Summary Business Law Notes - SQE2

REVISION NOTES – BUSINESS they have spent on the business.

These types of partnerships must be registered at
BUSINESS ORGANISATIONS, RULES AND PROCEDURES Companies House.

BUSINESS AND ORGANISATIONAL CHARACTERISTICS Limited Liability Partnership
(SOLE TRADER / PARTNERSHIP / LLP / PRIVATE AND An LLP is a hybrid as it has flexibility of a partnership with
UNLISTED PUBLIC COMPANIES) added advantage of limited liability for its members – law
firms often LLPs.
Sole trader
A person who owns all the assets in the business. The Limited Liability Partnerships Act 2000: governs LLPs.
business is not a separate entity from its owner so sole
trader business cannot run if sole trader dies. Sole trader An LLP is a separate legal entity from its members. BUT for
liable for all business losses and will make all the decisions tax reasons it is treated as a partnership and the members
in relation to the business. will be taxed as partners, each being liable to pay tax on his
share of the income of the LLP.
Key Characteristics:
- Number of persons needed to set up: 1 person. The members of the LLP are not personally liable and their
Cannot be any more or less. liability will be limited to their investment as like with
- Control and management: Sole traders have companies.
complete control over running of business. This gives
sole traders flexibility but pressure if working without These types of partnerships must be registered at
support. Companies House.
- Liability: not limited. Unlimited personal liability.
- Expenses when setting up: No formalities so no Key Characteristics:
setting up costs. - Number of persons needed to set up: Min. 2
- On-going expenses after business has been set - Expenses when setting up: Low costs but must pay
up: None, but sometimes accountant used for account legal fees for Partnership Agreement.
keeping. - On-going expenses after business is set up:
- Methods of financing: Sole trader can borrow from Accounts must be prepared by accountants annually.
bank but can’t create floating charges or raise finance File a Confirmation Statement minimum once a year.
by share issue. Higher costs due to regulation and disclosure rules.
- Profits: All go to owner - Management structure of business: Apart from
- Tax: Owner pays tax as individual (income tax + CGT) few default provisions, the LLPA and regulations leave
- May trade immediately? Yes matters of governance to partnership agreement – if
one exists. Pros of an LLP is few formalities for
management procedures.
General Partnership - Methods of financing: LLPs can borrow and create
s.1(1) Partnership Act 1890: Partnership = persons floating charges. If any financing is underwritten by
carrying on business with a view of profit. It is based on an member’s personal
agreement between the parties. May form a partnership
irrespective of contrary intention.
Company Limited by Shares
No separate legal identity. The partnership is unable to A company has a separate legal identity from that of its
own property or enter into contracts. It is the individual owners. Company can therefore own property, enter into
partners who will sue, own property jointly, and enter into contracts and be sued in own name. The owners of shares
contracts jointly. If goes insolvent, creditors can enforce in company are known as shareholders or members.
debt against partners personally.
Companies must be registered at Companies House.
Key Characteristics:
- Number of persons needed to set up: Min. 2 Key Characteristics:
- Expenses when setting up: None, but beneficial - Number of persons needed for set up: Min 1.
to have Partnership Agreement drawn up which will - Expenses when setting up: Higher set up costs as
come at cost. there will be legal costs incurred in dealing with the
- On-going expenses: None necessary but must company’s constitutional documents etc., as well as
pay for accountants. incorporation fees due to Companies House.
- Management structure of business: If - On-going expenses after the business is set up:
Partnership Agreement in place, in accordance with Accounts must be prepared by accountants annually.
that. If no agreement default provisions of PA 1890 High on-going administrative costs because of the
apply. greater regulation and disclosure rules.
- Methods of financing: Partners can borrow but - Management structure of business: Meetings of
can’t create floating charges. They can’t raise the directors and shareholders held in accordance with
money from issuing shares. the Companies Act 2006 and the company’s articles.
- Liability: Each partner has unlimited personal - Methods of financing: Company can borrow &
liability. create floating charges. If members give personal
- Publicity: Fewer requirements than for other guarantees, limited liability lost. Can raise finance by
options, easier to maintain privacy. No disclosure issuing shares.
required. - Liability to third parties: Shareholders’ liability to
- May trade immediately? Yes. third parties is limited to the amount paid on shares.
- Publicity: No privacy. Onerous disclosure
Limited Partnership requirements.
Limited Partnerships Act 1907: governs limited
partnerships.

