When starting a business it’s important to consider whether you are going to be a Sole-Trader, a Partnership or a Company.
Many fledgling businesses opt for a Limited Company. This has many benefits but may not necessarily be what you need, so it’s worth understanding what incorporating a company really entails and what responsibilities come with it.
There are five key points you need to consider before you start the incorporation process.
1. Company, Partnership or Sole-Trader?
A Company is a legal entity in its own right and completely separate from its Directors and shareholders. This offers a substantial amount of protection for its owners as any debts or liabilities are limited to the amount of unpaid shares that they hold (if any).
However, with Companies also comes great responsibility. For example; there are several annual requirements that need to be filed with Companies House.
Becoming a Sole Trader might be the best option for a one-man-band and anyone who intends to be entirely responsible for the business. This route gives the owner more freedom, but, there is a potential loss of assets for the owner through bankruptcy and the tax is not friendly either. However, if you start as a Sole Trader and the business becomes profitable then you have the option to incorporate a Limited Company at a later date and sell your sole trader business into the Company.
A Partnership, and in particular a Limited Liability Partnership, on the other hand, is commonly used where co-owners share the responsibilities and expenses e.g. solicitors and accountants.
If you decide that a Limited Company is right for you, you next need to consider what type of Limited Company is best for your situation.
2. Types of Limited Company
i) Private Company limited by share
This type of Company has a share capital and each shareholder’s liability is limited to the amount of unpaid shares they hold. This gives great protection to its owners.
ii) Public Company Limited by guarantee
With this type of Company, no shares are bought. The member’s liability is limited to the amount that he/she agrees to contribute to the company if it is wound up. Again, this gives good protection for its owners.
iii) Private unlimited Company
This type of Company may or may not have a share capital. The point of it is that there is no limited liability for its members. As there is no limited liability, this type of Company does not have to disclose as much information as other types would.
iv) Private limited Company
This type of Company has a share capital and again, liability is limited to the amount unpaid on shares. This type of Company, can, however, offer its shares for sale to the general public and may also be listed on the stock exchange.
Once you’ve decided what type of Company you need to be, you still need to choose a name – but beware there are a number of restrictions.
3. Restrictions on names
The Companies Act 2006 states that both ‘same as’ and ‘too like’ names are disallowed.
In addition there are a number of other restrictions including:
- names that suggest a connection with Her Majesty’s Government, a devolved government or administration or a specified public authority;
- names that include “sensitive” words and expressions included in regulations. A list of sensitive words is available on the Companies House website,
- names that include words that could cause a criminal offence;
- offensive names.
Where companies are concerned, pre-emption rights relate to the rights that a shareholder might have in respect of being offered shares in the Company before they can be offered to a third party.
Under the Companies Act 2006, shares must be offered to existing shareholders in proportion to their present shareholdings before being issued to anyone else. These pre-emption rights will not apply if a Company has tailor made Articles of Association and has opted not to include such pre-emption rights. So it’s worth considering this at the start rather than leaving it until its issue.
Having the protection of pre-emption rights on share transfers means that a shareholder cannot just go and sell their shares to anyone and in particular to a business competitor without the remaining shareholders at least having the option to buy them first.
5. Annual requirements
Companies House requires all companies to submit Annual Returns and Accounts on an annual basis. It is the responsibility of the Directors, who are responsible for the day to day running of the company, to ensure that these documents are submitted within the specified period. If a company fails to submit these documents, then there are serious consequences.
For example; Companies House could assume that the company is no longer carrying on business and will take steps to strike it from the Register of Companies, leaving all assets as Crown property. Also Accounts that are filed after the specified date will automatically incur a late filing penalty. The penalty will be determined by the length of time that the accounts are overdue.
Although there are many more factors, these are the top five points you need to consider before incorporating a Company. If in doubt, it’s advisable to speak to an expert – you want to be sure your business gets off to a good start!