SQE1 · Subject page 1 · 9 min read

SQE1 FLK1 subject notes: business structures, company formation and decision-making, directors' duties, shareholder protection, finance and security, insolvency, and the taxation of businesses and their owners.

What this subject covers

The SRA specification covers starting a business as a sole trader, partnership, LLP or company; managing a company and its decision-making so that it complies with the Companies Act 2006; the rights, duties and powers of directors and shareholders; financing a business by debt and equity; the taxation of a business and its owners (income tax, capital gains tax, corporation tax and VAT); and the end of a business, whether solvent or through corporate insolvency or personal bankruptcy. Stock exchange listing rules and other FCA market rules are excluded.

Questions are almost always practical: what resolution is needed, what the board may do alone, who can be made to pay, and in what order creditors are paid.

Key principles

Choosing a business vehicle

• Sole trader: no separate legal personality; the owner has unlimited personal liability and is taxed on trading profits as income.
• General partnership: arises whenever two or more people carry on a business in common with a view of profit (Partnership Act 1890, s 1). No separate personality in England and Wales; partners are jointly liable without limit for the firm's debts (s 9). Each partner is an agent of the firm and binds it by acts done in the usual way of its business, unless the third party knew the partner lacked authority (s 5).
• LLP: a body corporate under the Limited Liability Partnerships Act 2000, with members (at least two designated members), not directors. Members' liability is generally limited, but for tax the LLP is treated as a partnership.
• Private company limited by shares: separate legal personality (Salomon v A Salomon and Co Ltd); shareholders' liability is limited to any amount unpaid on their shares.

Partnerships without an agreement

The Partnership Act 1890 fills the gaps. Partners share profits and losses equally (s 24(1)); ordinary matters are decided by majority, but changes to the nature of the business and the admission of a new partner need unanimity (s 24(8), (7)). A partnership for no fixed term is a partnership at will, dissolved by any partner giving notice (ss 26, 32). A retiring partner is not liable for later debts (s 17(2)), but remains liable to people who dealt with the firm before and are not given actual notice of the change; a London Gazette notice covers everyone else (s 36).

Forming a company and its constitution

A company is formed by filing an application with a memorandum of association and, unless the model articles are to apply, its own articles (Companies Act 2006, ss 7 to 13). The articles are the main constitutional document and can be changed by special resolution (s 21), subject to any entrenched provisions (s 22).

Company decision-making

• Board: under the model articles directors decide collectively by majority at a meeting or unanimously in writing (arts 7, 8); the quorum is two (art 11); the chair has a casting vote (art 13). A director with an interest in a proposed transaction must declare it (s 177) and under art 14 may not vote or count in the quorum on it, unless an exception applies.
• Members: an ordinary resolution needs a simple majority; a special resolution 75% (s 283). At a meeting this is measured on votes cast; a private company's written resolution needs the stated majority of the total voting rights of all eligible members (ss 282, 283) and lapses after 28 days unless the articles say otherwise (s 297). A written resolution cannot be used to remove a director or an auditor (s 288(2)).
• Notice: at least 14 clear days for a general meeting (s 307); a private company may hold a meeting on short notice if a majority in number holding at least 90% of the voting shares agree (s 307(5), (6)). The quorum is two qualifying persons (s 318).
• Matters reserved to members include: changing the articles or the name, removing a director (ordinary resolution with special notice, s 168), directors' service contracts guaranteed for more than two years (s 188), substantial property transactions with directors (ss 190, 191: asset worth over 100,000 pounds, or over 10% of net assets and over 5,000 pounds), loans to directors (s 197), and ratifying a director's breach (s 239).
• Filing: every special resolution, and certain other resolutions, must be filed at Companies House within 15 days (ss 29, 30).

Directors' duties

The general duties in ss 171 to 177 are owed to the company:

• act within powers (s 171);
• promote the success of the company for the members as a whole, having regard to the long term, employees, suppliers and customers, the community and environment, reputation and fairness between members (s 172). The test is the director's own good faith judgment;
• exercise independent judgment (s 173);
• reasonable care, skill and diligence, judged by the objective standard of a person in that role and by the director's own greater knowledge and experience (s 174);
• avoid conflicts of interest, including exploiting opportunities, whether or not the company could take them up (s 175); in a private company the independent directors may authorise a conflict unless the constitution prevents it;
• not accept benefits from third parties (s 176);
• declare an interest in a proposed transaction with the company (s 177).

A breach may be ratified by the members, but the votes of the director and connected persons are disregarded (s 239).

