Introduction to Companies
These notes are intended to be a brief introduction to the background
of limited companies in the UK. They are certainly not comprehensive;
there is a huge amount of legislation covering company law, employee
taxes, company taxation and employment legislation.
LEGAL BACKGROUND
A company is an artificial person with its own name and has a separate
legal identity from that of its shareholders. So, it can contract,
own property, sue and be sued in its own name.
Most companies are limited by shares. This means that the shareholders
can lose only the money they invested in the company when buying the
shares (this also includes any amount not fully paid up on the shares).
Often a shareholder may surrender this limited liability by
giving personal guarantees for company debts. The most common examples
of this are personal guarantees given to the company's bank to cover
at least part of its borrowing and personal guarantees given to a landlord
for rent payable by the company.
And, if the share investor lends money to the company, this
may also be at risk.
There are other forms of companies, notably unlimited companies and
companies limited by guarantee. These are relatively rare. The owners
of an unlimited company are fully liable for the company's debts. In
a company limited by guarantee, each person's liability is limited to
the individual's amount guaranteed.
ADVANTAGES OF TRADING AS A LIMITED COMPANY
Some of the advantages of conducting business through a limited company are:
a) The shareholders' liability for the company's debts is limited.
b) The company's existence is perpetual and independent of that of its shareholders.
c) In some cases, it is possible to obtain tax advantages.
d) Trading as a Limited Company often projects a better image of the business for both
suppliers and customers.
There are some disadvantages, the main ones being:
a) Certain details about the company's trade and shareholders have
to be disclosed annually. This is done by submitting the company's accounts
and Annual Return to Companies House where they become a public record.
b) The conduct of the company's affairs is governed and controlled
by increasingly complex and rigorous tax and company legislation, although
for private companies the Companies Acts now contain a number of deregulatory
measures.
c) Although the costs of incorporation are relatively small, the recurring costs
such as accountancy/audit fees are inevitably higher because of the increased amount
of legislation and legal requirements.
CLASSIFICATION OF COMPANIES
a) Public Companies (plc or public limited company)
A public company must have at least two directors.
Its main features are that it is able to ask the public to subscribe for
its shares; but it must have allotted capital of at least £50,000 nominal value.
b) Private Companies (Ltd or Limited)
A private company is not subject to all of the stringent financial and other
rules that apply to public companies, but it may not offer its shares to the public.
This form of company is the most common for commercial enterprises which are privately
owned.
Under the deregulatory provisions of the Companies Act 1989, private companies
may transact business by written resolutions signed by all of the members
without a general meeting of the company. Also by an elective resolution
(i.e. unanimous consent of all the members) they may dispense with, for
example, the need to lay accounts and reports before a general meeting,
with the holding of the Annual General Meeting and with the annual
appointment of auditors.
CONCLUSION
No summary can deal in any depth with a subject as complex and
wide ranging as company law. There will be many points of detail
on which directors will need professional advice from their
accountants. Apart from highlighting some of those areas, it
is hoped this summary will assist in familiarising those responsible
for the running of companies with some of the more important
requirements of company law.
Please remember that the website has been written in very general terms.
You should always obtain individual advice based on your own particular
circumstances. Why not take advantage of a free initial discussion?
© Majors, Chartered Accountants, 2001; Updated 24 November 2001; Reviewed 25 April 2002