Two types of partners in these – need 1 of each:
1. General partners: manage the business and
have unlimited liability. These partners will be ones
entering into contracts on behalf of partnership.
2. Limited partners: invests capital in the business
and has limited liability. Liability limited to amount
1

,LEGAL PERSONALITY AND LIMITED
Company becomes a legal entity from date of
LIABILITY incorporation

COMPANY ADVANTAGES
A company is a separate legal entity from its shareholders - Traditionally slower but with online incorporation
and directors (s.16 CA 2006). It can: services difference in speed negligible, BUT
 Own property incorporation can only take place during Companies
 Sue and be sued in its own name House opening hours.
 Enter into contracts - Easier to prepare tailor made articles,

Limited liability means members are only liable up to: SHELF COMPANY ROUTE
 The amount unpaid on their shares (if limited by A shelf company has already been set up in advance by
shares), or another company / law firm ready to tailor it to client’s
 The amount they guarantee (if limited by guarantee). requirements. Used to speed up incorporation.

PARTNERSHIP When client requests a new company, change the
A general partnership under the Partnership Act 1890 is following via shareholder resolutions:
not a separate legal person. - Articles – s.21(1) CA 2006
- Members, directors and company secretary
Partners are: - Shares held by subscribers are to be transferred to client
 Jointly liable for partnership debts - Client’s representatives are appointed as directors
 Jointly and severally liable for torts committed in - The first directors assign
the course of business - Registered office.

LLP (LIMITED LIABILITY PARTNERSHIP) ADVANTAGES: Available all year round vs incorporation
An LLP under the LLP Act 2000 is a separate legal person method which is only available during Companies House
from its members. opening hours.

LLPs combine: COMPANY NAME: can’t be misleading, offensive,
 Flexibility of partnership structure suggest association with government, use sensitive
 Limited liability for members works, must end with LTD or limited.
 Tax transparency (members taxed individually)
CONSTITUTION

