A company is an independent legal entity that is owned by “members”, and controlled by “directors”. There is a long history of people using companies as the entity through which they trade, i.e. instead of trading as individuals (“sole traders”), or in conjunction with other people (“partnerships”).
One of the main benefits of using companies as trading entities is that any trading liabilities which a company may incur can be limited to the amount of money that the members of the company state as their backing to the company (its capital). If the company should incur greater liabilities than its capital then the directors and/or members would not normally be liable to make up any shortfall.
The overwhelmingly “normal” method of limiting liability for ordinary trading is for members to inject their capital into the company by the company issuing Shares in exchange for money. For a company whose liability is limited by shares, the ownership of the company directly relates to ownership of shares in the company. Trading surpluses can be paid to the owners of shares by dividend and if the company is wound up, any accumulated reserve will also be paid to shareholders.
A much less common alternative method of limiting liability for a company is by guarantee. This is usually when a company is not trading in the normal sense e.g. a charity or social enterprise. In this structure the members do not actually introduce capital into the company, but they pledge to do so if the company needs that capital in order to meet its liabilities. There is no equivalent concept of ownership by members (Guarantors) of a company whose liability is limited by guarantee.
The members of a company limited by guarantee are not normally eligible to benefit from any surplus such a company may generate. The company’s constitution will specify what should occur to any such surplus - this is often payable to a charity.
Whichever method of limitation is adopted, a limited liability company is normally the best way to trade because the structure separates your business affairs from your personal affairs. In particular, it protects your business in future from personal liability you may have undertaken in the past. This structure also protects you personally from liabilities your business might undertake in the future and ensures that your personal and company tax and accounting are separated.
Companies are the more common and convenient business structure for trade of any reasonable size and have the following advantages:
- A company lends itself to participation by others - including employees, supporters and investors
- It makes a business saleable/transferable (e.g. on death of its controllers)
- It enables a business to be ended cleanly if needed
- Companies may find it relatively easier to get credit, win customers, obtain favourable suppler terms and undertake leases as the are the normal form.
Mounteney Legal Services has established hundreds of companies; our Formation service (that can be bought on the internet) is intended to be an economical method of establishing a new company. Mounteney Legal Services’ Formation Schemes are particularly suited to the many ministries and groups who wish to establish new Company Limited by Guarantee on a low budget. The Christian ethos of our firm often resonates with such groups.
When deciding to use our Formation service, you should bear in mind that:
- Companies need an ongoing administration
- Annual accounts have to be prepared and files with Companies House
- Companies House have to be informed of changed to the make-up of a company
- Companies House’s records have to be confirmed each year with a Confirmation Statement
- Companies are separately taxed - normally by Corporation Tax
- There is some loss of privacy as documents filed with Companies House are public.
Included in our incorporation service is the first year’s Company Secretarial service (if required). You may also wish to consider our Charity Formation and Community Interest Company products and our guide Charity and Social Enterprise.
How long will it take?
The time taken for our work to conclude depends on precisely what it is we are asked to do.
- A Company Limited by Shares usually takes about 1 day to incorporate
- A Company Limited by Guarantee usually takes about 2 working days to incorporate
Our Formation product comprises; taking your instructions, establishing the company, first year’s Company Secretarial Service, if required and a Guidance service.