Trading as a Company

Forming a company is, in the eyes of the law, the process of ‘giving birth’ to a new person. This is because, strange as it may sound, a company is a separate person in the eyes of the law. Once ‘incorporated’, the company will ‘live’ until it is ‘wound up’ by its owners or ‘struck off’ the register of companies.

Advantages

This means that even if the people who own the company (the shareholders) and the people who manage it (the directors) are the same, they are separate in law from their company. The company can own property, sign contracts, commit crimes, and crucially it can owe money. This is the principal advantage of running a limited company – for well over a hundred years it has been accepted that the liability of shareholders is limited to the amount of capital unpaid on their shares (‘limited liability’).

So the effect of a company being ‘limited’ is that liability for debts and obligations entered into by the company stays with the company itself and does not pass to the individuals involved in the company. The owners of the company only stand to lose what they have invested by buying shares in the company.

This should be compared with the position for sole traders or partners – if the business of a sole trader or partner fails the owners stand to lose not only what they have invested in the business but also any private wealth which they may have.

There are a few instances where Parliament or the Courts have considered it prudent to ‘lift the veil’ of incorporation, such as where the directors have been trading fraudulently, but these are few and far between. Generally, if a company goes into liquidation as a result of poor sales or poor management, the shareholders and directors can simply walk away, taking anything that remains of the assets after preferential debtors and creditors have been paid in full.

The corporate form institutionalises the separation of management and ownership because, although the shareholders own the company, it is the directors who run the company on a day-to-day basis. In smaller companies, the directors and shareholders will be one and the same, but as companies grow the amount of issued share capital increases and it becomes increasingly expensive for the directors to amass a significant tranche of the equity of the company.

The directors of the company are of course answerable to the shareholders, who can remove any director or the entire board of directors by a simple majority shareholders’ vote, and on a whim. In larger companies this becomes both difficult, due to the large number of shareholders whose agreement would be required, and expensive, because of the cost of settling any claims of unfair dismissal and wrongful dismissal (especially where the directors have ‘golden parachutes’, i.e. service contracts specifying substantial termination payments).

A limited company is usually regarded as more credible and reliable than a sole trader or partnership, but you should note that anyone, and in particular any creditor, is free to perform a company search at Companies House to discover how much (or little) paid-up capital and assets the company has recorded with the Registrar of Companies.

Companies enjoy a wide range of opportunities for raising finance. As well as receiving injections of capital in the form of shares and loans, companies can issue ‘floating charges’ on their changing assets, and successful companies can convert to public limited companies to offer their shares to the public or to ‘float’ on a stock exchange where the general public can trade those shares.

Disadvantages

The main difficulty with trading as a company is adhering to the detailed provisions of the Companies Acts and case law. To give but a few instances of the administrative difficulties that will be experienced, you will be required by statute to maintain a register of shareholders, directors, secretaries, directors’ interests in company securities etc, ‘mortgages’ granted by the company, minutes of board (directors’) and general (shareholders’) meetings; to maintain accounting records and keep copies of directors’ service contracts. Accounts must be filed with Companies House, putting much of the company’s financial records on public display, and all stationery used by the company must comply with particular requirements.

Directors of a company are subject to numerous duties to their company, and virtually all company matters will result in legal documentation, a large amount of which you will have to file with Companies House within strict timescales.

Even if you have previous experience of company law and accounting, you will require the advice of specialist solicitors and accountants in running your company.

Finally, for directors of many small companies, limited liability can be somewhat illusory. At least in the early years of trading, banks and suppliers will often demand personal guarantees from director-shareholders before advancing cash or supplying goods. If the company fails, the directors’ assets are then just as vulnerable as those of the partner or sole trader.

Our services

If you decide to incorporate a company, our company formation services cover all kinds of UK companies, and are always competitively priced when compared with the more reputable company formation agencies.

In addition, as part of our packages, we can advise you on compliance with all the legal and practical requirements, minimise your potential liability by use of terms and conditions of business and help you avoid the risk of being sued for ‘passing off’ or prosecuted by Trading Standards.

Once the company has been incorporated, we can assist you by providing the full range of company secretarial services, from acting as the registered office address of client companies to preparing all manner of board and shareholder minutes and documentation, and Companies House filings.

As the company grows, we offer a full range of corporate and commercial law services, including advice on company law.

The three types of UK company

The above analysis focuses on the UK private company limited by shares, normally termed a ‘private limited company’ (the name of which usually ends ‘Limited’ or ‘Ltd’). Please click here, for a brief guide to what these are, what a ‘share’ is and what you will need to decide to set up a private limited company.

However, in some circumstances you may require a public company limited by shares, normally termed a ‘public limited company’ (the name of which usually ends ‘Plc’). Please click here, for a brief guide to what these are and what you will need to decide to set up a public limited company.

Alternatively, you may wish to set up a charity or a club and require a rare third form of company, the private company limited by guarantee, normally termed a ‘guarantee company’. If so, please click here for a brief guide to guarantee companies and what you will need to decide to set one up.