In this article
In the next instalment of our ‘types of businesses’ series, we have incorporated business.
As there are many different kinds of companies in the UK, it would require a whole book to cover them all. This series aims to get you through the basics, thus covering the main types, such as incorporated business.
Looking to cut to the chase? If you’re looking for a solicitor to help you with your business, just call us on 020 3007 5500, or submit a contact form.
What is an incorporated business?
The incorporation process separates the main types of companies in the UK. Incorporation is the legal process of setting up a business as a separate legal entity from its owners.
If you run a company and have not gone through this process, then you run an incorporated business.
The corporate entity is one we imagine when picturing a business in the UK. You form this entity by registering specific documents with the Register of Companies. This is done in accordance with the Companies Act 2006 (CA) requirements.
Sole traders and partners, examples of unincorporated businesses, emerge and begin trading straight away. They may not even be aware they exist. Conversely, setting up an incorporated company is generally a conscious decision.
Separate legal personality (the limited company).
The separate legal personality is the main reason people set up a limited company. It means that someone who wishes to take legal action against the business will have to sue the limited company. Those who own or manage the company are then free from liability.
In most instances, those who own the company through shares (shareholders) will not be personally liable for the company’s debts. Their liability is limited to the amount they originally invested or paid for the shares. This is why they are known as limited companies.
If the company were to wind up as a result of insolvency, the shareholders would only lose their investment. This is a very beneficial system for investors because it allows them to take more calculated risks. They can invest in companies without being concerned about their personal liability.
It also means companies benefit from it being easier to attract investors. This is especially true in the early growth of the business when they are more risky investments.
Many claimants do not think it is fair for directors and shareholders to make decisions on behalf of a company. They also believe it unfair for them to escape liability when the company cannot pay its debts to the claimant.
However, this system of corporate capitalism has created an economic boom in the last 50 years. As a result, many products and services are now on the market that would never have have seen development without limited risk investment being available. It may not always seem moral, but the law protects this system because of the benefits to the economy and society.
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A landmark case on the limited company.
Salomon v A Salomon and Co Ltd 1897 is a landmark case on this concept. Mr Saloman was a sole proprietor who fashioned leather boots and decided to turn his business into a limited company. In turn, the business would now purchase assets from him.
The company went into liquidation due to outstanding debts and the debts sought to make him personally liable. The House of Lords ultimately deemed the company was an independent legal person with its own rights and liabilities. This was despite Mr Salomon remaining the majority shareholder after setting up the company.
This case firmly established that the limited company had a separate legal personality independent of the shareholders in the business. This is the case even if a sole shareholder owns the entirety of the business and there are no other directors or employees.
The limited company vs limited liability partnerships (LLPs).
An LLP exists in the middle ground between a partnership and a limited company. It runs like a partnership and the partners pay tax as if the business were a partnership instead of a limited company.
The partners are self-employed and pay income tax rather than the company paying corporation tax. However, it offers the protection of the limited company as it protects owners from liability for the LLP’s debts.
In many ways, LLPs offer the best features of partnerships and companies. Therefore, it is surprising that more companies do not use this format. Economists suggest that the company is a more well-known format internationally than LLPs. This could be a big reason for companies not to be LLPs.
How can we help with your incorporated business?
There are various other types of incorporated businesses but limited companies and LLPs are the most common. If you are a business owner and interested in investigating a better way to run your business, we can help.
Call our team directly on 0203 007 5500 or send an enquiry to [email protected] to contact our expert business law team today.
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