Forms of Business Organisation

Question 1

What are the primary factors to consider when choosing a legal form for business activity?

Answer 1

Consider the required inputs, risk levels, expected returns, and consequences of incorporation.

Question 2

What are the advantages of operating as a sole trader?

Answer 2

• No legal filing requirements
• Simplicity and privacy
• Full control over the business
• Ability to trade under a chosen name

Question 3

Why is unlimited liability a disadvantage for sole traders?

Answer 3

Sole traders are personally liable for business debts, meaning personal assets can be seized if the business collapses.

Question 4

How does the Partnership Act 1890 define a partnership?

Answer 4

A partnership exists when two or more people agree to carry on a business in common for profit (Section 1, Partnership Act 1890).

Question 5

What is the difference between property ownership in partnerships and companies?

Answer 5

Partnerships cannot own property; legal title is usually held in trust for the partners, whereas companies can own property as legal entities.

Question 6

What does ‘entity shielding’ mean in the context of partnerships?

Answer 6

Entity shielding protects partnership assets from personal creditors of partners, but this is weaker compared to corporate limited liability.

Question 7

How does a limited partner differ from a general partner in a limited partnership?

Answer 7

A limited partner contributes capital and has no personal liability beyond that amount but cannot participate in management.

Question 8

What are the main advantages of a Limited Liability Partnership (LLP)?

Answer 8

• Separate legal personality
• Limited liability for members
• Organizational flexibility akin to partnerships
• Privacy in member agreements

Question 9

What case clarified the liability of LLP members for the actions of others in the partnership?

Answer 9

Dixon Coles and Gill (2021) clarified that innocent LLP members are not liable for misdeeds they were not party to.

Question 10

What was the significance of Salomon v Salomon [1897]?

Answer 10

It established that a company is a separate legal entity, distinct from its members.

Question 11

What distinguishes public companies from private companies in the UK?

Answer 11

• Public companies can offer shares to the public, while private companies cannot
• Public companies must use ‘plc’ in their name and have a minimum of two directors
• Private companies are the default under the Companies Act 2006 unless specified otherwise

Question 12

What is the primary disadvantage of limited companies in terms of administrative burden?

Answer 12

They must comply with formalities such as registration and filing requirements, which can be time-consuming and costly.

Question 13

What are the five core attributes of a company as defined in the lecture?

Answer 13

• Legal personality
• Limited liability
• Transferable shares
• Delegated management with a board structure
• Investor ownership

Question 14

Why is limited liability important for encouraging investment?

Answer 14

It limits investors’ risk to their contributions, encouraging participation without fear of personal asset loss.

Question 15

What is the goal of company law according to the lecture?

Answer 15

To provide a legal framework for businesses with key attributes (e.g., limited liability) while reducing transaction costs and agency conflicts.

Question 16

Why is the perpetuity of business a disadvantage for sole traders?

Answer 16

The business ceases to exist upon the death or abandonment of the sole trader.

Question 17

Why are partnerships considered ‘unincorporated associations’?

Answer 17

They are not separate legal entities distinct from the partners, and liabilities rest with the individual partners.

Question 18

What happens to partnership contracts that appear to be made with the partnership itself?

Answer 18

They are, in fact, contracts with the individual partners, as partnerships cannot enter into contracts themselves.

Question 19

What is the significance of the capital and profit-sharing rule in the Partnership Act 1890?

Answer 19

It sets default provisions for sharing profits and managing the partnership, though these are often overridden by agreements.

Question 20

How does the absence of a 20-partner limit impact partnerships today?

Answer 20

It allows partnerships, such as those formed by solicitors and accountants, to grow into large multinational associations.

Question 21

Why have limited partnerships been popular with private equity firms?

Answer 21

They allow limited partners to invest without liability beyond their contributions, while general partners manage the business.

Question 22

What reform introduced transparency measures for limited partnerships?

