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19 August 2015

Is A Company The Best Structure For Your Business?

This is the first in a series of articles providing a brief synopsis of various business structures. This article deals with the most common form of business structure: the company.

New business owners are often confused as to how their business should be structured.  Well-meaning advice from friends and neighbours as to whether or not to set up a company, a trust, a partnership or even a limited partnership adds to this confusion.  It is important, when commencing any business, to set up the right structure for your circumstances; one size does not fit all.

The Company

A company is a separate legal entity from its shareholders and directors, and many of a company’s benefits stem from this separation.  A company is capable of contracting, owning assets and incurring debt, all in its own name.  The essential requirements of a company are that it must have a name, one or more shares, one or more shareholders, and one or more directors.  The rules which govern a company are set out in the Companies Act 1993. Companies may also (but are not obliged to) have a separate constitution, which is a document setting out additional rules relating to the governance of the company.

Name

The name of a company is important because it often reflects the nature of the business, and represents the separate legal entity with which clients identify.  The name of a company can not contravene any Act of Parliament, be similar to the name of another company or in the opinion of the Registrar of Companies, be offensive.

Shares

Shares are owned by the shareholders of a company.  Shares are a bundle of rights that shareholders can exercise in relation to a company. Shares can be bought and sold without affecting the status of the company as a separate and continuing legal entity.  Although these can be altered by the company’s constitution, generally the significant rights that attach to shares include:

  1. the right to a share of the dividends of the company, if the company’s directors determine that a dividend is to be paid;

  2. the right to a share in the distribution of the surplus assets of the company if it is wound up; and

  3. the right to cast a vote for the appointment of directors and the approval of major transactions.

Shareholders

Shareholders of a company own the shares, and can exercise the rights attached to those shares.  Shareholders have limited liability for their involvement in a company.  They cannot be held accountable for the company’s debts (unless they personally guarantee these), so their risk is limited to the amount of money they have paid for their shares, or otherwise introduced into the company.  Shareholders get the benefit of any increase in the value of their shares, and receive a share of any dividend payments. Shareholders often enter into a Shareholder’s Agreement which specifies how the shareholders will exercise their rights in the company.

Directors

The directors manage the company.  There are a number of statutory duties and obligations imposed on every director. These duties are owed to the shareholders and to the company.  If a director is in breach of his or her statutory duties then it is possible for parties that suffer loss due to this breach, to sue the directors personally. If a director is also a shareholder, he or she can not hide behind the limited liability protection as shareholder, to avoid liability in the capacity of director.   

Advantages of forming a Company

  1. Limited liability for the shareholders.

  2. The entity remains constant, while enabling shares to be bought, sold or transferred at any time.

  3. Potential tax advantages including the corporate tax rate (28%), and the tax imputation system which removes double taxation. 

Disadvantages of forming a Company

  1. Requirement for annual reports and audits.

  2. Onerous director’s duties.

  3. Potential tax disadvantages where company annual income is lower than $50,000.00. The corporate tax rate is much higher compared to personal income tax rates (which are 10.5% for the first $14,000.00 and 17.5% from $14,000.00 to $48,000.00 of yearly income).

How can we help?

Saunders Robinson Brown can advise you on, and implement the following:

  1. Checking name availability, including potential conflicts;

  2. Incorporation of the company, including preparation of the necessary resolutions and consents;

  3. Drafting a constitution appropriate for your needs;

  4. Drafting a shareholder’s agreement.

 

Saunders Robinson Brown are happy to assist with any queries you may have in respect of structuring your business.

The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstances.