WS16 Guide - Incorporation of an Unincorporated Business & Partnership PDF

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MCQ - ONLY KNOWLEDGE WORKSHOPS

BUSINESS LAW AND PRACTICE (KNOWLEDGE) Workshop 16 Guide Incorporation of an Unincorporated Business and Partnership

Context Incorporation Sole traders and partners sometimes convert to running their unincorporated business through the medium of a company. In part their motivation is often to obtain the benefit of the principles of limited liability and separate legal personality which you studied in Workshop 2. In this workshop, you will consider the broad range of factors which are relevant to an individual’s decision about whether to convert a partnership business into a company. The workshop concentrates on the following ways in which solicitors become involved in the conversion process, which solicitors usually refer to as ‘incorporating the unincorporated business’: 1. Incorporating a new company to be a suitable vehicle for the business, including arranging for the sole trader or partners to become directors; and 2. Arranging the purchase by the company of the unincorporated business, in exchange for allotting shares by way of payment for that purchase. Partnership In its simplest form, an ordinary or general partnership can be formed by two or more individuals running a business together, whether or not the terms of that arrangement are formalised. In practice, you may come across more complex partnership structures underpinned by detailed partnership agreements. You considered a basic partnership agreement in Workshop 1. The escalating size of transactions and investment projects frequently requires commitments on a scale beyond the resources of individuals or even individual companies. This has resulted in a rise in the use of corporate partnerships, limited liability partnerships (LLP) and limited partnerships (LP). Companies and investment funds may consider using any of these vehicles for seizing opportunities in a particular industry sector and/or market. Many of these structures also have the advantage of tax transparency meaning that, unlike companies, the vehicle itself is not liable to tax as a separate entity, with the result that the participating investors are only liable to tax (if at all) in their own right. Lawyers must be able to explain the different forms of partnership to their clients and advise which of them is the most appropriate to achieve the client’s commercial and tax planning objectives. They must also be able to explain how partnerships differ from companies, and the advantages of companies over partnerships and vice versa. Furthermore, when acting for a partner / member in a partnership, LLP or LP, you should be able to advise your client on the rights and obligations of the partnership and/or its respective partners / members. 1819_blp_ws16_ce01_guide

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Outcomes By the end of this workshop you should be able to: 1.

Advise on the procedural aspects of converting an unincorporated business into a business run through the medium of a private limited company.

2.

Explain the difference between a LP and a LLP.

3.

Identify the main features of a general partnership and a LLP and explain how these differ from and are similar to the features of a company.

Workshop Activities In this workshop you will: 1.

Plan the procedure for converting an unincorporated business into a business run through the medium of a private limited company.

2.

Consider alternative partnership structures to assist a client in achieving its commercial objectives.

3.

Identify the main features of a general partnership and a LLP and explain how these differ from and are similar to the features of a company.

Preparation 1. This workshop is largely consolidation. To prepare for this workshop you should: • • • • • • • • •

Review your notes from Workshops 1, 5 and 8-10. Re-read Chapter 1, paragraph 1.5 only. Read Chapter 30 of Business Law and Practice. Read or re-read Business Law and Practice Chapters 13-18 inclusive. Re-read ss177, 190, 191, 248, 355, 550, 551, 554, 555, 561, 565, 569 and 769 Companies Act 2006. Re-read Model Articles 14 & 15. Re-read ss9, 19, 24 and 28-30 Partnership Act 1890. Read ss1-2, 4, 5 and 6 Limited Liability Partnerships Act 2000. Read ss4, 5, 6, 7, 8, 8A, 8B, 8C, 13 and 16 Limited Partnerships Act 1907.

2.

Complete Preparatory Tasks 1 and 2.

3.

Watch the i-tutorials ‘Limited Partnerships’ and ‘Limited Liability Partnerships’.

4.

Complete Test and Feedback – Workshop 16 (Preparation).

