This information is intended as a guide for Companies and their Directors to the principal filing requirements of the Companies Act 1993. It is not a complete statement of the obligations of companies or their directors, nor is it intended as legal advice. Therefore, the omission of any information will not relieve a company or its directors from any penalty that may be incurred through failure to comply with the Act.
Unless otherwise stated, all references in this document to the Companies Act relate to the Companies Act 1993.
Why Form a Company?
There are a number of reasons why people choose to incorporate a company rather than one of the other business types.
Limited Liability – The primary reason is the protection that limited liability affords to shareholders. All companies are limited liability companies unless the particular company’s constitution provides otherwise (Note: this is very rare). Although it is common to speak of a “limited liability company”, it is in fact the liability of the shareholders that is limited. The company is liable in full for all obligations that it incurs.
This concept of limited liability becomes important if the company is unable to pay its debts, and a liquidator is appointed. Shareholders of a limited liability company are not liable for the business debts of the company (subject to any personal guarantees given) – they are only liable (to the liquidator) for any unpaid money owing on their shares. If they have fully paid for their shares prior to the company being placed in liquidation, they will have no further liability to the company’s creditors.
By contrast a sole trader, or a person trading in partnership, will be personally liable for business debts that cannot be met by business funds.
Some other reasons for incorporating a company include:
· Continuity of existence – a company will continue until it is removed from the register. It can often survive many changes in ownership or management. With a partnership, the retirement or death of a partner usually brings that partnership to an end.
· Transferability of shares – shareholders may sell of otherwise dispose of their shares at any time (subject to any restriction imposed in the company’s constitution). A partnership interest, on the other hand, is generally not able to be assigned or transferred.
· Control by shareholders – if the shares held by a shareholder are voting shares, that shareholder may participate in the election and removal of directors. Accordingly, shareholders, with their collective right to elect the directors, have the ultimate control of the company without being concerned in its day-to-day affairs.