Revision kit question

This topic has 6 replies, 2 voices, and was last updated 3 months ago by MikeLittle.

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March 28, 2022 at 12:55 pm #652109
Safiya.12345
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Part 1 Mick has operated a house building business as a sole trader for a number of years. The business in growina. and in recent times, Mick has Taken out a business loan to buy business assets. Mick is considering tendering for a couple of very large contracts that should earn the business substantial sums, but also Mcreases his potential liability if he is in breach of contract.

Now his accountant has recommended that he should consider registering as a company in order to gain the benefits of separate corporate personality.
March 28, 2022 at 12:57 pm #652110
Safiya.12345
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Identify which of the following are benefits to Mick of incorporating the business

1.The company, rather than Mick, will be liable for any negligence claims made against the business

2.The limit of Mick’s liability in respect of the business will be any amount unpaid on his shares

3.The company will be liable for the business loan rather than Mick

4.The company can enter into the new contracts in its own right
Can u plz explain how 3&4 are benefits
March 28, 2022 at 7:09 pm #652166
MikeLittle
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3 is a benefit because it means (in theory at least) that Mick will not be liable to the bank – the loan is to be taken out by the company and not by Mick personally

In practice, it is MOST probable that the bank will want the loan to be secured by a personal guarantee from Mick, but that’s outside the scope of this question. Just be prepared for it when you’re in a real-life situation!

4 is a benefit for Mick because it won’t be Mick personally entering into the contracts – it will be the company

OK?
March 29, 2022 at 10:17 am #652212
Safiya.12345
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Actually 3 is not a benefit given in the answer key so the reason its not a benefit cuz mick will be personally liable
March 29, 2022 at 12:12 pm #652222
MikeLittle
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There’s a lesson for us all here, especially me! I failed to read the question carefully enough to realise that Mick had already taken out a business loan before the thought of incorporation. It’s not an option for the company to adopt liability for that loan taken out pre-incorporation

Sorry! My BAD mistake
March 29, 2022 at 4:54 pm #652245
Safiya.12345
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Thank u so much sir
( no problem)
March 30, 2022 at 5:38 am #652288
MikeLittle
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You’re welcome 🙂
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