Company’s constitution = all of the following
(1) Memorandum of association
PROCEDURES AND DOCUMENTATION REQUIRED TO
(2) Articles of association
INCORPORATE A COMPANY
(3) Certificate of incorporation
(4) Current statement of capital
TWO METHODS FOR INCORPORATION:
(5) Shareholder resolutions and agreements
1. Incorporating a new company from scratch
(6) Court orders and legislation which affect the company’s
2. Purchasing an existing shelf company
constitution
INCORPORATION FROM SCRATCH
PROCEDURES AND DOCUMENTATION REQUIRED TO
Procedure:
FORM A PARTNERSHIP / LLP
STEP 1: Send to the Registrar of Companies at
PARTNERSHIP
Companies House:
Definition
1. The application form (Form IN01) with the relevant fee
s.1(1) PA 1890: A partnership is “the relation which subsists
2. Articles of association
between persons carrying on a business in common with a
- Model Articles apply automatically
view of profit.”
- Company may entrench articles: notify registrar
- A company may have modified articles.
Key Concepts
IN01 application form must contain :
 “Business” includes all trades/professions (s.45 PA
1890)
- Name of company
- Registered Office address  Can exist before trading begins
- Memorandum of association o Khan v Miah [2000] – partners preparing for
- A statement of capital setting out the following: business were held to be in partnership
1. Total number of shares for the subscribers o Christie Owen & Davies v Raobgle [2011] –
2. Aggregate nominal value of the shares court found partnership on acquisition of
3. Total number of shares in each class property for business
4. The amount to be paid up on each share  In common: participation in management is strong
5. Details of all subscribers evidence (s.24 PA 1890)
- Initial shareholdings + lost of directors and their  With a view of profit: a key requirement
addresses. o s.2(3): sharing profits = prima facie
- If company is limited by guarantee, details of the evidence of partnership
guarantee o NB: profit-sharing alone is not conclusive
- Statement of compliance.
(e.g., repayment of a loan)
TIME TAKEN TO PROCESS: Applications may take up to 5
Formation
days to process but can pay a higher fee for same day
incorporations.
 No formal registration required – partnership arises by
conduct
STEP 2: Once approved, company receives a certificate  Partnership agreement recommended but not
of incorporation which contains: mandatory:
1. Name of company o If absent, default rules in PA 1890 apply
2. Date of incorporation  Business Name Compliance (under the Business
3. Company’s registered number Names Act 1985):
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, o If not using partners’ surnames, must Once incorporated and issued a certificate of incorporation,
disclose: a company must:
 Business name and UK address on
letters/invoices a. Maintain Statutory Registers
 Principal place of business and  Register of Members
statement of partners available for  Register of Directors
inspection (for partnerships with  Register of Directors’ Residential Addresses
>20 partners)  Register of Secretaries (if appointed)
 Register of People with Significant Control (PSC
Types Register)
 Partnership at will – no fixed term  Register of Charges (if created before 6 April 2013)
 Fixed term/project-based partnership – ends on
date/project completion These must be kept available for inspection (s.113–116
CA 2006), either at the registered office or a Single Alternative
Legal Personality & Property Inspection Location (SAIL).
 Partnership has no separate legal personality
 Cannot own property – assets are held by partners b. Issue Share Certificates
 s.20–21 PA 1890:  Must be issued to subscribers/shareholders within 2
o Property bought with partnership money = months of allotment/transfer (s.769 CA 2006).
partnership property
c. Accounting Records and Annual Requirements
o Assets credited to capital = partnership  Accounting Records: Must be kept from the date of
property incorporation (s.386 CA 2006).
o Assets acquired on account of the firm =  Annual Accounts and Reports must be filed with
partnership property Companies House (s.441 CA 2006).
 Ownership should be expressly clarified in the  Confirmation Statement (s.853A CA 2006): Must
partnership deed be filed annually confirming details of directors,
shareholders, PSCs, etc.
LIMITED LIABILITY PARTNERSHIPS (LLPs)
Overview d. Tax Registration
 Governed by the LLPA 2000 and the LLP  Register with HMRC for:
Regulations 2001 o Corporation Tax (within 3 months of
 Separate legal personality beginning business activity).
 Combines: o PAYE (if employing staff).
o Flexibility of partnerships
o VAT (if taxable turnover exceeds the
o Limited liability for members threshold).
o Tax treatment of partnerships
e. Open a Business Bank Account
LLP Agreement  Needed to operate commercially and receive
 Not legally required but strongly recommended capital/share subscriptions.
 If absent, default provisions of LLPR 2001 apply
f. Business Licences and Permits
Members and Authority  May be required depending on the business activity
 Members are agents of the LLP (s.6 LLPA 2000) (e.g. financial services, food handling).
o LLP may still be bound by an agent acting
without actual authority due to apparent PARTNERSHIPS
authority
While no formal registration is required under the Partnership
Types of Members Act 1890, partnerships should:
Designated Members
 Minimum of 2 required a. Draw Up a Partnership Agreement
 If not specified, all members are deemed designated  Strongly recommended to avoid default provisions of
members (s.8 LLPA 2000) PA 1890.
 Additional responsibilities:  Sets out capital contributions, profit sharing, dispute
o Signing and filing accounts resolution, exit procedures, etc.
o Appointing/removing auditors b. Business Name Compliance
o Filing confirmation statements  If not trading under partners’ names, comply with the
o Notifying Companies House of changes Business Names Act 1985:
o Applying for strike-off o Must include business name and address on
all documentation.
Ordinary Members
 Same ownership rights, but no extra compliance c. Register for Tax
duties  Inform HMRC of the existence of the partnership.
 Register for:
Employment Status of Members o Self-Assessment (for individual partners)
 LLP members are typically self-employed o VAT if applicable
 However, a member may be treated as an employee o PAYE if hiring employees
for tax purposes if:
o They meet the “salaried member” d. Open a Business Bank Account
conditions (e.g., under ITA 2007 / FA 2014)  Ideally in the partnership’s trading name.
OTHER STEPS REQUIRED UNDER COMPANIES AND e. Licences
PARTNERSHIPS LEGISLATION TO ENABLE THE ENTITY TO  Obtain any industry-specific licences or permits.
COMMENCE OPERATING:

