Keeping it Legal

The Features of Company Formation

Legal details can be a nightmare.

When I started to think about writing this page it became clear that I could not write something which would fit all purposes. Every country will have its own legal ways for creating business structures. However, fortunately there are many similarities!

The subject matter can be trawled very deeply. This will only go beyond my expertise and through my poor descriptive efforts will potentially confuse you.

So, I am going limit my efforts to:

• Describing formal structures in the UK
• Keep the advice as simple as I can and
• Trust that you will invest further time in investigating more detail if you need it!

The Easy Start – Becoming a Sole Trader

• All debts of the business are debts of the owner. There is no protective limit.

• You will not pay Corporation tax (but you will pay personal income tax on the profits).
• Accounting is much easier.

Quite often, the sole trader will choose to operate the business under a registered Trade Name. This allows the owner to do business with a name other than his own name. It will also allow a bank account to be opened up under the Trade Name.

So, for example...Mr. Bill Smith can run his plumbing business under the Trade Name of “Mr. Fixit Services”

Some care is required. It is possible to trade using a name that other traders or even companies will be using. A lot depends on the geography of where you are doing business.

BUT

• Choosing a name that is very similar to a close rival will only accidentally send clients in their direction, and

• Registered companies will seek to protect their names which may expose you to the expense and trouble of defending yourself in a Court of Law

Factors to consider

Advantages

1. There is better control - since there is only one owner, who can make decisions quickly without having to consult others.

2. In most cases, there are no legal formalities to forming or dissolving a business.

3. All of the profits from the business go right to the owner.

4. There is often more freedom from government regulations.

Disadvantages

1. Raising money (capital) can be more difficult. There are no “shares” to be offered for trade and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company.

2. Hiring employees may be more difficult.

3. There is a greater risk to the negative effects of being sued. In this case the business owner is personally liable. As the business grows, this risk will tend to increase.

4. The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.

However, if you are setting out on your own for the first time, in my view this is the best option. If your business grows rapidly, it’s very easy and quick to move up to the next step, so don’t worry whether you have made the right choice!

N.B. As soon as possible you will need to inform the authorities of your“self-employed” status.

(In the UK you will need to inform Her Majesty’s Revenue & Customs).

Becoming a Limited Company

"Limited by shares" means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested

i.e. the nominal value of the shares (which can be as little as £2) and any premium paid in return for the issue of the shares by the company.

These shares cannot be offered for sale to the general public.

A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.

It is very easy to form a limited company and there are plenty of companies offering this service on the internet.

To incorporate a company in the UK the following documents, together with the registration fee, must be sent to the Registrar of Companies:

- The memorandum of association
This states the name of the company, the registered office and the company objectives ee.g. its operates as a plumbing services provider.

- The articles of association
These are rules of operation which govern the company's internal affairs.

- Form 10
Shows the details the first directors, the first secretary and the address of the registered office.

- Form 12
This is a statutory declaration of compliance with all the legal requirements relating to the incorporation of a company.

It's not all Good News!

Advantages of being a "Ltd" company

• Raising money (capital) is easier. Your business is more credible and lenders will be more confident in extending credit.

• It’s easier to attract and hire employees.

• You will only lose your investment in shares if the business becomes insolvent. There is greater protection from being sued by creditors.

• The business can continue to operate beyond the lifespan of its principle shareholder.

• The business is easier to sell as an ongoing enterprise.

Disadvantages

• You will have to submit Financial Accounts to Companies House each year.

• You must have a registered business address (this can be your home address if this is where the business operates from)

• There will probably be more “interested parties” involved in the business, so greater consultation may have to occur.

• Dissolving the company because you are no longer trading is more formal.

• Your shareholders may expect a return for their investment from the profits generated.

• Government leagl rules become a little more restrictive.

• If there is a sole Director, a Company Secretary must be appointed who will be responsible for the legal formalities within the company e.g. submission of forms to companies House.

Becoming a “Public” Limited Company

To do this, your limited company must legally change from “Private” to “Public” ownership. A special resolution must be passed to allow the company to be legally re-registered. Shares can then be legally traded within the stock exchange.

This is a big step to take.

Viewpoints will differ on the advantages and disadvantages mainly relating to:

1. Control of the company
2. The ability to grow and react to its own market
3. Its exposure to variations in the financial market and
4. The cost of maintaining its “plc” status.

You can find out more by following this link: Duport provide company formation, company credit reports and director reports.

If you want further help and support to ensure you generate success, please follow this link to Contact Us or call 0845 408 5978

FREE Special Report