With this type of structure, the owners of the business become shareholders and, usually, directors of a company. The directors are responsible for the day-to-day running of the business.
A company is a separate legal entity to its owners. There is, therefore, on the face of it, limited personal liability for the owners. Their liability is limited to the amount they “invest” in the Company i.e. the amount they pay for their shares and any loans they make to the company. The losses and liabilities of the company stay with the company, as do the profits, the business and its assets.
Companies can offer flexibility in the sense that they lend themselves well to changes in ownership, whether by way of sale or inward investment. And, they also provide owners with a relatively simple way of incentivising staff by offering ownership through share options, often linked to the performance of the employee or the business.
However, there are, of course, some disadvantages to this structure. For example, companies must be transparent and must file ownership and financial information at Companies House on a continuing and an annual basis. This information is open to the public to inspect at any time and includes information such as the company’s annual return and accounts, and also when certain changes occur, for example to the directors or the shares in the company. Various statutory registers must also be maintained, with details of the company’s officers and owners. To find out more about Transparency of Corporate Ownership and the new requirements for companies click here.
As with other business structures, all companies must register for VAT if their turnover exceeds £83,000 annually, and must also register with HMRC as an “employer” if there are any employees engaged in the business.
A company will pay corporation tax on its profits, currently (as at Jan 2016) at the rate of 20%, and employers’ National Insurance if it has employees. The owners (as shareholders) will pay tax on their dividends at their income tax rate and, if they are also employed by the business, under PAYE, again at their income tax rate.
It is quite common, and advisable, for the owners of a company to have in place an agreement (a shareholders’ agreement) between them, to protect them , for example, by placing restrictions on the actions of the business and setting out a process for dealing with disputes, and how an owner might exit the business.
Where no agreement is put in place, the rules governing a company will be contained in its Articles of Association which is the company’s internal constitution, and, if unamended, will be fairly basic in form.
The recently enacted Small Business, Enterprise and Employment Act 2015 has introduced a number of changes which impact on the responsibilities of company secretaries and directors. These are summarised here.
The Corporate and Commercial team at TSP can not only help with setting up your company and advising on the roles and responsibilities of company secretaries and directors, but can also help put in place shareholders’ agreements.