Company formation to most people means forming a company limited by shares and is often know as a “private limited company”. Shares are issued and directors are appointed by the shareholders (often the same people in a small business).
The benefit of this type of company over a partnership is that the shareholders have limited liability so if the company fails there is no claim on the assets of the shareholders (beyond their original investment). As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company. As long as the business is operated legally and within the terms of the Companies Act, directors’ personal assets are not at risk in the event of a winding up or receivership.
Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer not to deal with non-limited businesses. Banks also appear to favour limited company customers, although they will often seek personal guarantees from the directors.
Forming a private limited company is reasonably straightforward and many of the costs associated with managing and operating a limited company are no longer much greater than with a non-limited business. Proposed changes to the Companies Act due to be introduced possibly in 2005 will further simplify much of the legislation relating to limited companies.
The benefits of a a private limited company formation include:
- Suits the majority of commercial trading requirements in the UK
- Can undertake any nature of business
- Can operate anywhere in the world
- Members (i.e. shareholders) have limited liability
- Can have a sole director and sole shareholder
- Enhanced credibility with customers and suppliers
- Must also have a company secretary – there must be at least two separate officers (director/secretary)
- Recent changes to corporation tax make LTD companies advantageous to most businesses
Changes to legislation over the last few years have meant much lower costs associated with limited companies and recent changes to corporation tax have further enhanced the attractiveness of operating as a limited company. Profits can be retained in the business to fund future growth or distributed to shareholders as dividends.
As there is no obligation for a limited company to commence trading within any set time period after its incorporation, the formation of a limited company is also a simple and low cost way to protect a business name for future use.
Company Limited By Guarantee
A company limited by guarantee is usually used for a club or an association. It also has limited liability. The liability of its members being limited to the amount each member undertakes to contribute to the assets of the company in the event of its being wound up, normally £1.
No shares are issued and the company has members who agree to contribute a membership fee or subscription. Normally they have equal voting rights and elect a board of directors. Any profits (often known as “surpluses”) are not distributed as dividends, but may be used to support the activities for which the club is formed.
Public Limited Company (PLC)
You must form a public limited company if you want to trade shares with the public. A PLC must have a minimum authorised and issued capital of £50,000. At least 25% (£12,500) of this minimum must be fully paid up before the Registrar of Companies can issue a Certificate for Commencement of Trading. As a private company can be converted to a PLC most PLCs start life as normal private companies and convert at a later date prior to flotation of the stock market. However, just because a company is a PLC does not automatically mean its shares a publicly listed.
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