Company formation defines the process of registering or incorporating a business venture as a limited company. Upon completion, the process is what makes the business a unique legal entity. Once a business is registered in this manner, it exists separate from the owners according to the provisions of the law. Therefore, it is treated as an individual on legal matters such as tax remittance and so on.
Once a company has been formed and registered, it is separate from its owners in terms of contractual agreements, liabilities, finances and property ownership. Therefore, your business if not incorporated is not considered a distinct legal entity. Therefore, sole traders are not separate from their businesses in terms of liabilities, assets and finances.
Why is Company Formation Important?
The registration of a business as a limited company comes with various benefits. However, the main reason is to limit the financial responsibility of business owners. In this arrangement, the owners have some protection known as “limited liability.” Private companies can be limited in two ways: limited by guarantee or limited by shares.
Limited by shares means that the company owners are only liable for the value of their shares. On the other hand, limited by guarantee means that the business owners are only liable for the value of their guarantees. As a result, their assets and finances are protected beyond the limit of their liabilities. Therefore, company formation gives you the following benefits:
1. Owners’ Protection from Company Liability
Unlike limited liability companies, unincorporated business structures have unlimited liability. Typical examples of unlimited liability entities are sole traders.
In an unlimited liability scenario, businesses are entirely liable for all their business claims and debts. This is so because there is no financial or legal distinction between the person and their business. However, the limited company formation process separates these issues between the owners and the company.
2. Professional Corporate Image for Doing Business
Other than the obvious personal financial protection, company formation gives your business a professional image. This allows business owners to manage their remuneration in tax-efficient ways. Such a move is good for doing business.
3. Enhances Credibility and Trustworthiness
The limited company status of your business gives the impression of a trustworthy and established business. Therefore, the business will be more attractive to investors, suppliers, lenders and even clients.
4. It’s an Avenue for Growth
Company formation is a process of paving a path of growth for your business. It is an affordable and effective means of furthering the potential of an existing business.
Through registration, the business appeals to a much wider audience and that means more business. Additionally, it attracts more favorable tax rates hence maximizing its revenue.
Company Formation Requirements for a Business
You cannot operate a limited liability company unless it is registered. The registration happens at the Registrar of Companies. Here, the registrar provides directives and requirements for everyone ready to register a business as a company. The company formation process thus requires the owners to provide the following:
- A unique business or company name
- A registered office address in the country of operation
- A director or list of directors
- A shareholder or guarantor or list of shareholders or guarantors
- A Memorandum and Articles of Association, which are the governing documents of the company
- A share capital of a minimum of one issued share – only for those companies limited by shares
- A Maximum of four Standard Industrial Classification (SIC) codes describing what the business does
- Information about People with Significant Control (PSCs) of the business
Upon meeting all these requirements, the company formation process will be implemented. However, the company formation can be rejected. This can happen if there is some oversight or error in any of the documents made for registration. In such a case, registration will not proceed until rectifications are done. You can use the services of a company formation agent to help you in the process.
Final Thoughts
Your business can grow rapidly upon registration. Therefore, the company formation process is vital for any business idea with well-defined goals and objectives. Your company will gain a professional image and appeal to the business world for growth. Most importantly, your business assets and liabilities will be separate from your own.