Shareholder protection

• Derivative claim (ss 260 to 264): a member sues for the company's cause of action against a director, with the court's permission; any recovery belongs to the company. A shareholder cannot sue personally for loss that only reflects the company's loss.
• Unfair prejudice (s 994): the court may make any order it thinks fit (s 996), most often that the majority buy the petitioner's shares at fair value. Exclusion from management in a quasi-partnership is the classic case.
• Just and equitable winding up (Insolvency Act 1986, s 122(1)(g)) is a last resort.

Finance

• Equity: directors need authority to allot (s 550 for a private company with one class of shares, otherwise s 551). Existing holders of ordinary shares have pre-emption rights on an allotment for cash (s 561), which a private company may exclude or disapply by its articles or by special resolution (ss 567 to 571). A return of allotment is filed within one month (s 555).
• Distributions: dividends may be paid only out of accumulated realised profits less accumulated realised losses (s 830). The share premium account cannot be distributed.
• Debt and security: a fixed charge attaches to specific assets the company cannot deal with freely; a floating charge hovers over a class of assets the company may use in the ordinary course of business until crystallisation. The label does not decide the matter (Re Spectrum Plus Ltd). Every charge must be delivered for registration within 21 days (s 859A); otherwise it is void against a liquidator, administrator and creditors, and the debt becomes immediately payable (s 859H).

Insolvency

• A company is unable to pay its debts if, among other things, it fails for three weeks to pay a statutory demand for more than 750 pounds (Insolvency Act 1986, s 123).
• Procedures: company voluntary arrangement, administration (with a moratorium on legal process, Sch B1 para 43), receivership, creditors' voluntary and compulsory liquidation. For individuals: individual voluntary arrangement and bankruptcy (creditor's petition debt at least 5,000 pounds).
• Claw-back: transactions at an undervalue (s 238, within two years before the onset of insolvency) and preferences (s 239, within two years for connected persons and six months for others); avoidance of floating charges for past value (s 245); fraudulent trading (s 213, intent to defraud) and wrongful trading (s 214, continuing to trade when the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, unless every step was taken to minimise creditors' loss).
• Order of payment: fixed charge holders from their security; then, from other assets, the expenses of the liquidation, preferential creditors (certain employee claims, then some HMRC debts), the prescribed part for unsecured creditors, floating charge holders, unsecured creditors, and finally shareholders.

Taxation

• Income tax: sole traders and partners pay on their share of trading profits, whether or not drawn. Employees pay on earnings through PAYE; shareholders on dividends.
• Capital gains tax: gain = disposal proceeds less acquisition cost, enhancement expenditure and incidental costs of acquisition and disposal (Taxation of Chargeable Gains Act 1992, s 38). Individuals have an annual exempt amount; reliefs include business asset disposal relief, roll-over relief and hold-over relief.
• Corporation tax: charged on a company's total profits, including chargeable gains, with no annual exempt amount. Dividends are not deductible.
• VAT: registration is compulsory once taxable supplies in the previous 12 months exceed the threshold; a registered business charges output tax, recovers input tax, issues VAT invoices and files returns.
• Inheritance tax: business property relief, in its business context.

Rates and thresholds that change with Budgets are usually given in the question; long-standing ones may not be.

Worked example

Fen Ltd has four shareholders: Ada (55%), Ben (25%), Cal (12%) and Dot (8%). Ada and Ben are its directors. Ben has been secretly supplying Fen Ltd's customers through his own business.

1. Ada wants Ben off the board. The members can remove him by ordinary resolution at a general meeting under s 168, after special notice of 28 days; a written resolution cannot be used. Ada's 55% is enough. Ben may speak at the meeting and keeps any contract claim.
2. Ben has breached s 175 (conflict) and probably s 172. The company can sue him to account for his profits. If he proposed ratification, his votes would be disregarded under s 239.
3. If the board will not act, Cal could seek the court's permission for a derivative claim. If instead Cal had been excluded from a business all four had agreed to run together, a s 994 petition for a buy-out would be the natural remedy.
4. To raise money by issuing new shares for cash to an investor, the board needs authority to allot and must offer the shares to existing shareholders first unless pre-emption rights are disapplied by special resolution: Ada and Ben together hold 80%, which is enough at a meeting where all vote.

Scope follows the SRA's SQE1 Functioning Legal Knowledge Assessment Specification (FLK1, Business Law and Practice). The notes are our own summary, not SRA material. Law of England and Wales as at 1 September 2026 (the SRA assesses the law as it stands four calendar months before the first assessment in a window).