TYPE OF COMPANIES

The Companies Act 2006 recognises a distinction between two different types of company:
private companies where the investment is usually provided by the founding members either
through their personal savings or from bank loans, and public companies where the intention
is to raise large amounts of money from the general public. While this is the key difference
there are others.
Private companies, obviously, are private. The vast majority of companies in the UK are
private companies. The law assumes a closer relationship between the members in a private
company than in a public company and so private companies commonly restrict the
membership of their company (to those approved of by the directors) in the articles of
association. In essence if a member wishes to leave the company by selling their shares or a
member has died, the directors have a say in who replaces them, if anyone. There may also be
a pre-emption clause in the articles which means that if a member wishes to sell their shares
they must first offer the shares to the other members. Private companies have also historically
been able to adopt an elective regime (CA 1985, s 379A) which recognised that often in
private companies the directors and the members of the company are one and the same and so
requirements for meetings, timing of meetings and laying of accounts can be suspended to
streamline the operation of the private company (additionally in the old Table A articles,
article 53 allowed a more informal decision-making process). One of the main intentions of
the reform process leading to the CA 2006 was to reform company law to suit small private
companies and so many of the problematic requirements for private companies to hold
meetings etc have been done away with in the 2006 Act (the AGM requirements for example
do not apply to private companies, see CA 2006, Part 13, Chapter 14 and CA 2006, s 288
provides for an expanded written resolution regime for private companies). Private
companies cannot invite the general public to buy shares (CA 2006, s 755), but they also,
unlike public companies, have no minimum capital requirements. The members only need to
come up with a nominal amount. £1 or even 1p would suffice and even then the member
could purchase the shares unpaid (plus the registration fee for the Companies Registrar) in
order to form the company. The members of a private company have limited liability and so
the word limited or ‘Ltd’ must appear after the company’s name. Members thereby are liable
only for the amount unpaid on their shares and not for the debts of the company.
Public companies, on the other hand have the aim of securing investment from the general
public and can advertise the fact they are offering shares to the public. In doing so the
company must issue a prospectus giving a detailed and accurate description of the company’s
plans. Because the general public are involved and need to be protected the initial capital
requirements for a public company are more onerous than for a private one. There is a
minimum capital requirement (‘the authorised minimum’) of £50,000 (CA 2006, s 763).
While there is no formal limitation on public companies having restrictions on transfer of
shares similar to those that apply to private companies, any such restriction would be highly
unusual, given that one of the reasons for forming a public company is to raise money from
the general public and such a restriction would discourage them. In any case if the public
company is listed on the stock exchange any restrictions on transfer will be prohibited. Note
here that public companies are not necessarily listed on the stock exchange. A listing is
essentially a private contractual arrangement between a public company and the stock
exchange (in the UK the London Stock Exchange (LSE) is itself a listed public company) to
gain access to a very sophisticated market for its shares. Some public companies do however
exist outside the stock exchange listing system—Sir Alan Sugar’s Amstrad plc being a high
profile example. The application for registration for a public company must state that it is
public and, as with private companies the liability of the members is limited thus the words
public limited company (PLC or plc) must come at the end of its name (CA 2006, s 58(1))
both as a statement that the members’ liability is limited and to tell those dealing with it that
it is authorised to secure investment from the general public.

Limited companies come in two forms: private and public. The main difference is that public
companies can sell their shares on a stock exchange, like the London Stock Exchange.
However, the real legal distinction between the two is that public companies are
permitted (but not obligated) to offer their shares to the public. In contrast, private limited
companies cannot offer their shares to the public at all. So, before listing your company on a
stock exchange, you must fulfil all the necessary conditions to become a public company.
This article will provide an overview of the key differences between public and private
companies.
Public Companies
Interestingly, the law defines private companies as those companies that are not public
companies. Therefore, when comparing the two, we can define private companies entirely
in opposition to public companies.
As mentioned, public companies are not required to list on the stock exchange. From a legal
perspective, you can think of public companies as those that have complied with all the
additional requirements and rules that enable them to sell their shares to the public. These
rules aim to promote increased transparency.
Advantages of Public Companies
1. Raising Public Equity
For many private companies, it is hard to raise equity financing unless they are willing to sell
a substantial number of shares to accredited private investors, like private equity
and venture capital funds. This is because it is illegal for the directors of a private company
to offer their shares to the public.
If a court finds that a private company has offered its shares to the public, it has great power
to penalise the company. Therefore, one of the main advantages of trading through a public
company is that you can raise more money by selling your shares to the public.
Prestige
Since the rules for listing your company’s shares on a public market are quite onerous,
public companies are fewer and farther. In a sense, they are more prestigious. Your
company may therefore find it easier to raise both debt and equity financing simply because
it is a public company.
2. Listing Shares on the Stock Market
By virtue of being a public company, you can offer your shares to the public. One of the best
ways to do this is to list them on one of the two exchanges in the UK:
Main Market of the London Stock Exchange; and
Alternative Investment Market (AIM).
The Main Market has more onerous listing requirements than the AIM, and it is easier to
raise money on the Main Market. Still, both markets make it easier to raise equity than a
private company.
Disadvantages of a Public Company
Public companies are far more difficult to administer than private companies because the
law requires that they operate at a higher standard. Likewise, a public company must
provide shareholders with more information.
For instance, there must be at least two directors of a public company, whereas, for a
private company, you can be the sole director of a company. The premise is that if your
company is going to offer its shares to the public, most of the shareholders will not have the
capacity or ability to be directly involved in the affairs of the company. Therefore, the law
protects the public shareholders’ interests by requiring the company’s officers (i.e. its
directors and secretary) to operate with more rigour.

Public vs Private Company

We will now go on to explore how administering a public company differs from a private
one.
Accounts
The law requires public companies to file their accounts more frequently than private
companies. The company’s accounts must likewise be presented at a general shareholder
meeting within six months of being due.
Limits on Directors’ Powers
Compared to private companies, the law restrains some of the powers of public company
directors. In particular, shareholders must approve any loan made to a director by a public
company.
Secretary
A public company must have a secretary, in addition to at least two directors. Their exact
duties will depend on the company. Still, in general, company secretaries are responsible for
ensuring that the directors comply with their duties, such as ensuring that shareholder and
director meetings are appropriately administered.
Restrictions on Share Capital
Share capital refers to the amount of money within a company that belongs to the
shareholders. For public companies, there must be at least £50,000 worth of share capital,
and this amount must be fully “paid up”. This means that the shareholders must have
actually paid the company for their shares.
There are also limits on the consideration shareholders can provide the company in
exchange for shares. In practice, shareholders will be restricted to cash or cash equivalents
unless they obtain a report on the true value of the consideration.
For example, suppose directors wanted to issue a shareholder 100 shares for a piece of
intellectual property. In this situation, an accountant or other qualified valuer would have to
certify that the intellectual property is worth 100 shares in the company.
City Code on Takeovers and Mergers
The City Code on Takeovers and Mergers is a large collection of rules on how one company
can purchase another company. The City Takeover Panel, which is a quasi-public body, is
responsible for enforcing the Code.
If a company is public, it is subject to the Code. Meanwhile, private companies are usually
exempt.

Key Takeaways
Public companies are those that meet the requirements to list their shares to the public.
While it is not a requirement for public companies to sell their shares on a UK stock
exchange, most do because it grants them access to the public equity market. Many
companies go public by listing as a public company after they have completed all the
necessary steps to do so. As a result, they are subject to far more regulations and regulatory
scrutiny compared to private companies.
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2. As we have observed in Chapter 1, the CA 2006 provides for companies to be

