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Questions and Answers
Which business structure allows for a separation of personal liability from business risk?
Which business structure allows for a separation of personal liability from business risk?
When evaluating the organizational structure, which consideration is least relevant?
When evaluating the organizational structure, which consideration is least relevant?
What is a critical drawback of using loans to raise capital for a business?
What is a critical drawback of using loans to raise capital for a business?
Which factor is least likely to influence the decision to establish a business structure?
Which factor is least likely to influence the decision to establish a business structure?
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Which statement best describes limited liability?
Which statement best describes limited liability?
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Why might confidentiality be a concern when raising capital for a business?
Why might confidentiality be a concern when raising capital for a business?
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What does limited liability imply for business owners?
What does limited liability imply for business owners?
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Which statement accurately describes partnerships?
Which statement accurately describes partnerships?
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What is a primary disadvantage of operating as a sole trader?
What is a primary disadvantage of operating as a sole trader?
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Which of the following is true about public companies?
Which of the following is true about public companies?
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Under the Companies Act 2006, which document is NOT required for company registration?
Under the Companies Act 2006, which document is NOT required for company registration?
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How is taxation typically structured for partnerships?
How is taxation typically structured for partnerships?
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What is a significant characteristic of a sole trader compared to other business structures?
What is a significant characteristic of a sole trader compared to other business structures?
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What is a common risk associated with partnerships?
What is a common risk associated with partnerships?
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What is a key factor making Keisha and Sion liable for each other's business actions?
What is a key factor making Keisha and Sion liable for each other's business actions?
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Which reason best demonstrates why £800 for one flower could be considered unreasonable in a business context?
Which reason best demonstrates why £800 for one flower could be considered unreasonable in a business context?
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What does limited liability imply for Keisha in the partnership with Sion?
What does limited liability imply for Keisha in the partnership with Sion?
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Which of the following describes why a company structure would be least suitable for Ali?
Which of the following describes why a company structure would be least suitable for Ali?
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What aspect of Ali's financial situation makes a partnership a potentially better choice than a company structure?
What aspect of Ali's financial situation makes a partnership a potentially better choice than a company structure?
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Why might Sion be responsible for Keisha's business decisions?
Why might Sion be responsible for Keisha's business decisions?
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What is a primary difference in the capital requirements between public and private companies?
What is a primary difference in the capital requirements between public and private companies?
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What factor significantly increases the regulatory burden on public companies compared to private companies?
What factor significantly increases the regulatory burden on public companies compared to private companies?
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Which of the following statements accurately reflects a characteristic of private companies?
Which of the following statements accurately reflects a characteristic of private companies?
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What is a major disadvantage of being structured as a public company?
What is a major disadvantage of being structured as a public company?
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Which scenario best illustrates a limitation of shared ownership in a small private company?
Which scenario best illustrates a limitation of shared ownership in a small private company?
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How does the process of transferring shares differ between public and private companies?
How does the process of transferring shares differ between public and private companies?
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What is a key advantage of a company structure for raising capital?
What is a key advantage of a company structure for raising capital?
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What is the responsibility of directors in relation to company shareholders?
What is the responsibility of directors in relation to company shareholders?
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What is a common misconception about the tax responsibilities of a limited company?
What is a common misconception about the tax responsibilities of a limited company?
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What assets can a company own that provides a significant advantage in terms of growth?
What assets can a company own that provides a significant advantage in terms of growth?
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Study Notes
Business Structures
- Sole Proprietorship: One-person operation, no legal filings, personal liability for debts, no separation of personal and business assets. Easy to set up, no regulations, all profits/assets go to the owner, limited expansion.
- Partnership: Relationship between two or more people carrying on a business for profit (Partnership Act 1980). Established through agreement (oral or written), or implied by conduct; joint and several liability for debts; all partners are jointly liable for the actions of any single partner. Flexible organisation/structure, new partners can join/leave, potentially low set-up costs. Taxed as individuals based on income bracket.
- Limited Partnership: Partnership with limited liability protection.
- Corporation (Company): Separate legal entity with limited liability. More complex structure, regulated. Can raise capital through shares.
Factors for Comparing Business Structures
- Capital Raising: Ability to raise money; options include loans, investors, issuing shares (only corporations/companies can issue shares).
- Risk: Personal exposure to liability. Limited liability protects personal assets.
- Organisational Structure: Desired level of business control and management authority (managing the business versus someone else doing so).
- Taxation: Tax implications of different structures (sole traders and partnerships are taxed as individuals, Companies pay corporation tax).
- Set-up Ease and Costs: Complexity and legal requirements.
- Confidentiality: Protecting business information.
Risk Considerations
- Business Risk: Identifying potential risks.
- Liability: Determining who is responsible for business debts.
- Liability Reduction: Creating a separate legal entity (company) for limiting liability for personal assets.
