“My best entrepreneurial advice is to start” (Dave Morin, entrepreneur, angel investor, CEO and co-founder of social network Path)
What is a private company?
7 advantages of private companies…..
1. A company has “perpetual succession” – it survives the death/incapacity/insolvency/exit of the directors and shareholders. That carries a host of practical benefits, including making it a possible estate planning tool.
2. Transferring ownership and management is easy – shareholders and directors change but the company lives on.
3. Directors and managers have limited liability. Note however that directors and senior managers can be held personally liable in cases of reckless or fraudulent trading, non-compliance with statutory duties and the like - the “new” Companies Act in particular has imposed a whole new set of duties and risks in this regard. Bear in mind also that that your limited liability falls away to the extent that you sign personal surety for company debts.
4. Shareholders are in general not liable for the company’s debts, although they do risk liability for some tax debts e.g. if they control or are regularly involved in the management of the company’s financial affairs.
5. It is generally easier to raise funding for a company than it is for a sole tradership or partnership.
6. Similarly, a company is adaptable to both small and large businesses, so if you are starting off small but planning to grow substantially, consider using a company from day one.
7. Tax: Sometimes an advantage ….. see below.
….. and 3 disadvantages
1. Formation: Unlike sole traderships and partnerships, companies require formal registration and compliance with various formalities. Factor the attendant delay and cost into your plans. Using a shelf company can reduce the hassle but make sure you buy it from a reputable business.
2. Costs of administration: Prepare for a higher administrative and regulatory burden than with your other choices. Factor in both the time and financial costs of complying with the host of legal requirements, statutory returns and general red tape associated with companies. Find out up front for example whether you are going to have to pay for a full audit or independent review every year.
3. Tax: Sometimes a disadvantage ….. see below.
The tax angle
The bottom line is this - take full professional advice on both the legal and the tax implications of using each type of entity before choosing.
This is the fourth article in our series “Choosing the right legal entity for your business”. Next time we’ll look in more depth at the business trust option.