Over the years, entrepreneurs have been taking full advantage of this entrepreneurial spirit by operating various small businesses, known as start- ups. This is to ensure they reap the benefit of having multiple streams of income. As a start-up begins to grow, you must consider whether to make the move to operate as an incorporated company.
The Benefits of Incorporation
The first step for an entrepreneur is to decide what legal structure is best for their business. There are several factors to consider such as the intended size of the business, their risk appetite, financing the business and limiting liability. An entrepreneur will have to decide whether the business requires corporate status, by incorporating a company under the Companies Act, or whether to register a business name under the Registration of Business Names Act.
When you incorporate a company under the Companies Act, a separate legal entity is by law created or established. The company is seen as a separate legal entity from the people that own it. Therefore, the company may sue and be sued in its own name. It can enter contracts, purchase goods and services and take on debt.
Having a separate legal entity affords greater protection to the shareholders of the company as they generally cannot be held personally liable for the debts and liabilities of the company. This protection is notably referred to as a ‘Corporate Veil’. This Corporate Veil is ‘lifted’ and this protection against liability is lost in circumstances such as fraud by the company.
An unincorporated business, unlike a company, is not a separate legal person. Therefore, there is no distinction between the entrepreneur and the business, leaving the entrepreneur’s personal assets at risk for the liabilities of the business.
Incorporating a company provides an entrepreneur with the benefits of limited liability, perpetual succession of the company and an increased possibility of financial support.
Incorporated companies can be limited by shares or limited by guarantee with/without share capital. This means where an entrepreneur incorporates a company limited by shares for example, the liabilities of the shareholders will be limited to the extent of the unpaid amount on their shares or amount guaranteed. Without limited liability many shareholders would be reluctant to invest in the company as their personal assets could be used to settle the debts of the company.
The benefit of perpetual succession means that the company will continue to exist despite a change in the membership of the company. Therefore, in circumstances such as the retirement, bankruptcy or even death of a member of the company, the company will continue to exist.
Incorporating a company can also result in financial lenders and investors being much more likely to fund or invest in the business. Other businesses will be more willing to establish business relationships and enter into contracts given the benefits of the separate legal entity.
Business Name Registration
Any company trading in a name other than its true corporate name, any individual or firm offering services in a name other than that individual’s own name or the names of all the partners of the firm and any individual or firm buying or selling goods from an established address are required to register a business name under the Registration of Business Names Act.
Unlike an incorporated company, the owner of a business name does not benefit from separate legal personality, limited liability or perpetual succession. However, there are less ongoing obligations associated with Business Name registration and it also provides the entrepreneur with more opportunity for other businesses to be willing to enter into contractual relations. It is generally more suitable where a product is in its infancy stages and is primarily associated with the business owner. Registration may assist with greater brand recognition and brand loyalty.
As an entrepreneur, navigating the best route for expansion of your start up is an important decision. Speak to a lawyer to determine the best structure for your business as well as information on the steps to incorporate a company or register a business name and the ongoing obligations of both in order to remain compliant and maintain your company or business in good standing.
Rachel Poole is an Associate in the Commercial Department at Myers, Fletcher and Gordon. She may be contacted at firstname.lastname@example.org or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.