COMPANIES (POST-INCORPORATION REQUIREMENTS)
LIMITED LIABILITY PARTNERSHIPS (LLPS)
(Post-Incorporation Requirements)
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, t of companies incorporation 2006
Once an LLP is registered with Companies House under the Guarante limited by (as part of
LLPA 2000, the following steps must be taken: e guarantee IN01)

a. Prepare an LLP Agreement Statemen Confirms that all On s.13 CA
 Advisable to set out rights and duties of members to t of legal incorporation 2006
avoid reliance on default provisions in the LLP Complian requirements (as part of
Regulations 2001. ce for IN01)
incorporation
b. Maintain Statutory Records are satisfied
 Keep registers similar to those of companies:
o Register of Members Registrati Must be a On s.86 CA
on of physical incorporation 2006
o PSC Register Registere address in the
o Minute Book of decisions d Office UK jurisdiction
Address of incorporation
c. Accounting and Reporting (England &
 LLPs must: Wales / Scotland
o Maintain accounting records (reg. 4 LLPR / NI)
2001).
o File annual accounts (reg. 8 LLPR 2001). Notificati Must include full On s.162–167
on of name, service incorporation CA 2006
o Submit confirmation statement (formerly Directors address,
annual return). and nationality,
Secretari occupation,
d. Register for Tax es DOB, and other
 Register with HMRC for: particulars
o Self-assessment for members
o VAT (if applicable) PSC Information Within 14 ss.790A–
o PAYE (if employees are hired) Register about days of 790Z CA
(People individuals with becoming a 2006
e. Open a Business Bank Account with significant PSC; notify
 Required for commercial operations. Significan control (e.g. CH within 14
t Control) >25% shares or days of
voting rights) update
f. Business Name and Licensing
 Comply with business name rules (LLP must appear in Issue of Share Within 2 s.769 CA
the name).
Share certificates months of 2006
 Obtain any required operational licences. Certificat must be issued share
es to subscribers allotment
COMPANIES HOUSE FILING REQUIREMENTS Register Must be Immediately s.113 CA
of maintained from upon 2006
DOCUME DESCRIPTION TIMING / RELEVAN Members incorporation incorporation
NT / DEADLINE T
ACTION PROVISIO Register Statutory From date of s.162,
N of registers must incorporation s.275 CA
Directors be maintained 2006
IN01 Application to On s.9–13 CA and internally
Form incorporate the incorporation 2006 Secretari
company; es
includes name,
registered Register Internal From s.790M CA
office, directors, of PSCs statutory incorporation 2006
shares, etc. register (in (must be
addition to filing kept up to
Memoran Signed by initial On s.8 CA PSC details at date)
dum of subscribers incorporation 2006 Companies
Associati stating their House)
on intention to
form the Confirmat Confirms First one due s.853A CA
company and ion accuracy of within 12 2006
take at least Statemen company months of
one share t information incorporation
(directors,
Articles Governing On s.18–20 CA shares, PSCs,
of document of the incorporation 2006 etc.)
Associati company – may
on adopt Model Accountin Normally auto- Can be s.391 CA
Articles or g assigned to the changed by 2006
submit Referenc last day of the filing AA01
customised e Date month of
articles (ARD) incorporation,
unless changed
Statemen Sets out share On s.10 CA
t of structure (for incorporation 2006 First Must be Within 21 s.441 CA
Capital companies (as part of Company prepared and months of 2006
limited by IN01) Accounts filed with incorporation
shares) Companies
House
Statemen Required for On s.11 CA

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