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Materials required for the workshop Please bring with you to the Workshop: 1.

Your Business Law and Practice textbook and Business and Company Legislation Book.

2.

Your written answer to Preparatory Task 1 and your completed form IN01 from Preparatory Task 2.

Consolidation after workshop It is important that you consolidate your learning after the workshop. In particular, you must complete Test and Feedback – Workshop 16 (Consolidation).

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BUSINESS LAW AND PRACTICE (KNOWLEDGE) Workshop 16 Preparatory Task 1

Your supervisor, Phil Rice, has received the following email from Colin Hampden, Company Secretary to Mayson Limited (“Mayson”), a company which you first encountered in Workshop 1. Please read the email and answer Colin’s questions. You may find the attached grid useful for recording your answers. Limit your answers to questions a) to c) to the types of business medium covered by the grid. Date: [ ], 9:56am From: Colin Hampden To: Phil Rice Subject: Joint Venture ___________________________________________________________________ Dear Phil, Thank you for your advice on the commercial joint venture with Donaldson plc and Enrichment Limited. Given your advice, we would like to put the arrangements with Donaldson and Enrichment on a more formal footing. Please can you: (a)

Advise on the business structures which we could use.

(b)

Summarise the characteristics of each of these structures and the main differences between them.

(c)

Recommend the preferred structure (bearing in mind Mayson’s heavier involvement in the later stages of the project and its desire to continue being involved in the management of the project).

(d)

One of my colleagues mentioned limited partnerships. Are these the same as limited liability partnerships? I’ve heard of those but I’m not sure what they are or whether either would be appropriate here. Please can you make sure that you cover this in your advice. Similar to a general partnership. Two or more people in business but there needs to be at least one general partner with unlimited liability and then one partner who is limited.

Kind regards Colin

LPA 1907 Act - this partnership needs to be registered. general partnership does not have to be registered but a limited s. 5 + 8 Limited Partnership Act 1907 s. 4 Limited Partnership Act 1907

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Preparatory Task 1 Answer Grid Partnerships Owners (Who and how many?)

Limited Liability Partnerships

Partners (there nees to be 2 or more).

Must have 2 designated members. Must satsify the s. 1 defitnion

Must satisfy the s.1 defintion

Managers (Who and how many?)

At least 2 partners.

The members act as the managers. Similar to a partnership.

Can have “sleeping partners”

Must have at least 2. s. 24 (5) ‘may’ take par-take

Decision-making

Private Limited Companies Shareholders - just need one. s. 7 (1) CA 2006

The directors manage the company. Can just have 1 director (s. 154 (1) CA 2006)

Regulation 7 ss. 3 LLPR 2001

Default position - ordinary matters are just by simple majority of the partners. (Under the partnership act)

Members make the decisions. Ordinary decision - by simple majority of the members

s. 24 (8) Bringing in a new partners requires aninimity. (s. 24 (7)

Default positions - LLPR 2001 Regulation 7 (5) Reg. 7 (6)

Directors have the day-today management (M.A 3) Most decisions are a simple majority (M.A. 7) Shareholders get involved when changing articles and changing the name. Specific type of voting.

Changing the nature of the business. s. 24 (8)

Liability Who and for how much?

Unlimited

Limited to whatever the members puts in.

Personal assets of the partners are at stake.

Status - separate legal personality (s. 1 LLPA 2000)

Joint and several liability s. 9 PA. 1890 - Joint liability

Insolvency Act applies here.

s. 21 CLPA - several liability-

Ownership of property and other assets

Limited to shareholders.

Individual partners.

Separate legal person owns its own assets.

Text

Agreement.

Partnership agreement.

Articles of Association

If none then we have a default agreement under Partnership Act 1890

Absence - default regulations in the LLPR

No separate legal personality. para 14. 9 BLP textbook p. 267

Constitution (What is it?)

