Any business owner or director should fully understand the risks of setting up a business, ideally before they set it up. There are a range of claims which can follow if things go wrong - often personal claims for money.
Setting up a private limited company requires an individual or group of individuals to make the appropriate application to the Registrar of Companies for a company name to be registered publicly.
- this public record will require details of the person(s) to be appointed as a director and the persons who are shareholders in the company (together with the number of shares allotted by the company and how many each shareholder owns).
- the Registrar of Companies will assign a company registration number (“CRN”) to the company and a Certificate of Incorporation will be issued.
- the company has been incorporated on that date.
As an alternative, and which is most commonly used, is a “shelf company”. This is a preregistered company where the paperwork with Companies House has already been done and all that you need to do is pay a small fee to acquire the company, which will include changing the names of directors and dhareholders. Shelf companies are sold online through a number of company registration websites and the cost is low.
There are of course alternatives to a limited company which our other web page explores.
What benefits does a company bring?
A company is a separate legal entity, essentially recognised at law as an entity in its own right and can bear liabilities on behalf of others. An individual who wants to run a business but does not want to personally bear the risk of being financially ruined if it all goes wrong, can mitigate this risk by setting up a company and running their business through it.
A company will also provide the individual director / shareholder with the ability to determine how they are paid and ensure that any income they receive is organised so as to minimise tax and maximise personal earnings.
Indeed, the tax legislation has historically supported the use of companies for this purpose, with dividends derived from company profits (and paid to shareholders) incurring a lower rate of tax than an individual would be liable for if they were employed.
If managed well, there are lots of benefits to setting up and running your business through a company.
Directors
A director is the appointed manager of a company. In the UK there is no requirement for a minimum number of directors, although at least one director has to be a natural person.
- under current legislation, aimed at corporate transparency as of writing, there are proposals to require that all directors be natural persons. However, this is not currently the legal position (as of writing);
- directors bear a number of duties whilst acting in this capacity, all of which could make them personally liable for claims.
Most commonly, such personal liabilities arise when a company is placed into some form of insolvency process or where there is a fall out between directors or directors and shareholders.
Directors’ risks
In exchange for the position of trust placed in a director, they face personal risks if such trust is abused. These risks are wide and seemingly ever increasing, in accordance with government policies to ensure companies and their Directors are transparent. Some of these risks are as follows:
- prosecutions of directors by Companies House;
- disqualification;
- personal liability for breaches of a directors fiduciary duties;
- personal liability of directors in insolvency proceedings.
The above is not an exhaustive list and it remains the case that if a director abuses his/her position of trust, there are numerous risks they face personally and the above are the most common examples of claims we assist director clients with.
Shareholders
A shareholder (and shareholders collectively) own the company, although their interest is limited to the value net of third party rights (i.e. creditors).
A shareholder’s interest will conventionally be defined by the number of shares they hold, and thus the % of the company they own. This % they hold, as against any valuation of the company, may be affected by the type or class of share held, any underlying shareholder agreement and whether the interest is a minority interest (i.e. 50% or less).
Shareholders will generally not participate in the running of the company but will attend to issues such as the change of management (i.e. directors), the company’s constitution, dividends and structural alterations to the company.
Shareholders with majority interests generally have the power to control the company and its directors from within. Shareholders with minority interests (50% or less) are subject to the power of the majority shareholders, in the absence of which there are other remedies available to minority shareholders.
If you require more assistance with understanding the risks and benefits of forming a limited company, then at Francis Wilks & Jones you will always speak to someone at a senior level who will respond to any query you have very quickly.
