Intro To Business Law Flashcards
What are the four ways in which finance is raised?
- Capital contributions by owners
- Capital contributions by outside investors
- Borrowing
- Reinvesting profit
What happens if finance runs out?
If expenses exceed income then the business will make a loss.
A loss-making business can survive if it has sufficient finance to cover its expenses.
If finance completely runs out the business will be insolvent.
What are the main ways a business can be structured?
- Sole trader
- Partnership, limited partnership, limited liability partnership
- Company limited by shares or by guarantee
- Unlimited company
Sole trader
Legal status? Legislation? Liability?
The business has no separate legal entity.
No specific legislation.
Unlimited personal liability.
Partnership
Legal status? Legislation? Liability?
Partnerships have no separate legal identity. The individual partners must conduct actions in their own name.
Partnership Act 1890.
Unlimited personal liability on either a joint, or a joint and several basis.
Limited Partnerships.
Legal status? Legislation? Liability?
Limited partnerships have no separate legal personality.
Limited Partnerships Act 1907.
Limited partners have limited liability, and general partners have unlimited liability.
Limited Liability Partnership.
Legal status? Legislation? Liability?
The LLP is a separate legal entity. But for tax purposes is treated as a partnership.
Limited Liability Partnerships Act 2000.
Liability is limited to the amount (if any) that they have agreed to pay.
Company limited by shares.
Legal status? Legislation? Liability?
A company is a separate legal entity.
Companies Act 2006.
Shareholders’ liability is limited to the amount, if any, unpaid on their shares.
What factors influence the choice of business structure?
- Set up costs: formal procedures needed to set up a company and LLP.
- On-going costs: companies and LLPs are subject to a greater level of regulation.
- Liability on insolvency: the personal assets of sole traders and partners are at risk.
- Tradition: many types of business are traditionally operated as partnerships
- Raising finance: many lenders prefer to lend to a company as they are subject to a higher degree of regulation and disclosure. Companies and LLPs are also able to give more forms of security.
- Tax: a company pays corporation tax on its profit. The profits of partnerships are treated as profits of the individual partners, so are subject to income or capital gains tax
Why is it important that a lawyer understands the commercial world in which their clients operate?
Advice given by lawyers must take into account the commercial context, and consider how the client’s business operates and the risks it faces.
The lawyer must understand what the client is trying to achieve, spot any legal problems and provide solutions.
