What is a company and why might you want one?
Tristan Ozanne, Partner at Babbé LLP explains...
A couple of important questions that are very often asked by those looking to set up their own business is “Why should I set up a company to trade my business from?” and “what exactly is a company anyway”. If you are wondering the same thing, then you are not alone!
What is a company?
In law, a company is treated as a legal person separate from its members and comes into existence upon incorporation and continues until it is removed from the Register of Companies.
While there are various types of company available in Guernsey (companies limited by guarantee often used for charities, protected cell companies often used for investment funds and other holding vehicles, and even unlimited or mixed liability companies), we would anticipate that the majority of new businesses would have in mind what might be termed a “standard” company, that is to say a non-cellular company limited by shares. Indeed when you hear the term “company” from time to time in the context of trading businesses, it is a good bet that the person is referring to one of these standard companies.
Setting up the company
Setting up a company and the making of the necessary applications will need to be done by a corporate services provider, that is to say a professional firm which holds an appropriate licence from the Guernsey Financial Services Commission. You will need to think of an appropriate company name and the company will need to be registered with the Guernsey Registry which will enter it on the public records and give it a company number. The companies law provides for certain compulsory and prohibited rules around company names.
You may also require legal assistance to advise you in more depth about the precise structuring of your company and the drafting of appropriate memorandum and articles.
Directors and Shareholders
The business of a company is managed or supervised by its directors. It can have a sole director or as many directors as needed. The directors are sometimes referred to as the “Board” of the company. No minor or disqualified person may be a director of a company. A person wishing to be a director must not be appointed before having given consent to be a director and having declared that he or she is not ineligible. The board has all of the powers necessary for managing, directing and supervising the management, business and affairs of the company, subject to any restrictions contained in its memorandum and articles.
A company must have at least one shareholder but may have as many shareholders as needed. The shareholders of the company are the persons who own the company. When dividends are declared, they will be paid to the shareholders. Shareholders may be, and often are, the same individuals as the directors, especially for small businesses.
Running of the company
The company will have to abide by the requirements of the laws of Guernsey (and importantly the provisions of the Companies (Guernsey) Law, 2008 and associated laws). A set of memorandum and articles will need to be drafted which will contain all manner of important details about the running of the company, such as how meetings of shareholders can be held, how directors must conduct their business and what the rights are for shareholders to receive dividends, for example. The memorandum and articles can be seen as a rulebook which contractually supplements the requirements of the companies law.
So why should I set up a company?
One of the main (and most attractive) reasons why a new business owner might want to incorporate a company is that the shareholders have their own personal liability limited to the amount, if any, unpaid on the shares held by them. This is in sharp contrast with a sole trader whose liability will not be limited in this way.
In the conduct of the business it is the company which will enter into transactions, issue terms and conditions and sign contracts with customers and suppliers and it will do this via those authorised by it to do so (employees and directors normally). As a result your customers are entering into agreements with your company, instead of you. If a customer wishes to bring a legal action, it would principally need to do so against the company, seeking recourse against the company’s assets (or lack thereof). By structuring as a company therefore the business owner is often seeking to prevent a situation where a claim is brought which might otherwise, if he were a sole trader (and uninsured), need to be settled out of the business owner’s personal assets, i.e. potentially including his or her house! Of course a prudent business owner will, irrespective of whether the business is structured as a soler trader or a company, look to have in place suitable insurance against claims, but that is not to say that an insurance policy will always come to the rescue and when it does not, it may be costly.
Companies can be set up for a wide variety of reasons. It may be that you are currently a sole trader wishing to incorporate a company to seek to limit your risk or alternatively it may be that a joint venture arrangement is proposed. A joint venture arrangement might be, for example, where two people wish to set up a business, one providing financial backing and the other providing the day-to-day expertise. In that scenario, it might be that the parties wish to retain the person providing day-to-day expertise as a director and have both joint venture parties as shareholders (potentially with differing rights as to the profits of the business, if all goes well!).
A company also can survive the death of its shareholders and directors, and so it is possible for them to change over time. This might be attractive in terms of succession planning for a family business, for example, where it is intended to pass the business down to the next generation.
Forming a company also potentially provides an exit strategy for the shareholders for the future whereby new owners can buy out the business by way of a share purchase and take the company forward post sale.
Setting up a company will involve a wide number of considerations before deciding whether to proceed. This short note does not cover all considerations and is not intended to be in any way comprehensive advice tailored to your specific situation.
If you wish to further explore the possibility of setting up a company for your business, please visit our service directory where you can find details for Babbé LLP who will be very happy to assist you.