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Partnerships Accounts (Are they produced, audited, and published?) and publicity of information

Limited Liability Partnerships

Must be prodcued, audited and filed at the Comanies house.

Do not need to file and publish accounts.

Have to be produced and filed at Companies House

Will produce accounts to work out how much each partner gets.

Accounts need to be audited.

Peoples with significant position (who has control of the company)

Need to file an incorporation document.

Articles of Association are at the Companies House for the public to see.

The partnership agreement does not need to exposed to the public. It is just internal (entirely private)

Decisions need to be available for public inspection.

Every year updated information.

Accounts do not need to be audited but may employ an accountant to audit within the firm. Not a corporate body.

Security (What types can be granted?)

Private Limited Companies

Individual partners will offer secutiy.

Can offer ‘fixed’ and ‘floating’ charge.

Can offer a gurantee or a ‘FIXED CHARGE’

More attractive. Widens the capacity to get money in from outside.

Individuals cannot offer a ‘floating charge’.

Incorporation formalities

Fill out all the details LLIN01 FORM s. 2 (1) LLAP 2001

Shareholders agreement is the one thing that the Companies House does not need.

Company will still need valuable assets to act as security fpr any bank borrowing. However, the company can also offer floating charges, and raise mkoney by issuing shares.

IN01 Form Articles need to be incorporated. Statement of incorporation

Duties imposed on managers by law

Duties are ‘fiduciary’ duty.

Duties - members owe fidcuairy duty to the corperate body (principle)

Partners owe fiduciary duties to each other.

individuals - look at partnership agreement.

Duty to disclose information - s. 28 - 30 P.A 1890.

Fidicuary duty s. 172 - 178 s.174 not a fiduciary duty. This is common law.

On-going duties - file documents at Companies House. Can apply I.A. (insolvency type duties)

Termination

PA 1890

Reasonable notice does not dissolve the LLP because it is a corporate body (LLPA s. 4 (3))

Any partner can give notice. Insecure for a business.

Winding up provisions apply to an LLP (CA 2006)

Only needs to be written if there is a deed.

Solvent winding up Directors can decide to wind up the company. Compaines dormant for 3 months can apply to the registrar to have it dissolved.

Bankruptcy/death (See WS 1)

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BUSINESS LAW AND PRACTICE (KNOWLEDGE) Workshop 16 Preparatory Task 2

Introduction As a trainee solicitor in the Company and Commercial department of a firm, you are likely to be involved in the incorporation of an unincorporated business. This Preparatory Task, and the workshop, are intended to develop your understanding of some of the procedural and tax issues. Background You are a trainee solicitor in the Company and Commercial department of Ulaws LLP, 3 Victoria Street, Manchester, M1 2DL. Your supervising solicitor, Sheena Patel, has recently been instructed by Anna Jones and her sister Isabel Jones. The file reference is AJIJ001-001. Anna and Isabel run Chapter Two, a bookshop, as a partnership. Chapter Two is doing well. Anna and Isabel have a four-year lease of a unit on a light industrial estate to store stock. They have also taken on employees. They have instructed your supervisor to incorporate Chapter Two as a company limited by shares, to be called Chapter Two Books Limited (“C2B”). Another trainee has checked that the name Chapter Two Books Limited is available, and was about to fill in Companies House form IN01 (the form for registering a new company) when she was called away to another task. Sheena has asked you to complete the form. Please download the form from the Companies House website at https://www.gov.uk/government/publications/register-a-private-or-public-companyin01 and fill it in. You should either print it off or bring it with you to the workshop on a laptop. Registered office The company’s registered office will be at 7 Tabley Street, Cranford, Cheshire, WA60 0NP. The clients would like Companies House to send the certificate of incorporation and any other relevant documents to that address. First directors Anna and Isabel will be the company’s first directors. There will not be a company secretary. Memorandum of association Your fellow trainee has already drafted a memorandum of association and Anna and Isabel have signed it as subscribers. You have the signed memorandum in the clients’ file (not attached to this Task).

