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Part three - To limit liability or not?

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This series is looking at the common formats of trading as a business. Part 1 looked at sole traders, Part 2 at Partnerships and this part is looking at private limited companies.


Private Limited Companies

A business which is run as a private limited company will be owned and operated by the company itself.

The company is recognised in law as having a personality which is separate from the person/s who formed the company and/or directors and shareholders. It is a ‘person’ in its own right. The company can enter contracts and it can sue and be sued and is quite separate and distinct from individuals involved. Those individuals can be directors and shareholders of the company.

The directors of a company are typically responsible for decisions such as:

  • Entering into contracts,
  • Day to day management of the business,
  • Calling general meetings,
  • Taking legal proceedings in the company’s name.

 The shareholders of a company are its owners and have responsibility for decisions such as:

  • Altering any aspect of the company’s constitution,
  • Dismissing a director from the board,
  • Appointing directors to the board and,
  • Authorising the directors to issue new shares in the company.

In small private limited companies often the directors and the shareholders are the same people. Decisions affecting the business must be made either by the directors or by the shareholders. It depends on the Companies Acts or on the company's constitution whether a particular decision rests with the directors or shareholders.

The main characteristics of a company are:

  1. The assets of the business are owned by the company not by the shareholders.
  2. The company will pay corporation tax on the profits. The directors and shareholders of the company cannot be made liable for payment of corporation tax.
  3. Directors and shareholders may receive income from the company in form of salaries and dividends respectively both of which give rise to possible charges to income tax.
  4. The company alone is responsible for the debts and obligations of the business. Shareholders enjoy the benefit of limited liability which means that their liability is limited to paying to pay for their shares. Once those shares have been paid for in full the holder of those shares (in capacity of shareholder) has no further liability. There are only a few exception circumstances, such as where the individual has acted dishonestly.
  5. Certain information has to be made available to the public about the company, its directors, shareholders and finances.

There are more procedural and regulatory requirements in starting up a business as a private limited company.

If you want to form a company, you need to file certain document with the Registrar at Companies. This includes the constitutional document of the company also known as the articles of association. There are regulations for the internal arrangements and the management of the company.

The articles deal with the:

  • Issue of shares,
  • Transfer of shares,
  • Alteration of share capital,
  • General meetings,
  • Voting rights,
  • Directors (including their appointment and powers),
  • Dividends,
  • Accounts,
  • Winding up and,
  • Various other matters.

The legislation lay down model forms of articles that a company can adopt but many companies seek bespoke arrangements to suit individual requirements of the shareholders.

If you want more information regarding setting up a company, please contact our Head of Corporate, Margaret Evans at Margaret.evans@fdrlaw.co.uk. You can also reach Margaret or our commercial team on 01925 230 000

**This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest. Specialist legal advice should always be sought in any particular case **