Updated: Oct 20, 2021
This is it people! The final edition of our forms of business series. We’ve explored the Sole trader and the Partnership and now it’s time for (drum roll please)…THE COMPANY!
We live in a world in which companies surround our lives daily. I mean, it is an intrinsic part of our existence. We depend on companies for our basic necessities and pretty much everything else that Maslow has so aptly described in his hierarchy of needs. But what if you were start one on your own? In my experience in Corporate Governance, many simply do not understand exactly what it is they are getting into. I hope this article can shed some light on three key considerations that you should take into account when deciding to incorporate.
The Company is by far the most popular business structure in various countries across the globe. In the United Kingdom for example, companies formed 71.4% of VAT/PAYE business each year, as of 2019. In Trinidad and Tobago, a company, or body corporate, or Corporation as it is sometimes called, can be created under two instruments - its own Act of Parliament or under the Companies Act 1985, Chapter 81:01. This is important to know as a company’s instrument of creation will serve as its legal guide throughout the life of the company. When I worked in the public sector, those Corporations were created by Acts of Parliament, however in this article we will focus on companies created under the Companies Act 1985, Chap 81:01.
Before deciding to incorporate, you must consider the following:
a. Will the company be public or private?
b. Will the company have share capital?
c. Will the liability of the company’s members be limited or unlimited?
Consideration #1 – Will the company be public or private?
A public company is one that is authorized to issue its shares to the public. The requirements of the public company far outweigh those of a private company so I won’t scare you and go down that long road. Private companies are not authorized to offer its shares to the public. i.e. conduct trading on a stock exchange. Plus, the vast majority of us incorporating companies will begin as a private company, so let’s focus on the private company for now.
Consideration #2 – Will the company have share capital?
Many private companies that are incorporated for profit have share capital. Share capital (or equity capital) is one of the ways in which a company is financed. After you’ve incorporated your company and you have your incorporation certificate proudly in hand, your next mission is to acquire money to run your company. This money is provided either through debt capital (such as loans, mortgages, bonds debentures etc.) or through share capital (money invested by the owners or shareholders of the company for a rate of return). In practice, new companies are typically funded by share capital, as banks are reluctant to lend to start ups and they demonstrate this reluctance by exorbitant interest rates! Who wants to start a company only to be tied to such a high cost of debt? It simply isn’t worth it right? I always recommend to my startup clients, to take your time, invest your own money into your business, maybe find one or two other investors willing to put money into your dream and stay away from the banks until you have grown a little more. Remember, Rome wasn’t built in a day.
Your private company can also be incorporated as a non-profit corporation engaged in some form of community service and the members of such companies usually do not have share capital as they are limited by guarantee. That is, the extent to which the members are liable to the company upon being wound up is limited to the amount on its Statement of Guarantee or Articles of Incorporation filed with Companies Registry. These amounts are typically very small as the owners of non-profits do not want to be tied to excessive liability.
Consideration #3 – Will the liability of the members be limited or unlimited?
We’ve heard a lot about the Limited Liability Company or the LLC, but what does this mean? For an LLC with share capital, this means that should a creditor come after your company for an unpaid debt, or your company is being wound up, your liability as an owner. i.e. as an individual, is limited to the unpaid value of your shares. Therefore, if you are an owner who has paid the company for your shares in full, you, as an individual, are not liable to contribute any more to the company to settle its debts. In this way, your personal assets are protected. Remember we spoke about the “Corporate veil” in our article on the Pros and Cons of the sole trader, that says that the company has its own separate personality in the law’s eyes? (If you haven’t please click this link to have a read https://www.bayleysconsultingservices.com/post/starting-a-new-business-as-a-sole-trader-here-are-the-top-pros-and-cons-that-you-should-know).
It is this separation that allows your personal assets as an owner to be shielded in this way. This is perhaps, the most significant advantage of the limited liability company.
So what if my liability as a member is unlimited? If your company is unable to pay its debts, and creditors petition the court to have the company wound up, you may be called upon to contribute your personal assets to the company to settle those debts. If your liability is unlimited, there is no limit on the amount that can be claimed. Yikes! It is for this very reason that many persons, incorporate the Limited Liability Company.
So there you have it. We hope our tips gave a little clarity on what you should be thinking about before you run to Companies Registry.
For more information on registering businesses or incorporating companies, visit www.bayleysconsultingservices.com
Ceronne Bayley LLB MBA is the Lead Corporate Governance Consultant of her own consulting firm, Ceronne Bayley’s Consulting Services. She is a Corporate Secretary by profession and has fifteen years’ experience working with and advising Boards of Directors of State Enterprises as well as profit and non-profit companies in the private sector.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information contained herein are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to this article do not create any professional relationship between the reader and Ceronne Bayley’s Consulting Services.