Picture this. A client walks in with a friend, an idea, and £20,000 between them. They want to start a business selling handmade furniture. Should they operate as a partnership? A limited liability partnership? A private company limited by shares? And when the money runs low two years later, what happens to their personal savings? If you can answer those questions cleanly, you have already grasped the spine of Business Law and Practice — one of the seven FLK1 subjects tested in SQE1.
This subject frightens a lot of candidates because it stitches together company law, partnership law, tax and insolvency into one messy commercial reality. The good news? The SBA questions reward people who understand how a business actually runs, not people who memorise section numbers for sport. Let me walk you through the parts that come up most often, and what you should actually do to lock them in.
Choosing a Business Structure: The First BLP Decision
Every Business Law and Practice scenario starts with a choice of vehicle, so make sure you can distinguish the three main ones on sight.
A general partnership arises automatically under the Partnership Act 1890 whenever two or more people carry on a business in common with a view to profit. No paperwork is needed — which is exactly why it catches clients out. Partners share unlimited personal liability, and under section 5 each partner is an agent of the firm, so one partner can bind the others. That agency point is a favourite in the exam.
A limited liability partnership (LLP), governed by the Limited Liability Partnerships Act 2000, gives members the flexibility of a partnership but the protection of limited liability. It is a separate legal person and must file accounts at Companies House.
A private company limited by shares, formed under the Companies Act 2006, is the workhorse. It is a separate legal entity — remember Salomon v A Salomon & Co Ltd [1897] — so the company owns the assets, owes the debts, and shields the shareholders' personal wealth (usually to the amount unpaid on their shares).
Exam tip: when a question stresses that the founders want to protect their homes, the answer usually points towards a company or LLP. When it stresses privacy and low cost with two trusted friends, a partnership may fit. Read what the client actually values.
Incorporation and the Company Constitution for SQE1
Once a company is chosen, you need to know how it comes into existence and how it is governed day to day.
Incorporation happens on registration at Companies House, when the registrar issues the certificate of incorporation. The application requires form IN01, a memorandum of association, and either bespoke articles or the default Model Articles. Under the Companies Act 2006, the articles of association form a statutory contract between the company and its members, and between members themselves (section 33). If a question hinges on how decisions are made, the articles are usually where you look first.
Two decision-making bodies matter. The board of directors runs the company through board resolutions, normally passed by a simple majority of those voting at a quorate meeting. The shareholders hold the residual power and act by ordinary resolution (over 50%) or special resolution (75% or more). Know which decisions need which. Changing the company name, altering the articles, or a members' voluntary winding up all need a special resolution. Appointing an auditor or approving ordinary business needs only an ordinary resolution.
Watch the interaction between directors and shareholders. A director can be appointed by the board or the members, but removal of a director is a shareholder power under section 168, requiring an ordinary resolution and, crucially, special notice of 28 days. That special notice requirement is a classic trap — candidates reach for 75% and get it wrong.
Directors' Duties: The Heart of FLK1 Business Law
If you learn one block of this subject really well, make it directors' duties. They appear again and again in FLK1 scenarios because they generate clean, testable facts.
The general duties sit in sections 171 to 177 of the Companies Act 2006. In plain terms, a director must:
- act within their powers and for proper purposes (s171);
- promote the success of the company for the benefit of members as a whole (s172), taking into account long-term consequences, employees, suppliers and the like;
- exercise independent judgement (s173);
- exercise reasonable care, skill and diligence (s174), judged by a dual objective/subjective standard;
- avoid conflicts of interest (s175);
- not accept benefits from third parties (s176); and
- declare any interest in a proposed transaction (s177).
The section 177 duty is a heavy hitter in the exam. Where a director has a personal interest in a contract the company is about to enter, they must declare it to the board before the company commits. Compare that with section 182, which requires declaration of an interest in an existing transaction. Get the timing right and you will pick up marks others drop.
Remember that these duties are owed to the company, not to individual shareholders. So when a scenario asks who can enforce a breach, the default answer is the company itself, usually acting through the board — with the possibility of a derivative claim by a member under Part 11 if the wrongdoers control the board.
Shares, Financing and Distributions
Companies raise money in two broad ways, and the exam loves to test whether you can tell them apart.
Equity finance means issuing shares. When a company allots new shares, directors generally need authority to allot, and existing shareholders may enjoy pre-emption rights under section 561 — a right of first refusal to keep their percentage stake. Those rights can be disapplied by special resolution. Where an allotment dilutes an existing member, check whether pre-emption was offered and, if not, whether it was validly disapplied.
Debt finance means borrowing, often secured by a charge over company assets. A charge must be registered at Companies House within 21 days of creation, or it becomes void against a liquidator or administrator. Distinguish a fixed charge (over specific assets such as land) from a floating charge (over a shifting pool such as stock), because on insolvency the fixed charge holder ranks well above the floating charge holder.
Then there are dividends. A company may only pay a dividend out of profits available for the purpose. Pay one where there are no distributable profits and it is unlawful — directors who knew or ought to have known can be personally liable to repay. When a question mentions a struggling company paying its shareholders a "reward", start checking the accounts.
Insolvency, Tax and the Commercial Endgame
Businesses fail, and Business Law and Practice expects you to know what happens when they do. The Insolvency Act 1986 gives you the framework.
A company is insolvent if it cannot pay its debts as they fall due (the cash-flow test) or if its liabilities exceed its assets (the balance-sheet test). The main procedures to distinguish are administration (a rescue-focused process run by an administrator, often triggering a moratorium), company voluntary arrangement (a binding deal with creditors), and liquidation (winding up and distributing assets).
Know the order of priority on liquidation: fixed charge holders first, then liquidation expenses, preferential creditors, the prescribed part set aside for unsecured creditors, floating charge holders, unsecured creditors, and finally shareholders. Directors also need to watch for wrongful trading under section 214, where they carry on trading past the point at which insolvent liquidation was inevitable and fail to minimise loss to creditors.
Tax threads through the whole subject. You should be comfortable with the headline points: companies pay corporation tax on their profits; individuals and partners pay income tax on trading profits; shareholders may face income tax on dividends and capital gains tax on selling shares; and VAT applies to taxable supplies once the registration threshold is crossed. You are not being asked to be an accountant — you are being asked to spot which tax bites and roughly when.
Do this today: draw one A4 diagram showing a company's life cycle — incorporation, board and shareholder decisions, raising finance, paying dividends, and insolvency priority. When a BLP question lands, you will know instantly which stage it is testing.
Turning Knowledge into SQE1 Marks
The SBA format never asks you to recite the Companies Act. It gives you a client, a set of facts, and five plausible options. The winning skill is procedural: identify the vehicle, identify who has power to act, apply the right resolution or duty, and check for a trap in the timing or the majority required.
Practise by rewriting each fact pattern in a single sentence before you look at the answers. "A director wants the company to buy a car from his wife" instantly signals section 177 declaration of interest. "Shareholders want rid of a director" signals section 168 and special notice. That translation habit is worth more than another read-through of your notes.
How CELE SQE can help. If you want structure rather than guesswork, our SQE1 courses cover all seven FLK1 subjects — including Business Law and Practice — alongside FLK2, from the Long-term Course at £3,720 down to the Short-term Course at £1,750, with a single-FLK option at half price if you only need FLK1. Many candidates pair the course with our SQE1 Question Bank at £575/month to drill the exact SBA reasoning described above. Reach us any time on WeChat SQE100, at [email protected], or at celebar.com — no pressure, just ask.