When It Pays to Form a Limited Company
Page 60
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Benefits Include Limitation of Liability and Reductions of Death Duties
.1. BELIEVE that many hauliers who at present conduct their businesses under their own names have in mind the possibility, some day, of forming a private limited company. There are those who have a vague idea that certain benefits arise from being incorporated as a limited company, but would like to see a case stated before making the change. It may be that the points mentioned below will assist in deciding whether or not such a course is desirable.
The fundamental reasodf or incorporation as a limited company is, of course, that the liability of the business may be restricted to the amount of the paid-up capital. When persons pool their resources in order to run a business undertaking. they wish to be assured that, in the event of the failure of the enterprise, they will not be forced to subscribe further capital to satisfy the debts of the company.
• The Shareholders' Position.
The shareholders may not have been at all to blame for losses incurred by the business; these losses may result from bad management on the part of persons in the company's employ, or simply from adverse circumstances.
The holder of fully paid shares in a limited company has a certain stated interest in the company. He cannot be compelled to contribute anything more should the businesS fail, so that by forming such a company the unlimited personal liability of the operator is removed.
Trading as a private individual, the whole of the haulier's personal capital may be lost in satisfying trading losses, and, should bankruptcy follow, his private property may be seized. To separate one's business arid private affairs, in order that the misfortunes of one do not affect the other, is obviously a wise course, and represents a protection to one's dependants as much as to oneself.
The idea can well be extended to provide for separate companies, where an individual conducts more than one business.
Control of a business need not pass out of the hands of the present owner as a result of incorporation as a limited company, for the original shares may all be held by the pro.
A34 prietor and his family. A minimum of two members is required to constitute the private company, but, in many cases, one of these is only a nominal shareholder.
The reader will probably be acquainted with companies in which the whole of the share capital is held by the principal and some near relation. A majority holding of shares, coupled with a directorship, will give effective control of the company.
When a Sale is Effected.
strong point in favour of limitedcompany formation occurs upon disposal of the undertaking. The sale of the whole or part of a business is more easily and economically effected if the concern be a limited company. The assets remain in the name of the company, only the shares being transferred.
The matter then concerns no one but the buyer and seller of the shares. On the other hand, the sale of a haulage business by an individual is the occasion for an application for a new licence in the purchaser's name, and an agreement of sale covering the vehicles and other assets taken over.
Limited companies can also raise additional capital with more facility than can a private firm. Working capital can be introduced by investors, without altering the name or control of the business. This method permits of all the advantages of partnership arrangements, without the corresponding disadvantages.
If Bankruptcy Should Occur.
Again, an increase in capital concerns only the Registrar of Companies, but a new partner admitted to a private firm involves application for a new carrier's licence, whether or not the name is changed.
In the event of the death or bankruptcy of a private individual trading in his own name, the assets of his business are dispersed, the trading interrupted and the goodwill lost. Upon the death or bankruptcy of a partner. the deceased or bankrupt partner's share will have to be paid out sooner or later, and this may cause the business to be severely handicapped.
With a limited company, however, there is no disturbance of the business, or its name, upon the death or bankruptcy of a shareholder. Shares
may be left by will or transferred to a purchaser.
Now, supposing Mr. X (who has been trading as an individual) dies and his business is valued at £5,000. Death duties will be payable on this amount, but if Mr. X and Mrs. X had each held half of the shares of a limited company (registered as, for example, "X's Transport, Ltd."), death duties would be payable only on the shares held by Mr. X and valued at £2,500.
I have known limited companies to be formed for this reason alone, and shares have been distributed among several members of the family. Of course, there is always a chance that a relation who holds shares in this way may predecease the real proprietor, causing that part of the capital prematurely to be chargeable with death duties. Many people are, however, prepared to take this chance rather than involve their .dependants in heavy death duties on the whole value of the business.
Protectionof Registration.
The name chosen by a private limited company usually includes, so far as possible, the name attached to the business taken over, so that the reputation belonging to the name is preserved. Registration has the effect of protecting that trading name, for no other limited company will be permitted the same title.
Registration as a limited company is not such an expensive proceeding as may 'be imagined. Capital duty at 10s. per cent. falls to be paid upon the amount of the nominal capital, and documents 'presented to the Registrar must be correctly stamped before a certificate of incorporation will be issued. The following figures will give an idea of the total cost of capital duty and stamp duties : —
Total' duties Nominal capital. and sta.= s..
100 4 lo
500 610 1,090 9 0 5,000 32 0 10,000 58 5
Large numbers of private companies are registered, these days, with the purely nominal capital of £100. Expert advice on the preparation of the necessary documents is, of course, indispensable, and the cost of this, which need not be prohibitive.
must be added.. A.W.P.