Why set up a company?

You don't need to have a company to be in business, but there are some circumstances where it can be very helpful.

The two things to bear in mind are that

The legal person

A company can do most of the things individuals can do - it can own property (subject to the same sort of restrictions as apply to individuals), employ people, enter into contracts.  It has the same rights as an individual to start legal proceedings.  The other side of this is that it can itself be sued.

If you have a contract with a company, whether to provide you with a telephone service at home or to supply raw materials for your business, the fact that the person who signed the contract leaves to join another company makes no difference.  Your contract is with the company.

A company can live for ever.  If you want your business to keep going beyond the end of your working life, a company may be the answer.  The owners can change, the management can change, the company is the same company it always was.

About owners and managers

A company is owned by its members.  If the company has shares, the members are often referred to as shareholders.  The members appoint directors to manage the company for them.  Members can be directors, but they don't have to be.  The people who own the company are not necessarily expected to have the skills to run it.  All they are expected to do is to appoint competent people to do this for them.

Limited liability

When you invest in a company with shares, you agree to provide it with a sum of money to enable it to finance its activities whilst still having a reserve to meet any claims from creditors.  In return for your investment, if the company is profitable, you can expect it to pay you a dividend from time to time in proportion to the amount you invested and thus the number of shares you hold.  If the company should fail, you cannot be required to pay more than you agreed to invest, that is, the amount you have already paid.

If you operate a business as an individual and get into difficulties, owing money to creditors, the creditors can pursue their claims against you personally up to the point where you are declared bankrupt.

If a company owes money, its creditors can claim against it in the same way.  If it cannot pay, it may end up in liquidation, but the creditors have no claim against the company's members.

Types of claim

A company can get into debt in the normal course of business, for instance, if its customers fail to pay on time or market conditions change.  There is also the possibility of a claim, say for negligence or personal injury, which may or may not be covered by insurance.  

So among the possible benefits of setting up a company are -

You don't have to have a company

There is no compulsion.  If the sort of issues we have mentioned are not particularly important to you, you may wish to trade as an individual or a partnership.  If you are interested, you may wish to look at -

 

Types of company

Forms and articles

 

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