrupts or those disqualified under the CDDA 1986 cannot be directors.
Impact on Business Establishment:
Presence of disqualified individuals makes establishing any business challenging.
Unlikely appeal to potential co-owners, investors, or banks due to legal and financial difficulties.

Question 75

Why might certain legal restrictions, such as those related to age or disqualifications, impact the choice of a limited company for an entrepreneur?

Answer 75

Age Restrictions:
Individuals under 16 cannot typically serve as directors, limiting options for forming a limited company.
Disqualifications:
Undischarged bankrupts or those disqualified under the CDDA 1986 are ineligible as directors.
Presence of disqualified individuals hinders the establishment of any business and deters potential co-owners, investors, or banks.

Question 76

How does the business structure impact an entrepreneur’s attitude to risk?

Answer 76

Unincorporated Forms (Sole Trader & Partnership):
Liability: Unlimited liability for business debts.
Risk: Personal assets at risk; potential bankruptcy.
Common Threats: Financial misfortune or litigation.

Question 77

What is the liability difference between unincorporated and incorporated business forms?

Answer 77

Incorporated Forms (Limited Company & LLP):
Liability: Separate legal personality; limited liability.
Risk: Owners’ liability limited to agreed amount at establishment.
Reality Check: Despite limited liability, personal guarantees are often sought.

Question 78

Why might banks seek personal guarantees despite limited liability?

Answer 78

Commercial Reality:
Nature of Banks: Commercial entities seeking protection.
Security Measures: Banks seek personal guarantees despite limited liability.
Commercial Evolution: New businesses need banks more than banks need them.

Question 79

What risks are associated with running a company in terms of director’s liability?

Answer 79

Director’s Personal Liability:
Imposition: Under CA 2006 if statutory duties not fulfilled.
Fines: For late filings, failure to maintain records.
Other Legislation Liability: e.g., Insolvency Act, Health and Safety Act, Bribery Act.
Regulatory Challenges:
Private Company: Requires at least one director.
Public Company: Requires at least two directors.
Ownership & Directorship Link: Directors often owners in new businesses.

Question 80

What benefits might an entrepreneur gain from limited liability in the long term?

Answer 80

Advantage of Limited Liability:
Long-Term Perspective: Limited liability beneficial as business thrives.
Commercial Evolution: Law firms transition to LLPs for reduced personal liability.
Risks in Commercial Evolution:
Regulatory Challenges: High regulation under CA 2006.
Personal Liability Risks: Directors personally liable for various breaches.
Transition to LLPs: Seen as a strategy to manage and reduce personal liability.

Question 81

What formalities are associated with the establishment of incorporated businesses?

Answer 81

Incorporated Businesses (Company & LLP):
Establishment Process: Registration involves application, fee payment, and legal document preparation.
Cost and Time Implications: Incurs cost and time delays compared to unincorporated businesses.
Partnership Agreement: Partnerships may record agreements in writing, incurring solicitors’ fees for certainty.

Question 82

What is the ongoing compliance difference between unincorporated and incorporated businesses?

Answer 82

Unincorporated Businesses:
After Establishment: No ongoing formal requirements, except tax obligations with HMRC.
Incorporated Businesses (Company & LLP):
Ongoing Compliance: Must comply with legal requirements based on size.
Documents and Accounts: Regular filing requirements with Companies House.
Administrative Burden: Represents administrative inconvenience and additional expense.
Professional Involvement: Professionals may need to prepare documents, incurring fees.

Question 83

How does the level of formality differ in decision-making for sole traders, partnerships, and LLPs compared to companies?

Answer 83

Decision-Making Formality:
Sole Trader & Partnership: Freedom to structure decision-making; may lead to slow decisions in large partnerships.
LLP: Similar freedom as a partnership in organizing decision-making.
Company (Under CA 2006 Rules):
Decision-Making Rules: Strict rules govern how decisions are undertaken.
Directors’ Role: Directors, often also owners, subject to personal liability for statutory duties

Question 84

How do the compliance requirements for limited liability partnerships (LLPs) compare to companies?

Answer 84

LLPs vs Companies Compliance:
LLPs: Must file certain documents and accounts, but generally fewer requirements than companies.
Companies: Higher compliance obligations under CA 2006, involving meetings, registers, and regular filing with Companies House.

Question 85

What are the public disclosure obligations for unincorporated businesses?

Answer 85

Unincorporated Businesses (Sole Trader & Partnership):
Generally not obligated to reveal operational details to the public.
Exception: Identity of partners and an address for service of documents.

Question 86

What are the legal obligations for incorporated businesses regarding public disclosure?

Answer 86

Incorporated Businesses (Company & LLP):
Must, by law, reveal specific information, including financial details.
Company’s Public Disclosure: Involves filing returns and documents with the Registrar of Companies.
Access to Information: Publicly available at Companies House, often online for a fee.

Question 87

How might an entrepreneur consider these disclosure obligations in choosing a business type?

Answer 87

Entrepreneur’s Consideration:
Privacy Concerns: Some entrepreneurs may prefer confidentiality about finances.
Example: Law firms might choose to stay as partnerships to avoid public disclosure

Question 88

What are the initial setup costs for a sole trader or partnership?

Answer 88

Sole Trader & Partnership:
Can be set up without any initial costs.
Partnerships might incur fees for drawing up a partnership agreement.

Question 89

What fees are associated with forming a company or an LLP?

Answer 89

Company & LLP:
Incur fees during the formation process.
Generally, these fees are relatively low.

Question 90

Are there ongoing administrative costs for running different types of businesses?

Answer 90

Ongoing Costs:
All Businesses:
Common costs such as premises, wages, supplies, etc.
Incorporated Businesses (LLPs & Companies):
Tend to have higher administrative costs due to compulsory regulations.
Companies may face extra burdens under the CA 2006.

Question 91

Which types of businesses avoid certain compliance costs?

Answer 91

Avoiding Compliance Costs:
Sole Trader & Partnership:
Escape some administrative costs associated with compliance.
No need for certain formalities after establishment, except tax requirements with HMRC.

Question 92

Why might the status or legal structure of a business matter?

Answer 92

Importance of Status:
Persons trading with the business may perceive a company as more substantial than a partnership or sole trader.
Companies undergo a registration process, make information public, and face greater regulation

Question 93

What advantage does a company or an LLP offer in terms of securing loans?

Answer 93

Securing Loans:
Company & LLP:
Offer an additional form of security known as a floating charge.
This security option is not available to a partnership or sole trader.

Question 94

How does the legal structure affect fundraising and potential investors?

Answer 94

Fundraising and Investors:
Company & LLP:
Generally have a wider pool of potential investors.
This broader investor base makes it potentially easier to raise funds for future expansion.

Question 95

Why might third parties and lenders prefer dealing with a company or an LLP?

Answer 95

Preference of Third Parties:
Third parties and lenders may be more willing to deal with a company (and possibly an LLP).
Perceived stability, registration process, and regulatory compliance contribute to this preference.