A company is always the best medium to conduct a business
With the recession falling all around us, and businesses falling left right and centre, we need to consider what is the best way to get people back into entrepreneurs. We need people to do this in order for them to create jobs on the job market and conduct a profitable business which encourages people to spend money so that the Government can collect tax via VAT and tax from the entrepreneur. How should an entrepreneur conduct his business? Through a company, this is the best way for entrepreneurs to conduct their business.
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a compnay limited by shares has limited liability for the owners
If you conduct a business through a company limited by shares, what you must do is allot shares to yourself. The ordinary value of shares is often one unit of currency, so one pound for example. You do not have to pay for that share upfront, you may elect to pay it later. If the company should get into debt and become insolvent, you are only liable to pay back any unpaid amount against those shares[[S3 Company Act 2006 ('CA')]]. Therefore, it could only be one pound! This is the only amount creditors of the company will be able to claim from you as the owner of the company. Compare this to a sole trader or a traditional partnership. Sole traders have unlimited liability for their business. If their business is in debt by several thousands, they owe several thousands. This can lead to repossession of their person belongings in order for the creditors to get back their debt. The same with the traditional partnership, although the debt is split between the partners (2 or more). This makes a company limited by shares the best business medium.
In the grand scheme of things, how is this good for the recession? Especially when the banks have already been bailed out by our taxes[[http://news.bbc.co.uk/1/hi/business/7666570.stm]], why is it good to promote businesses being conducted by a company that has people behind it who can escape all liability for their losses.
Besides, the reality of the situation is that a new company will not be trusted by banks and they will not want to lend the money to a company without a personal guarantee. This renders the benefit of limited liability to be available only to large businesses who have a good bargaining position.
a company is a separate legal entity
A company is a separate legal entity and it has its own legal personality. That means the company can enter into contracts, be liable for tax, and be liable for any actions or misconduct. This is called the 'veil of incorporation'. It is what the courts have described as the process whereby a company conceals the liability of the owners and the company takes all responsibility. This once again comes back to the principle of limited liability but it also raises the issue of contracts and the ease of business.
As the company can enter into contracts, anyone with authority can sign a contract on behalf of the company. That way, the company is not reliant on the presence of one individual, like a sole trader is.
Whilst the company may be able to enter into contracts, there are strict rules contained in the CA 2006 as to who is allowed to enter those contracts on behalf of the company.
Shareholders, the people who purchase the shares (the owners of the company), do not have day to day management of the company unless they are also directors[[S.40 CA 2006]]. Directors who sign contracts on behalf of a company are not exempt from liability if the signing of the contract was beyond the scope of their powers [[s40(5) CA 2006]]. Therefore, it is not true to say that the company takes all the liability from a contract.
In addition, there are strict rules as to how the contract executed on behalf of the company is to be executed [[S.44 CA 2006]]. Often this requires two directors of the company or one director with the signature duly attested by a witness. This is in comparison to a sole trader who merely has to sign his name on the paper!
you can isolate liability within a company by creating companies
A company can own other companies. A company that owns another company is called a parent company. They can create a company which is a 'wholly owned subsidiary' [[s1159(2) CA 2006]]. This means that the parent company owns 100% of the shares in that subsidiary company. This is a great way for companies to isolate liability. Imagine a successful supermarket that wanted to start a new venture in the online market. The company was not sure whether this would work. If they traded online in their capacity as a company, they would be liable to any debts incurred should the new venture fail. Compare this to if they incorporated a new company with them as the only single member [[S.123 CA 2006]]. That company need only have a single share with a nominal value of as little as one pound and the creditors of the new venture, any banks that provide loans or any customers that make a contractual or tortuous claim against the wholly owned company would only be able to recover the money held by the new wholly owned company, not the money held by the parent company. This enables and promotes companies to be more entrepreneurial, this is what we need in a recession.
