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Limited Liability Companies  

As the name suggests, in this form of business, your liability is limited to the amount you contribute by way of share capital.

A company registered in accordance with the Companies Act is a separate legal entity, distinct from both its shareholders, directors and managers. The liability of the shareholders is limited to the amount paid or unpaid on issued share capital. A company has unlimited life and no limit is placed on the number of shareholders. The Companies Act does, however, place many restrictions on the company. It must maintain certain books of accounts, appoint an auditor and file an annual return with the registrar of companies which includes the accounts as well as details of directors and mortgages.

A minimum of three shareholders and one of these as the Managing Director is required to form a company. There are in fact two types of companies limited by shares. The first is a ‘Public Limited Company which has a minimum authorised and allotted share capital. This is a company which, according to its memorandum of association, may invite the public to subscribe to its shares. Any company, which is not ‘public', is called ‘private'. Public companies have further onerous legal requirements and restrictions placed upon them. Generally, most companies start life as `private' and only become `public' when they need funds from a wider range of shareholders. Companies pay ‘corporate tax' on their taxable profits.

Advantages of the limited company

• Members' (the directors and shareholders) financial liability is limited to the amount of money they have paid for shares.
• The management structure is clearly defined, which makes it easy to appoint, retire or remove directors.
• If extra capital is needed, it can be raised by selling more shares privately.
• It is simple to admit more members.
• The death, bankruptcy or withdrawal of capital by one member does not affect the company's ability to trade.
• The disposal of the whole or part of the business is easily arranged.
• High status.

Disadvantages of the limited company

• Requirement to register the company with the registrar of companies and provide annual returns and audited statement of accounts. All details of the company are available for public inspection so there can be no secrecy. There are penalties for failing to make returns.
• Can be more expensive to set up.
• May need professional help to form.
• As a director, you are treated as an employee and must pay tax.
• The advantages of limited liability status are increasingly being undermined by banks, finance house, landlords and suppliers who require personal guarantees from the directors before they will do business.

Requirements for a Private Limited Company

1. A Registered Business Name: This must be followed by the word ‘Limited' or ‘Ltd'. The Companies Registration Office exercises some control over the choice of name, it cannot be identical (or very similar to) the name of an existing company. It won't be considered if it is offensive or illegal and the use of certain words in a company (for example, `Institute', `National') can only be used in certain circumstances. The company name must be displayed in a conspicuous place at every office, or other premises where the company carries out business.
   
   
2. A Registered Office: This need not necessarily be the same address as the business is conducted from. Quite frequently the address used for the registered office is that of the firm's solicitor or accountant. This is the address, through, where all official correspondence will go.
   
   
3. Shareholders: There must be a minimum of two shareholders (also described as `members' or `subscribers'). A private company can have up to fifty shareholders.
   
   
4. Share Capital: The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. Small companies are frequently formed with a nominal share capital of Rs.100.
   
5. Memorandum of Association: The memorandum is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway a 75 per cent majority of the members of the company can change the objects whenever they like. Nevertheless, it is worth bearing in mind that directors of the company will incur personal liability if the company engages in a type of business which is not authorised by the objects clause. The memorandum must be signed by at least three shareholders.
   
   
6. Articles of Association: The document contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders. Many companies don't bother to draw up their own articles but adopt (sometimes with some modifications) articles set out in the Companies Act.
   
   
7. Certificate of Incorporation: This is the document, which the registrar of companies issues to you once he has approved your choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.
   
   
8. Auditors: Every company must appoint a qualified auditor. The auditor's duty is to report to the treasurer whether or not the books of the company have been properly kept, and that the balance sheet and profit and loss account presents (or doesn't present) a true and fair view of the company's affairs and complies with the Companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.
   
   
9. Accounts: The Companies Act lays down strict rules on accounting. Every company must maintain a set of records, which show the financial position at any one time with reasonable accuracy. The accounts comprise a profit and loss account and balance sheet with the auditors' and directors' reports appended. A new company's accounting reference period begins on its incorporation and runs until the following 31st March - unless the company notifies the registrar of companies otherwise. Within ten months of the end of an accounting reference period, an audited set of accounts must be laid before the shareholders at a general meeting and a set delivered to the registrar of companies.
   
   
10. Registers, etc.: In addition to the accounts books, companies are required to have: a register of members and share ledger; a register of directors and secretaries; a register of share transfers; a register of charges; a register of debenture holders; a book can be purchased to hold all of the above. This will be provided automatically if you buy a running concern.
    
    
11. Company Seal: All companies must have an engraved seal. This must be impressed on share certificates and must be used whenever the company has to execute a deed. Again, this is included in the ready-made company package.