ADVANTAGES OF FORMING AN INCORPORATING COMPANY

The process of formation (registration) incorporated company is regulated by law in the Companies Act 2006. Summarised below the main advantages of incorporating the company.

  1. Limited Liability

The most important of the advantages of incorporation is its limited liability, what means that the legal responsibility of shareholders is limited to the amount paid on their shares. The most important thing for Jack and Jill might be that their personal assets will not be put at risk.

  1. Separate Legal Identity

The limited liability company is a legal entity separate from the board and its members (shareholders). And again, any debts made by the company will not be borne personally.

  1. Protection of Company Name

The name of the company must be unique and no one else cannot use it. However the choice of company name is restricted and complies with the rules.

  1. Continuity

In case that Directors, management and employees leave, retire, die it doesn’t mean that the company will be winding up. Once the company is formed it will be exist till insolvency, bankruptcy, liquidation or other cause of the courts or Registrar of Companies.

  1. Taxation

Sole traders and partnership companies pay income tax but the companies pay corporation tax which has currently lower rate than income tax. There are also wider range of allowances and tax deductible costs which decreases the taxable profit.

Differences between private limited company and public limited company

DIFFERENCES PUBLIC COMPANIES PRIVATE COMPANIES
NAME Must end with ‘Public Limited Company’ or PLC Must end with ‘Private Limited Company’ or LTD (unless the company is unlimited)
SHARE CAPITAL Must have a minimum subscribed share capital of £50,000 and this must be paid up to at least 25% (at least £12,500 must already have been raised by the issue of shares) No limit on share capital
SHARES The company may offer its shares and debentures to the public (stock exchange) Cannot be advertised for sale or listed on the stock exchange
DIRECTORS At least 2 One director
COMPANY SECRETARY Must have suitably qualified company secretary There is no obligation to have a secretary, if there is one does not need to be qualified
ANNUAL GENERAL MEETING Must hold every calendar year No obligation, of AGM, unless there is the decision to have one

Disadvantages of forming a company

  1. In the first stage of the formation of a company must be prepared various documents, such as: memorandum of association and articles of association, a statement of capital and declaration of compliance, which must be delivered to the registrar of companies at Companies House. This stage is more laborious and complicated in comparison to the partnership and therefore incorporated companies will take longer to set up. The company also must have a unique name and gain unique number from Registrar of Companies.
  2. To set up the company there must be paid fees which make this type of company more expensive to set up. Also, there are extensive legal issues that have to be complied with. The various ongoing formalities must fill and publicity include the company’s directors, secretary, also the financial accounts (which can be viewed by individual or other companies), the annual return of the company, and constitution.

A company limited by shares, limited by guarantee or unlimited

  1. Limited by shares what means that the liability of the members (shareholders) of the company is limited by the memorandum to the amount capital originally invested. That will protect the shareholders’ private assets in the event of the company will announce bankruptcy. This kind of liability I would advice to Jack and Jill’s company as their private assets will not be involved in case of insolvency.
  2. Limited by guarantee means that the liability of shareholders is limited to the amount which they have undertaken or guaranteed to pay if company winding up. This kind of liability has normally been formed for educational or charitable purposes, and may or not have a share capital. If there is a share capital, the shareholders’ liability is for the amount of his shares and also to the amount of guarantee. Companies with no share capital normally gain funds by subscription or endowments.
  3. Unlimited means that there is no limit of the liability of the shareholders. Unlikely to the partnership the shareholders are not directly liable to creditors, but they are liable to the company. However, their liability is the same as partners.

Three ways the Company Act 2006 has affected private companies

In the Company Act 2006 many of the changes has applied to small private companies and its one of the most important rules is a simplification of the corporate regime. Some of these rules will be presented below:

  1. The company makes the decision if they wish to appoint the company secretary, as they are no longer obligated to do so.
  2. The shareholders written resolutions are no longer has to be unanimity. The simple majority of the eligible shares for ordinary resolutions, but 75% for special resolutions.
  3. The Act gives a possibility of reducing share capital by a company without obtaining the court order. Also reduces the period of filing the accounts from 10 to 9 from the financial year end.

Documents required for registration

1. The memorandum of association

This document is also known as an external constitution of the company, and determines key features of the company’s status. From 1st of October 2009 the document was simplified and does not contain too much information, but it has to be prepared by those who wants to form an incorporation company under Company Act 2006. This must contain the subscribers’ names and signatures and if the company has a share capital, each of the member must have at least one share.