Organisational Structure
- Business Management: Who will direct and run the business.
Raising Capital
- Funding Needs: Assessing capital requirements.
- Sources of Funding: Personal savings, loans, investors, issuing shares.
- Liability of Investors: Investor liability depends on the business structure.
- Loan Considerations: Repayment, asset risk, impact on future investment.
- Share Issue: Only companies can issue shares (to raise capital).
Set-up Costs
- Ease of Establishment: Procedures for setting up different business structures.
- Legal Requirements: Necessary legal documents and filings.
- Multiple Parties: If multiple parties need to agree or cooperate.
Confidentiality
- Confidential Information: Protecting sensitive business data.
Separate Legal Personality
- Company Name vs Owner Name: The company operates in its own name.
- Protection of Owner Assets: Person's assets aren't at risk.
- Property/Asset Ownership: The company owns its assets.
- Debt Ownership: The company holds its debt.
Limited Liability
- Investor Liability Limits: Investors are only liable for their investments.
Company Formation (detailed)
- Companies Act 2006: Regulates company formation.
- Required Documents: Constitution (articles of association, object clause), memorandum of association, application for registration.
- Registration Details: Company name, share capital, registered address, member details, and compliance declaration.
- One Member Requirement (now): Private and public companies can be formed with one member.
- Certificate of Incorporation: Issued upon submission of correct documents; the company comes into existence.
Public vs. Private Companies (comparing)
| Feature | Public Company (plc) | Private Company (ltd) |
|---|---|---|
| Share Capital Required | Yes, minimum £50,000 | No |
| Shareholder Liability | Limited | Limited |
| Share Offering | Public | Private |
| Stock Exchange Listing | Possible | No |
| Incorporation Suffix | plc | ltd |
| Regulatory Burden | Significantly Higher | Lower |
Private Companies (detailed)
- Membership Restrictions: Often restrict membership through articles of association (a document that outlines the company's rules).
- Pre-Emptive Rights: Members may have to offer shares to existing members before selling them to outsiders.
- Flexibility: Greater flexibility in governance/structure than public companies due to lower regulatory restrictions.
Small Private Companies (special consideration)
- Ownership/Control Alignment: Ownership and management are often linked (directors and shareholders are often the same people).
Public Companies (detailed)
- Capital Raising: Aim to raise capital through public share offerings.
- Prospectus Required: Must issue a prospectus (a formal document listing the company's details).
- Initial Capital: Substantial (£50,000 minimum).
- Share Transferability: Generally unrestricted unless otherwise specified.
- Listing Requirements (Stock Exchange): Public companies can list on stock exchanges, and are subject to additional regulations.
Running a Company
- Shareholder Control (General Meeting): Shareholders manage the company through general meetings.
- Director Appointment: Directors are elected by a majority of shareholders and manage day-to-day operations.
- Annual Reports: Directors file annual reports to shareholders.
- Auditing: Accounts must be audited.
Company Advantages
- Capital Raising: Easier for public companies due to public share sales.
- Limited Liability: Protection of members' assets.
- Longer Lifespan: Does not cease upon the death or transfer of ownership.
- Formal Structure: Explicit constitution outlines/defines the organisational and power structure.
Company Disadvantages
- Increased Regulations: More complex and extensive rules and regulations.
- Separation of Ownership and Control: Not ideal for smaller enterprises.
- Set-up/Operational Costs: Significantly higher startup costs due to legal/regulatory requirements.
Structuring Changes
- Transitions/Conversions Possible: A business can change its structure (e.g., from sole proprietorship to a company) as its needs evolve.
MCQ Answers (based on provided text)
- Sion & Keisha: a) Yes, because partners are jointly and severally liable.
- Ali: c) Company
- Business Structure comparison: b) Partnership (easy to set up, flexible, shared risk)
Corporate Personal & Limited Liability
- Separate Legal Entity: A business acts and holds assets independently of its owners (individuals involved in the company).
- Consequences of Separate Personality: Requires rules for agency, fiduciary duties, statutory obligations, and rights.
- Limited Liability consequence: A result of the separate personality of the company; individual shareholders are only liable to the amount they invested in the company.
- Distinction: Separate legal personality is a fundamental concept; limited liability is a consequence/result of separate legal personality
Lifting the Corporate Veil
- Exceptions to Limited Liability: Certain circumstances allowing courts to hold shareholders personally liable (e.g., fraud, abusing the separate legal personality).
- Concealment Principle: Court looks behind the company to identify the real players.
- Evasion Principle: Corporate structure used to avoid or defeat legal obligations. This principle allows courts to "pierce" the corporate veil in cases of fraudulent or evasive activity.
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Description
This quiz covers various types of business structures, including sole proprietorships, partnerships, limited partnerships, and corporations. Learn about their characteristics, advantages, and limitations. Test your knowledge on how these structures compare in terms of liability and capital raising.
