AAT L2 Introduction to Business and Company Law 1 — Questions and Answers
Question 1: Which of the following is a characteristic of a sole trader?
- Limited liability for business debts
- Separate legal personality from the owner
- The owner has unlimited liability for all business debts (Correct answer)
- It must have at least two partners
Correct answer: The owner has unlimited liability for all business debts
A sole trader has unlimited liability, meaning the owner is personally responsible for all the debts of the business. There is no legal distinction between the owner and the business — if the business cannot pay its debts, the owner's personal assets are at risk.
Question 2: A contract requires which of the following essential elements to be legally binding?
- Only a written document signed by both parties
- Offer, acceptance, consideration, intention to create legal relations, and capacity (Correct answer)
- A solicitor to witness the agreement
- Payment of a deposit
Correct answer: Offer, acceptance, consideration, intention to create legal relations, and capacity
A legally binding contract requires: an offer, acceptance of that offer, consideration (something of value exchanged), intention to create legal relations, and capacity (both parties must be legally able to enter a contract). Not all contracts need to be in writing.
Question 3: The term 'limited liability' in relation to a limited company means:
- The company can only trade for a limited time
- The shareholders' liability is limited to the amount they have invested or guaranteed (Correct answer)
- The company can only have a limited number of employees
- The directors have no responsibilities
Correct answer: The shareholders' liability is limited to the amount they have invested or guaranteed
Limited liability means that if the company fails, the shareholders can only lose the amount they invested (in a company limited by shares) or the amount they guaranteed (in a company limited by guarantee). Their personal assets are protected.
Question 4: Which UK legislation governs the formation and operation of companies?
- The Partnership Act 1890
- The Companies Act 2006 (Correct answer)
- The Sale of Goods Act 1979
- The Consumer Rights Act 2015
Correct answer: The Companies Act 2006
The Companies Act 2006 is the primary legislation governing the formation, management, and dissolution of companies in the UK. It covers incorporation, directors' duties, shareholders' rights, accounts, auditing, and company administration.
Question 5: An invitation to treat is:
- A legally binding offer
- An indication of willingness to negotiate or receive offers, not a binding offer itself (Correct answer)
- A type of contract
- An acceptance of an offer
Correct answer: An indication of willingness to negotiate or receive offers, not a binding offer itself
An invitation to treat is not an offer but an invitation for others to make offers. Examples include goods displayed in a shop window, advertisements, and items on a website with an 'add to basket' button. The customer makes the offer at the checkout.
Question 6: A private limited company (Ltd) differs from a public limited company (PLC) because:
- An Ltd cannot have shareholders
- An Ltd cannot offer its shares for sale to the general public on a stock exchange (Correct answer)
- A PLC has unlimited liability
- An Ltd must have more directors than a PLC
Correct answer: An Ltd cannot offer its shares for sale to the general public on a stock exchange
A private limited company (Ltd) cannot offer its shares for sale to the general public or trade them on a stock exchange. A PLC can offer shares to the public and may be listed on the London Stock Exchange. A PLC must also have a minimum share capital of £50,000.
AAT L2 Introduction to Business and Company Law 1
Which of the following is a characteristic of a sole trader?