2. The articles of association (CA 2006 s. 18)

The article of association (also known as internal constitution of the company) is the most important because it determines how company will be operate and regulates the rights between members, directors and company. The company has a right to make a changes to articles but it has to be done during the general meeting and the copy should be delivered, within 15 days from the day the changes were enacted, to the Registrar of Companies. The articles of association must be sign

This document must be signed by each subscriber of the memorandum in the presence of a one witness and usually areas such as:

  • Rights, duties and responsibilities of the directors;
  • General meetings’ organization;
  • Company’s members’ voting rights;
  • Shares issues and transfers, shares’ classes, share certificates;
  • Paying dividends and etc.

To make easier preparation of this document for the companies, Companies House has prepared standard article of association and might be adapted by this company.

3. IN01 form – The registration application (which contains the statement of compliance)

  1. The name of the company might be chosen, by those of setting up the company, of any name they wish, however there is certain rules which must be kept.
  2. The situate of the office of the company
  3. A statement of the objects of the company
  4. A statement of the limitation of liability of the company
  5. A capital clause stating the amount of the share capital which is authorised and the division of the share capital into shares of a stated amount

Role of Registrar of companies

The Companies Act 2006 makes the rules how the documentation should be filled in Companies House. The Registrar of Companies is responsible to record and control from companies either new or existing, to incorporate and dissolve companies, regulates formation of new companies and changes of existing companies, and also deals with any breaches of Companies Act. The section 1117 Companies Act covers where is stated the form, delivery’s manner, method of authentication, whether delivered electronically or as a paper document. The one of responsibility isto make the information available to the public.

The names can be checked on Companies House website before formation, but also Registrar of Companies will check that if it is consistent with rules.

The name of the company must be chosen very carefully, and the best way to make it easy to memorise is to make it as logical to the company activity as it possible. The name cannot be similar to other companies and should be too long as the long names are difficult to memorise.

The words cannot be used but might be if the company will receive a written permission from the Department of Constitutional Affairs. These words are: Royal, Queen, King. The words used by a company without a permission such as: “Solicitor” or “Patent Agent”; might be treated as criminal offence. There is also words that company will need to get a written specified body’s permission, and they are: British, English, International, Group or Association.

What is the effect of section 33 of Companies Act 2006

In the Section 33 of Companies Act 2006 that is provided information for a statutory contract between the company and its members; each member of the company and other companies. Over the years this contract have made a lot of controversy and confusion. The main question is if the contract might be enforced by members, to make sure that the right associated with them in another role such as the right given to a director who is also a member.

In the members rights were breached, the company can be sued by them.

Corporate personality and effect on Jack and Jill

Corporate personality means that the company is treated as a legal entity and its ‘personality’ exist independently from its owners, directors and shareholders. That means also that the company is liable for its own debts and can sue but it can be sued in its own name and also a company can buy and sell properties in its own name. The limited liability of the company means that the shareholders are not liable on its private assets for the debts belongs to the company (as the company and the owners are two separate entity).

This might be one of main advantages to register the company by Jack and Jill with Companies House. In case of any problems with liquidity of the company, problems with paying company’s liability such as loans or debenture, Jack and Jill private assets will be safe from creditors of the company.

The case Salomon v A. Salomon Co. Ltd (1887) will illustrate and will be the best example the separate entity:

‘Mr Salomon owned a boot-making business which was sold to another company A. Salomon Co. Ltd, which had been formed by the same Salomon. “There were seven members in the business: his wife, daughter and four sons who took one share each and Salomon himself who took 20,000 shares. The price paid by the company to Salomon was £30,000 but instead of giving him cash, the business gave him 20,000 fully paid shares and £10,000 in the secured debentures i.e. he lent the company £10,000 which was owed to Salomon and £7000 to unsecured creditors. The unsecured creditors claimed that as Salomon & Co Ltd was really the same person, he could not owe money to himself and that they should be paid their £7000 first.

Held: The House of Lords stated that Salomon was entitled to the £6000 and the unsecured creditors got nothing. The reason for this decision was that the company was to be regarded as a completely separate person in the eyes of the law from its members and its officers. The House of Lords thought it a completely irrelevant argument that Salomon was the leading shareholder in the company and that he could effectively control the destiny of the business’.[1]

Salomon v Salomon & Co Ltd has been taken from book Nicholas Grier, “Company Law, Second Edition”, Scotland: W. Green & Son Ltd, 2005)

Bibliography:

Nicholas Grier, “Company Law, Second Edition”, Scotland: W. Green & Son Ltd, 2005

Websites used:

http://www.bridgewest.eu/

Home page – New

http://www.companieshouse.gov.uk

http://www.companylawclub.co.uk/

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[1] Case Salomon v Salomon & Co Ltd has been taken from book Nicholas Grier, “Company Law, Second Edition”, Scotland: W. Green & Son Ltd, 2005)