What is meant by incorporation?
The term means the creation of a limited company.
What is a limited company?
A limited company is a separate legal entity, which is owned by the shareholders who purchase shares in the company. The company owns all the assets within itself, not the shareholders.
What does limited mean?
Operating a business through a company enables the owners (ie the shareholders) to take advantage of limited liability. Effectively this means that if the company is unable to pay its debts, the assets of the individual shareholders cannot normally be claimed by a creditor.
What are directors?
Directors are the people appointed by the shareholders to run the company on their behalf. In most small businesses, the directors and shareholders are the same people.
Can a director claim limited liability?
Normally, yes. However, if a company fails and its assets are insufficient to meet its liabilities in full, and it can be shown that the director did not act responsibly, then they can become personally liable for the shortfall.
This isn’t as bad as it sounds, as a self employed person operating a business has no liability protection anyway - all personal assets are at stake if the business fails.
What is a company secretary?
This is the title given to the person who is responsible for attending to company secretarial matters on behalf of the company. This does not mean secretarial duties in the sense of a secretary - typing, dictation, or filing. Instead it refers to the person who is responsible for attending to certain duties required by statute eg dealing with statutory paperwork to appoint a new director or to transfer shares.
How many shareholders are needed?
There is no specific number required. The minimum number of shareholders is one.
How many directors and secretaries are needed?
All companies require a minimum of one director and one company secretary. If there is only one director, there must be another person to act as company secretary.
What is a registered office?
This is the term used to describe the address at which formal documents can be lodged with the company.
What is a Certificate of Incorporation?
This is the company’s birth certificate. It states its official name, a unique identification number (the company number), and the date it was created.
All companies have to be audited, don’t they?
No. Only those companies which have annual sales in excess of £1 million.
Will everyone see my trading accounts?
Whilst it is true that a limited company has to file annual accounts on the public register, there are many exemptions available to small companies which allow you to retain a lot of privacy about your trading results.
Does a company pay tax?
Yes. At the end of each trading year, the business profits will be calculated and the company will pay tax on these. The tax the company pays is called corporation tax. The tax is normally payable in one instalment nine months after its year end.
Will I still be self employed?
No. When the company commences to trade, you will cease your self employment and commence as an employee of your company.
What are dividends?
These are distributions of profit made by the company to its shareholders.