Chapter 1: Key Advantages and Disadvantages of the Various Business Mediums Flashcards
What is the ‘veil of incorporation’?
Incorporation makes a company a separate legal entity, and therefore it is the company itself that is responsible for any debts to creditors.
The shareholders’ liability is limited to their capital contribution -their shareholding.
What liability is there is a partnership?
Liability is joint and several.
A creditor can pursue all or any of the partners for the outstanding debt.
What is the downside of incorporation?
The benefit of limited liability comes with the requirement for tighter regulation + filing requirements on incorporation.
Companies and LLPs are required to register with Companies House + to comply with various filing requirements, including the need to file accounts + an annual confirmation statement.
Why does incorporation often require additional expense?
The company/LLP may need to hire a company secretary to assist with the filings and, in most cases, accountants to prepare and auditors to audit the annual accounts.
Why is setting up a sole trade or partnership quicker and less expensive?
Not required to comply with the same filing requirements.
Why might it be seen as an advantage for sole traders and general partnerships not having a statutory requirement to file accounts?
Can be seen as an advantage as it involves less publicity for the business.
How are sole traders + partners taxed?
By way of income tax - the sole trader and each of the partners’ total taxable income is taxed at the appropriate rate
How are companies taxed?
Pay corporation tax, and their shareholders pay income tax on any dividends received
How are LLPs taxed?
Akin to partnerships - their members are taxed for income tax rather than the LLP being liable for corporation tax like a company
Why will companies and LLPs find it easier to raise finance + potentially grow the business?
Because lenders tend to see these business entities as more secure from a lending perspective.
Companies and LLPs have the ability to grant floating charges over their assets, which sole traders + general partnerships do not.
What is a floating charge?
A charge over present and future assets that are to be retained in the business (e.g., inventory.)
Such a charge is useful to give a lender enhanced security over and above a fixed charge over immovable assets
What does the Partnership Act 1890 contain? How does this affect how a partnership is run?
Contains provisions that deal with the management of a partnership, such as the partners’ power to bind the firm and partners’ liability.
However, the partners are largely free to dictate how the business should be run in a separate partnership agreement, so have a large degree of flexibility
What does the Companies Act 2006 provide re ownership + management of a company?
Private company must have at least 1 director (2 if public).
Imposes strict statutory duties on individuals that take on the role of director.
Other than statutory rules governing their role, what else are directors of a company subject to?
The provisions of the company’s articles of association, which is effectively the company’s internal constitution.
The articles usually contain provisions governing such things as when and how board meetings should be held, and the appointment and termination of directors.
What is required for the formation of a sole trader?
No formalities.
Owner simply operates the business
What is required for the formation of a general partnership?
No formalities
Can be formed by verbal or written agreement, or by conduct
What is required for formation of Limited Partnership?
File relevant documents at Companies House and receive a Certificate of Registration
What is required for the formation of a Limited Liability Partnership?
File relevant documents at Companies House and receive a Certificate of Registration
What is required for the formation of a Limited Company?
File relevant documents are Companies House and receive a Certificate of Registration
What liability does a sole trader have?
Unlimited personal liability for the obligations of the business
What liability does a partner in a general partnership have?
Unlimited personal liability for the obligations of the partnership, jointly and severally
What liability do owners of a limited partnership have?
General partner - unlimited personal liability
Limited partner - limited liability to their capital contribution
What liability do owners of an LLP have?
Partners generally not personally liable beyond their investment
What liability do owners of a limited company have?
Shareholders generally not personally liable beyond their investment