either private or public. Essentially the distinction in terms of capital raising
between the two types of companies is that the law presumes that in private
companies the investment is largely provided by the founding members either
through their personal savings or from bank loans and that in public companies
the intention is to raise large amounts of money from the general public. Private
companies can take a number of forms under the CA 2006. They can be limited or
unlimited. If they are limited they can be limited either by shares or by guarantee.
Crucially, private companies are prohibited from raising capital from the gen- eral
public (CA 2006, s 755). Additionally the Listing Rules of the London Stock
Exchange (LSE) require that a company be a public company. Public companies
have no such prohibi- tion and may freely raise capital from the general public.
Sometimes where extremely large amounts of capital are needed a public
company will choose to raise capital through listing on the stock exchange. This,
as we will see, engages a further layer of regulation.
3. 5.3 While the majority of this chapter deals exclusively with the capital-raising
activities of public companies this does not mean that all private companies are
small concerns. Some private companies are very large, often obtaining their
capital through lending (see Chapter 6) or private investment firms (e.g. venture
capital firms such as 3i or more recently hedge funds such as Blackstone) rather
than from the general public. Sir Rich- ard Branson’s Virgin Ltd is an example of a
large private company. Virgin was formerly a listed company that de-listed
because of the enhanced scrutiny a public listing brings to a business from both
regulators and institutional investors (these are the largest investors in listed
companies, and are made up of insurance companies, pension funds, and
investment funds, see further Chapters 15 and 16). Very large private companies
are, however, unusual as most business ventures in need of capital fulfil it
through the formation of a public company in order to access the public funding
market. We will concentrate here on the public company as a capital-raising
vehicle.
4. 5.4 Public companies are subject to a more onerous regulatory regime than
private compa- nies because of their dealings with the general public. In contrast
to private companies, a public company can only be formed as a company limited
by shares (CA 2006, s 4(2)). Therefore the application for registration of a public
company must state it is public and as with private companies the liability of the
members is limited, thus the words pub- lic limited company (PLC or plc) must
come at the end of its name (CA 2006, s 58(1)). While private companies can
have a purely nominal share capital, public companies have much larger
requirements imposed. Section 763 of the CA 2006 provides that the authorised
minimum share capital for public companies is £50,000.
5. 5.5 Public companies are designed to secure investment from the general public
and can advertise the fact that they are offering shares to the public. In doing so
the company

64 Raising capital: equity and its consequences

must issue a prospectus giving a detailed and accurate description of the company’s
plans (see later). Because the general public are involved and need to be protected, the
initial capital requirements for a public company are more onerous than for a private
one. As we have just discussed there is a minimum capital requirement of £50,000 (CA
2006, s 763). However, the capital requirement may be partly paid so the company does
not actually have to have £50,000, it just needs one-quarter of that and an ability to call
on the members for the remaining amount (CA 2006, s 586). While there is no formal
limitation on public companies having restrictions on transfer of shares similar to those
that apply to private companies, any restriction would be highly unusual, given that the
aim is to raise money from the general public as it would discourage them. In any case, if
the public company is listed on the LSE such restrictions on transfer will be prohibited.

The differing regulation of private and public companies

6. 5.6 As we have just noted, because the general public is affected by the capital-
raising activi- ties of these companies the state has taken a greater interest in
investor protection where public companies are concerned. For example the
CLRSG in its consultation document Completing The Structure (para 2.73)
identified three distinct areas in the Companies Acts where public companies
were subject to enhanced regulation. These were:
 accounting: there are tighter deadlines for preparing and filing accounts,
and no economic size exemptions similar to those available to small
private companies;
 capital: public companies are subject to a minimum capital requirement,
tight rules on subscription for shares and tighter rules on financial
assistance and pur- chase of own shares;
 governance: there are more demanding requirements for the company
secretary, a requirement for at least two directors, no written resolution or
elective regime procedures, stricter rules on directors’ conflicts of interest,
etc.

The distinction between public and listed companies

7. 5.7 As we will see in Chapter 15, one of the key developments in company law
was the effec- tive separation of ownership from control once the registered
company began to tap the stock exchange for funds in the late 19th and early
20th centuries. The operation of these very large public companies became so
complex that shareholders could no longer run the company and so appointed
managers. These managers did not con- trol the company by virtue of their
shareholdings, as they usually only held a tiny fraction of its shares, but wielded
enormous power through their technical skills and the power delegated to them
by shareholders. They could therefore act in their own self-interest if they were
not monitored. Unfortunately, one of the features of this new managerial
company that raised money in the public markets was a very large and dispersed
shareholding (i.e. millions of shareholders all holding a tiny fraction of the

