A corporation is a separate legal entity totally independent of its shareholders, directors and employees says Aron Govil. It has the ability to act, to contract, to sue and be sued in its own name. A shareholder or group of shareholders acting together hold shares in the corporation entitling them to share in profits (through dividends) and/or claim losses (through capital loss). A board of directors is elected by the shareholders who then appoint management (corporation’s CEO or president) to run daily operations. The managing director directs employees who do much of the work.
The main reason for incorporation is limited liability; it means that if you invest your money in the business – called “investing at risk” – you cannot lose more than you’ve invested. If the company goes bankrupt with debts amounting to more than what it owes, shareholders are liable up to the amount they’ve invested only.
There are three different types of corporations, with some key differences in law and tax treatment: close corporation (CC), public company (plc) and private limited company (Ltd).
A public is a listed on the stock exchange while private companies do not offer share sale or purchase to general public says Aron Govil. Public companies must comply with disclosure requirements under Listing Rules.
The close corporation is by far the most common type of corporation for small businesses in England & Wales. This kind of business is also known as “private company”, although this term actually has no legal significance in the UK.
As a close corporation, there is no limit on the number of shareholders, but if there are more than 25, it must have at least two directors. A company has to keep its financial records separate from those of any other business entity in which it owns shares or has an interest. Close corporations in Scotland come under the auspices of Scottish Partnership registration.
Close corporations can be form by four or fewer people who want to run a business together without forming a full limited liability company (LLC). However, if they choose this route, members do not have much protection against lawsuits brought by debtors or outsiders because unlike LLCs or private companies, close corporations cannot afford to indemnify their members for losses incurred due to wrongful conduct explains Aron Govil.
Close corporations can be form easily by writing a simple agreement that the members sign and register. With the local government body called Registrar of Companies, which will cost around £20-30. This memorandum of association is also your articles of association: it dictates how your business should work. And how it will split profits and losses among its shareholders/members.
Public company (plc)
There are many reasons why you might want to form a public limited company. Including access to capital or revenue, giving shareholders liquidity (i.e. ability to sell their shares quickly). And because it is an established business form in the UK. Public companies register with Companies House and file annual financial returns. Which disclose information about its operations, such as profits earned or other sources of income during the year. Public companies must also comply with disclosure requirements under Listing Rules. The larger the number of shareholders, generally speaking the more difficult it will be for your business to remain private.
Private Limited Company (Ltd.)
The greatest benefit of using Ltd rather than plc is that. This form puts a ‘veil’ of limited liability between the company and its members. Meaning that if your business goes under, you will not be hold personally responsible for any of its outstanding debts. So this is a much safer form than plc. The members’ financial liabilities are limit to the amount they’ve invested in the company.
Therefore, if you are starting a small business and want to limit the amount of money you invest in it. Then plc (public limited company) is not the form to use. Because you won’t get any personal liability protection says Aron Govil.
Of course there are more benefits of a corporation. But I think these are the two most important reason people decide to start a corporation rather than a LLC. Next time I’ll cover more benefits of corporations that normal people might not consider. Leave any questions or comments below!