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Articles of association Your fellow trainee has already drafted the articles, which are the Model Articles except as amended to include the following special article: 2. Participation in directors’ decision-making process If a proposed decision of the directors is concerned with an actual or proposed transaction or arrangement with the Company in which a director is interested, that director is entitled to be counted as participating in the decision-making process for quorum and voting purposes notwithstanding his or her interest. Article 14 of the Model Articles shall be modified accordingly. The signed articles are also in the clients’ file. Proposed shareholdings The value of the Chapter Two partnership business is £55,000. Anna and Isabel will therefore be receiving the shareholdings below, as consideration for transferring ownership of the partnership business to the company. All the shares will be ordinary £1 shares, allotted at par value. They will become paid up at the moment when the transfer of the partnership business from Anna and Isabel to the company comes into effect. Anna and Isabel will automatically receive a single share each at the moment of incorporation. Once the company has been incorporated, the board will arrange for it to allot a further 34,999 shares to Anna, and a further 19,999 shares to Isabel. Clients’ personal details Anna Jones Home address: 3 Florence Road, Cranford, Cheshire, WA60 6PT. Service address: she will use the company’s registered office Date of birth: 10 January 1982 Nationality: British citizen Isabel Jones Home address: 5 Brancote Gardens, Cranford, Cheshire, WA60 2TT. Service address: she will use the company’s registered office Date of birth: 16 December 1984 Nationality: British citizen. Complete form IN01. You should sign the statement of compliance as agent for Anna and Isabel.

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BUSINESS LAW AND PRACTICE (KNOWLEDGE) Workshop 16 Workshop Task 1

Introduction This Task is a continuation of Preparatory Task 2. Assume for the purposes of this Task that Companies House has issued C2B’s certificate of incorporation. As a result, Anna and Isabel have automatically become the first directors of the company, and are the owners of a single ordinary £1 share each. Anna and Isabel have not yet transferred ownership of the Chapter Two partnership business to C2B, and C2B has not yet issued Anna’s outstanding 34,999 shares and Isabel’s outstanding 19,999 shares. Board meeting later today Anna and Isabel have validly called a board meeting for later today, to deal with the following items of business: 1.

Issuing the outstanding shares.

2.

The contract under which ownership of the Chapter Two business will transfer to C2B.

Other information . For the sake of simplicity, they will to pass any such resolutions in their capacity as shareholders, during a short adjournment from the board meeting. Issue 1 1.

Will C2B’s board need to obtain any shareholder resolutions in relation to issuing the outstanding shares to Anna and Isabel?

2.

Identify any shareholder resolutions which will be necessary in relation to the proposed purchase of the Chapter Two business from Anna and Isabel. For any resolution you identify: • •

State whether it will have to be an ordinary resolution or a special resolution; and Explain why it will be necessary, with reference to the facts.

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Note: consider carefully whether the transfer of the Chapter Two business to C2B will require approval under s.190 of the Companies Act 2006. On these facts, C2B’s ‘called-up share capital’ for the purposes of s.191 CA 2006 is the value of its current issued share capital. See s.547 for the full definition of ‘called-up share capital’. 3.

Produce a single, chronological list of the board resolution(s) and shareholder resolution(s) which will be necessary in relation to the items of business which the board meeting will be considering.

4.

Will Anna and Isabel be able to participate in the voting and quorum at the board meeting? Would it make any difference if C2B’s articles included Model Article 14 instead of special article 2?

5.

Will Anna and Isabel have to vote unanimously in order to pass any necessary shareholder resolution(s)?

Issue 2 Assume that later today all necessary board and shareholder resolution(s) are passed, and C2B enters into the contract to transfer ownership of the Chapter Two partnership business, and issues the outstanding shares to Anna and Isabel. List the documents which must be filed at Companies House as a result, and any information which must be updated in the company’s internal records. Include all relevant deadlines.