This is only if the agents of the parent company are patient. In business, timing is key. Often the directors of a company will be keen to effect idea immediately so as not to miss out on an opportunity. Problem being that when incorporating a new company, the company only has its own legal personality upon the Registrar at the Company House dating the certificate of incorporation[[S. 16 CA 2006]]. Any contract signed before that will actually not bind the new company which is not yet formed; it will bind the person who signed the contract [[S.51 CA 2006]]. However, if a director, acting as agent for the parent company-to-be [[Model Article 3 CA 2006]] then it will in fact be the parent company that is liable. By waiting for the certificate of incorporation the company may miss out on a valuable trading opportunity. So there is no real benefit to a company here. It is entirely dependent on the circumstances and the proposed new venture.
Sole traders have no primary applicable law to them
If you conduct your business through being a 'company', you are subject to vast amounts of legislation [[Companies Act 2006]]. Even the hybrid form of a company, a Limited Liability Partnership ('LLP') is subject to vast amounts of legislation [[Limited Liability Partnerships Regulations 2001]]. Companies and LLPs not only have to comply with the contents of these pieces of legislation as to how they conduct their business, they also have to comply with general legislation such as the Supply of Goods and Services Act 1982 and other legislation designed to protect the consumers. However, there is no such legislation in place for sole traders, therefore they will not have so much worry as to how they conduct their business and they will have less chance of breaching rules as there are less rules that apply to them.
This can make it harder for a sole trader. With no primary legislation attached to a sole trader (someone conducting their business on their own, unregistered) there is no precedent on how the sole trader should operate. Whilst allowing for ingenuity, it does make it hard for a sole trader to know what to do in order to conduct their business.
We can also question whether it is desirable in a recession to have many sole traders. Sole traders typically will only employ themselves or their family. This is not conducive to the recession.
there are expenses in setting up a company
In order to form a company, there are many documents to fill in and laws to comply with. You need to write your Articles of Association, sending them with an application for incorporation and a statement of compliance(stating that you have complied with the provisions of the CA 2006[[S.9 CA 2006]]. You also need to have a register of officers, a registered office and documents stating if you are a company limited by shares or guarantee. If limited by shares then you need to issue a statement of capital [[S.9 (4)(a) CA 2006]]. If limited by guarantee then you must send a statement of guarantee [[s.9 (4)(b)CA 2006]]. All these forms need to be sent to the Company House and need to comply with strict regulations on how each document is to be laid out. This is a timely and cost consuming process. A sole trader or traditional partnership will have no such start up costs.
The reason for the documents is to bind the conduct of anyone who purports to act for the company. Be they shareholders or directors. It is protection of the legitimate interest of the company. Even in a partnership, businesses would be best advised to documents their agreements with each other in order to ensure that anything they agree is legally enforceable. In fact, it needs to be laid down in order to ensure that the parties themselves know what the business is aiming for. A sole trader if they wanted their business to expand and continue should also set up a company as this would ensure the longevity of what they have achieved. Otherwise, when they die, so does their business.
a company is far more exposed
In order to trade as a company, your business has to be disclosed publicly. Most of the decisions, certainly the important ones, made by the shareholders have to be made available at your registered office [[S. 29 CA 2006]] The registered office has to be updated and sent to the Company House if it changes [[S.87 CA 2006]]. The Company accounts has to be sent to the Company House to. This causes a lot of people concern as this will show the money the company is making or losing[[S444 CA 2006]]. This information will be on display for all to see over the internet [[http://www.duport.co.uk/companies-house.php?gclid=CKn4kLXqy6UCFQ8f4QodjCEKlQ]]. Sole traders will not have to do this, they can keep their finances and the running of their business private.
The information that you are required to disclose are of no concern if you are conducting a legal business! The only disadvantages of disclosure of this information is that you cannot defraud people! You cannot lie to the tax man to avoid tax. You cannot lie to a bank in order for them to give you more credit that you can afford. And you cannot lie to your customers as to how well your business is running. These are all great factors for the recession. We want companies to pay tax. We want banks to make informed decisions as to who they give credit to. This makes companies the best way to conduct a business.
What do you think?