To incorporate or not to incorporate?

Barry Riley

We are often asked by clients setting up as a business whether or not they should form a limited company.

Why Incorporate?

A primary reason for setting up a company is to obtain limited liability for the shareholders.   A company will be liable without limit for its own debts and can be forced to pay them to the extent of its assets, but the liability of its shareholders will consequently be limited to the value of their respective shareholdings.  However, in practice, this limited liability may be whittled away to a certain extent by the common requirement of banks (and possibly creditors) that the shareholders of a small company give personal guarantees for the company’s indebtedness.

A second motive for incorporation is that contractual liability for all contracts made in the company’s name will rest with the company.  As a separate legal entity, the company therefore sues or is sued in its own name rather than the individual controllers suing or being sued personally.   It is only if the company is being wound up and there is evidence of fraud or misconduct that the creditors may have recourse against the directors and shareholders.

A third motive for incorporating a business is that a company has perpetual succession.   This means that, unless it is dissolved, the company continues to exist despite the death, bankruptcy or retirement of any of its shareholders.

A fourth reason (and an extremely important advantage of incorporation) is that a company, unlike a sole trader or partnership, can give security for its borrowings by granting a floating charge over all or a particular class of its assets.   Only when a particular event occurs will the charge become a fixed one and until that time the company can deal with and dispose of its assets in the ordinary course of business.  The assets of a company do not belong to the shareholders, but to the company itself.   The shareholders have no rights to the assets, having only an indirect interest in them through the medium of their shares.

There may be tax advantages in trading as a limited company, although this does very much depend on the individual circumstances.   We will gladly consider the particular circumstances of your business and advise you whether or not, for tax reasons, you ought to incorporate.

Formalities

However, incorporation is not without its price.   As well as the cost of incorporation (about £200) there is the cost of maintaining proper secretarial and accounting systems to enable the company to comply with the formalities of the Companies Acts.   In spite of this, however, it is generally thought that the advantages of incorporation greatly outweigh the possible disadvantages.

Barry Riley
briley@metcalfes.co.uk
DDI – 0117 9453 042

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