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Questions and Answers
Which of the following is NOT a reason why businesses raise finance?
Which of the following is NOT a reason why businesses raise finance?
What is one of the methods businesses can use to raise finance?
What is one of the methods businesses can use to raise finance?
Which business model involves the least complexity in terms of legal structure?
Which business model involves the least complexity in terms of legal structure?
What is one key consideration when forming a business?
What is one key consideration when forming a business?
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Regarding business financing, which option best describes 'retained profits'?
Regarding business financing, which option best describes 'retained profits'?
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What is a primary characteristic of a sole trader regarding liabilities?
What is a primary characteristic of a sole trader regarding liabilities?
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How does the business structure of a sole trader differ from other business forms?
How does the business structure of a sole trader differ from other business forms?
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Which of the following is true concerning privacy for a sole trader?
Which of the following is true concerning privacy for a sole trader?
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What is a financial aspect that sole traders do not face?
What is a financial aspect that sole traders do not face?
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Which statement accurately describes the contractual relationship of a sole trader?
Which statement accurately describes the contractual relationship of a sole trader?
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Study Notes
Raising Finance
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Businesses require finance for various reasons, including purchasing assets (premises, machinery, stock), employing staff, seeking professional advice, and expanding through acquisitions or investments.
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Four primary methods of raising finance include:
- Owner investments: Owners contribute capital to their business.
- Outside investors: External individuals or entities invest in the business for a share in future profits.
- Borrowing: Businesses secure loans from banks or other financial institutions.
- Retained profits: A portion of generated profits is kept within the business to support growth rather than being distributed to owners and investors.
Business Models
- Key considerations when forming a business include:
- Costs: Initial setup expenses for the chosen business model.
- Risk: Level of personal liability for the participants in the business.
- Structure: Organizational framework, flexibility, and clarity of the model.
- Formalities: Legal procedures required to operate the business, including flexibility in complying with these requirements.
- Privacy: Information about the business needing to be publicly disclosed.
- Finance: Methods of raising capital for the business.
Sole Trader - Key Characteristics
- No setup costs - businesses can operate immediately without formal procedures.
- No separate legal entity - the individual, not the business, enters contracts with third parties.
- Unlimited personal liability - all personal assets are potentially liable to be used to cover business debts.
- No formal structure - freedom for the sole trader to organize their business how they see fit.
- No Companies House filing or procedural requirements for business operations.
- Complete privacy - no need for public disclosure of business information.
Partnerships - Key Characteristics
- No setup costs - Partnerships can operate immediately without set-up formalities.
- All partners have unlimited personal liability - their personal assets are potentially liable for the business's debts.
- No formal structure - Flexibility for partners to organize the business based on chosen model.
- No Companies House filing or procedural requirements for business operations.
- Complete privacy - no need for public disclosure of business information.
Companies
- Companies are separate legal entities from their owners.
- Company law requires two constitutional documents for companies registered under the Companies Act of 2006: Articles of Association and Memorandum.
- A company's memorandum is a declaration that the first members of the company wish to form a company and agree to be members of that company.
Memorandum
- Under the Companies Act of 1985 (CA 1985), the memorandum was a company's constitutional document outlining restrictions and stating the company's purpose.
- Under CA 2006, companies have unrestricted objects unless these objects are specifically limited in the company's Articles.
- The ultra vires rule, which prevented companies from acting outside their stated purposes, is not applicable to companies incorporated under CA 2006 unless explicit restrictions are included in the company's Articles.
Articles of Association
- All companies must have Articles of Association (Articles).
- Articles are the main constitutional document of a company and regulate the relationship between shareholders, directors, and the company.
Subsidiaries
- A subsidiary company is controlled by another company (parent or holding company) that owns a majority of its shares.
- One company can be the subsidiary of another company without being wholly owned.
- A company can have multiple subsidiaries, and a subsidiary can also have its own subsidiary, forming a group structure.
Shares
- Shares represent ownership in a company and may carry different rights, including voting rights in shareholder meetings and entitlement to a share of profit or assets upon company winding up.
- Different classes of shares may carry different rights and entitlements, outlined in the company's Articles.
- The most common share type is the ordinary share, which generally grants voting rights and entitlement to a share of profits and surplus assets after liquidation.
Nominal or Par Value
- Shares in a limited company with share capital must have a fixed nominal value, representing a unit of ownership rather than the actual market value.
- The minimum subscription price for a share is its nominal value.
- Shares cannot be allotted at a discount to their nominal value but can be issued at a premium, which is the excess over their nominal value.
Issued, Paid-Up, and Called-Up Shares
- The total value (nominal and premium) of all shares issued at any time is the issued share capital.
- Paid-up share capital is the amount paid by shareholders for the shares.
- Called-up share capital refers to the outstanding amount that a company can demand from shareholders at any time.
Share Capital
- A company's issued share capital comprises:
- Subscriber shares: Shares purchased by the initial members of the company.
- Additional shares: Shares issued to new or existing shareholders after incorporation, which can be done at any time following the appropriate procedures.
- Allotment: The process of acquiring the unconditional right to be included in the company's register of members regarding shares.
- Issue: The act of making shares available for purchase.
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Description
This quiz covers essential methods of raising finance for businesses, including owner investments, outside investors, borrowing, and utilizing retained profits. Additionally, it explores key considerations when forming a business, such as costs, risks, and organizational structure.
