Incorporated Forms of Business

In the 19th century legislation was introduced enabling businesses to be recognised as legal entities - legal personalities. Large amounts of capital was needed for emergent industries such as engineering and chemicals and the personal wealth of investors who did not want to be active in managing the business was at risk with unlimited liability. So a need for new forms of business other than sole proprietors and partnerships was evident.

Those who work in companies are employees and ‚continuity of successionç is available in more flexible ways than provided by sole proprietors and partnerships. If an employee leaves a businessçs employment, the company as a legal entity can re-appoint and go on without having to dissolve as a result.

Setting up the Company

Section 1 of the Companies Act 1985 allows two or more people to form an incorporated company for any lawful purpose. The business has a legal identify separate from the shareholders and between shareholders.

The company's accounts must be audited annually by a chartered or certified accountant and records of the company must be filed at Companies House (Cardiff).

You can start the company with only two shareholders, one a director and the other the company secretary who keeps the records required by law. Direwctors salaries are taxed under PAYE as employees.

You can either

• buy a ready made company from a company registration agent (say £250). If you do not like the name offered - this can be changed for approx. £50.
• or set up a tailor-made company with the help of a solicitor/adviser (costs more, takes longer)

NB: companies pay corporation tax on profits. It has a registered name which is legally protected and the company has a regulated structure.

Benefits/constraints are;

• investors offer capital to the company becoming one of the owners. Ownership is shared with other investors. The amount owned is in units of "a share".
• in exchange for injection of shareholder capital, the company agrees to distribute a portion of the profits between shareholders. How much is (the dividend) is decided by company management. Dividend payments (and growth in the value of shares) represent shareholdersç return on investment. These can be compared to other investments such as government bonds or interest from bank accounts.
• Shareholders liability is limited to amount they have invested (the value of their shares and no more). If company fails, business assets e.g. land, equipment, stocks, bad debts etc are liquidated and losses are paid. Creditors can only claim back as much money as the business owns (personal possessions cannot be claimed).
• employees contract to do work for a reward package. They may suffer job loss, but employees cannot be pursued for company debts.
• in reality liability may not be limited. If a company is new, small or has problems, financial institutions (the bank) may be unwilling to lend money without personal guarantees.

Ownership of companies
When a non-incorporated business develops into a limited company the entrepreneur capitalists who injected capital to fund the business and can retain control (via a majority shareholding). Shares can be transferred when others pay the "owners" for a number of shares at a given value. Thus the original owners can raise money for the company or to liquidate some of the funds they injected into the company. The shares reflect the value of the firm which may be greater than the actual sums thus invested.

A companyçs value (Harry the Horseçs chain of betting shops is valued at, say £1 millon). This value is divided up into shares typically £1 or 25p. So at 25p, 4 million shares are created and taken up by private investors. With a handfull of shares (large or small hand), the shareholder part owns the business and can vote on policies at annual general meetings. Voting rights are pro-rata to size of share-holding. Large shareholdings offer more voting power.

Shares of some limited companies may be held by one person and have a total nominal share value of a few hundred pounds only. Share values of £ billions are common to large public limited companies and shares are held by tens of thousands (but maybe the majority by a few, large, other companies - the institutional investors).

Distribution of share ownership

The distribution of share ownership influences how the business is controlled. If a shareholder has enough shares (51%), then he/she effectively controls the company. He/she can veto the motions of other shareholders at AGMçs and so determine company policies and management.

There is more than one type of company

a private company

• limited by shares>the companyçs capital is limited to the amount of share capital its members have agreed to pay

• limited by guarantee - company liability limited to the amount members have undertaken to contribute to the companyçs assets if it is wound up

  a private unlimited company no limit to its members liability

  Public limited company (Plc) - must have a share capital of at least £50,000 (authorised minimum) at the time of incorporation

  Legal Conditions

  A company is bound by legal conditions. Failure to comply puts the company in breach of the law. All companies must submit the following all of which can be inspected by the public:

  Memorandum of association
  This is filed at Companies House when the company is founded. It gives

  • the company name and purposes, the address of the companyçs office
  • a ‚declaration of associationç (members intention to form a company and take shares in it)
  • a statement that the ‚membersç are claiming limited liability at law, the value of the share capital
  • how the shares are distributed
  • type each member holds (e.g. voting/non-voting rights).

  Articles of association
  These are bye-laws regulating internal arrangements and rules of the company

  • identity of shareholders
  • regulations for issue and transfer of shares
  • rules for shareholder meetings
  • appointed directors, their powers and responsibilities
  • the company secretary
  • the auditors of the companyçs annual accounts.

  An annual general meeting (AGM) must be held each year and not more than 15 months after the holding of the preceeding one.

  Every year the company must report the following to the Registrar of Companies.

  • details of its office, share capital, members and their shareholding, security, directors and total debts secured by a charge on assets.

    In addition to the accounts the company must keep

  • a minute book
  • a register of directors and company secretaries
  • a book of share certificates
  • a register of debenture holders

  Annual audited accounts

  The company must have a proper sert of books and records. The following must be submitted to Companies House

  1. the profit and loss statement
  2. the balance sheet
  3. a directors report

  (1) and (2) must be audited by an accredited accounting organisation. At Companies House the statements are open to public inspection. Certain exemptions from audit are possible.

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  Written by Chris Jarvis for the BOLA project