Answer 22

The Economic Crime and Corporate Transparency Act 2023 requires disclosure of partners’ details, such as names and addresses.

Question 23

What is a Private Fund Limited Partnership (PFLP)?

Answer 23

A subcategory of LPs introduced in 2017, designed to reduce administrative burdens on private funds using LP structures.

Question 24

What is the main limitation for limited partners in a limited partnership?

Answer 24

They are prohibited from participating in the management of the business.

Question 25

How does the concept of 'tax transparency' apply to LLPs?

Answer 25

The profits of the LLP are taxed as if they were earned directly by the members, not the LLP itself.

Question 26

Can LLP members avoid personal liability entirely?

Answer 26

Not always; members may still be liable for misfeasance, clawback provisions under the Insolvency Act, or by agreement.

Question 27

How does an LLP compare to a company in terms of floating charges?

Answer 27

LLPs, like companies, can create floating charges over their assets.

Question 28

What filing and disclosure requirements apply to LLPs?

Answer 28

LLPs have the same accounting and filing obligations as companies but benefit from confidentiality in their member agreements.

Question 29

What is the primary distinction between companies limited by shares and companies limited by guarantee?

Answer 29

Companies limited by shares are designed for profit-making activities, while those limited by guarantee are often used for not-for-profits.

Question 30

What flexibility do companies limited by guarantee provide regarding membership?

Answer 30

Members can join or leave easily, similar to a club or society.

Question 31

Why is raising finance challenging for companies limited by guarantee?

Answer 31

They lack share capital and rely on limited contributions from members in the event of liquidation.

Question 32

What advantage do companies limited by guarantee have for not-for-profit organizations?

Answer 32

They allow for easy management and reduced liability while meeting the needs of non-commercial objectives.

Question 33

Why might some businesses opt for an unlimited company despite the risk of insolvency?

Answer 33

Unlimited companies are not required to file accounts with the registrar, offering a higher degree of privacy.

Question 34

What is the minimum share capital requirement for a public limited company (PLC)?

Answer 34

t must have at least two shareholders and directors; 25% of its shares must have been issued to the public, amounting to a minimum share capital of at least £50,000 Public limited companies must meet an authorized minimum share capital as specified by the Companies Act 2006.

Question 35

How does the Companies Act 2006 define private and public companies?

Answer 35

* Private company: Any company not classified as a public company (Section 4(1)) * Public company: A company whose certificate of incorporation explicitly states it is public (Section 4(2))

Question 36

Can a public company exist without being listed on a stock exchange?

Answer 36

Yes, public companies do not need to be listed to qualify as a public company.

Question 37

What is Richard Posner's argument regarding limited liability?

Answer 37

Limited liability encourages investment by reducing investors' risk of loss to their contributions, increasing the supply of investment.

Question 38

How does the corporate form address the non-perpetuity of unincorporated businesses?

Answer 38

Companies allow for perpetual succession, enabling the business to continue regardless of changes in ownership or management.

Question 39

What is the 'cost of limited liability' for companies?

Answer 39

Companies face an administrative burden, including filing with the registrar and adhering to regulatory requirements.

Question 40

Why might banks require personal guarantees despite limited liability?

Answer 40

Banks often insist on personal guarantees for loans, negating the limited liability benefit for small company directors.

Question 41

What is affirmative asset partitioning in corporate law?

Answer 41

It allows companies to separate the firm’s assets from personal assets, protecting the business from personal creditor claims.

Question 42

How do transferable shares benefit a company?

Answer 42

They enhance liquidity, enabling ownership changes without disrupting business operations.

Question 43

What is the role of a board of directors in a company?

Answer 43

The board centralizes management, coordinates productive activity, and makes fundamental decisions separate from day-to-day operations.

Question 44

What conflicts does company law aim to address?

Answer 44

It seeks to manage conflicts between managers and shareholders, among shareholders, and between shareholders and other corporate constituents.