Public and private companies 65

total shares in the company). Thus because shareholders held only a minute stake in the
company they were uninterested in monitoring management. This dispersed and huge
shareholder population also caused a problem for regulators as very few of these small
shareholders had the expertise to investigate fully the activities of public com- panies
before they invested in them. Therefore they were prone to being defrauded. While we
discuss the consequences of the separation of ownership from control at length in
Chapters 15 and 16, the problem for regulators of dispersed ownership is relevant here.
At first the quality control function for investors was carried out by the stockbrokers who
did have the expertise to assess companies. However, the role of the LSE itself in
regulating the equity markets has been crucial as it adopted a dis- closure regime with
the view to encouraging companies to provide investors with the information they
needed to make informed investment decisions. Slowly, however the state became
involved in shareholder protection and, as we will see, in providing sanctions for abuse.

5.8 It is important to note that public companies are not necessarily listed on the stock
exchange. A listing on the stock exchange is essentially a private contractual arrange-
ment between a public company and the LSE (itself a listed public company) to gain
access to a very sophisticated market for its shares. The public company, once it gains
access to the stock market, is then generally known as a ‘listed’ company but sometimes
a ‘quoted’ company and its shares as ‘listed’ or ‘quoted’ shares or securities. The LSE
offers the facility of a secondary market, that is, a place where shares can be traded
after they have been issued to shareholders. It also functions as a capital market for
companies to sell new shares to the general public who can then trade them on the stock
exchange. Some public companies do however exist outside the stock exchange listing
system. For example, Amstrad plc, Lord Sugar’s company (you know, the mean bloke
from The Apprentice) is a very large public company operating without a listing on the
LSE. Amstrad was formerly a listed company but de-listed for the same accountability
reasons as Virgin Ltd. However, if a company wishes to raise large amounts of money its
efforts will be immeasurably aided by a stock exchange listing. This is because investors
will have greater confidence in the business if it is within the regulatory ambit of the LSE
and investors will be able to sell their shares easily through the LSE secondary market.
While there is only one stock exchange the LSE operates two separate equity markets
which together list over 2,400 companies. The main market is the official list made up of
estab- lished large companies. It has existed since 1801. To list on the main market a
company can choose a premium listing, a standard listing, or a high growth one.
Standard and high growth listings comply with certain minimum EU standards while a
premium list- ing meets the UK’s higher standards for listing. The other equity market is
the Alterna- tive Investment Market (AIM) which began life in 1980 as the Unlisted
Securities Market (USM) in response to the demand from less established companies for
access to a listing on the LSE. In 1995 the USM became AIM. The idea of the AIM is to
promote younger, less established companies which, although good companies, might
not have the track record necessary for a full listing. In total some of the largest
companies from more than 90 countries are listed on the LSE markets with a total market
value of over £4 trillion.

66 Raising capital: equity and its consequences

Methods of raising money from the public
9. 5.9 The process of gaining a listing on the LSE is complex, costly, and extremely
time consuming involving a large number of financial and legal advisers.
However, as well as preparing the company itself for compliance with the
regulations of the LSE the company must also manage to sell its shares to the
general public. In order to do this a company will need to employ a merchant
bank (the issuing house) as well as a stockbroker to decide on the way to issue
the company’s shares. This can be done in a number of ways, the following being
the most relevant here. First, the company could simply offer its shares for
subscription itself by issuing a prospectus and advertising in the trade or general
press. Second, the more common method is an offer for sale. This is where the
company has an agreement with an issuing house whereby it will allot its entire
issue of shares to the issuing house. The issuing house will then try to sell the
shares to its clients and the general public. The advantage of this type of sale is
that the issuing house takes the risk that the shares will not sell (of course it takes
this risk in return for a large fee). Third, the shares may not be offered to the
general public at all but be ‘placed’ with the clients of a merchant bank or group
of merchant banks.
10. 5.10 Fourth, the company could raise money through a rights issue. This is where
new shares are offered to the existing shareholders in proportion to their existing
shareholding usually because of shareholders’ pre-emption rights. These rights of
pre-emption are conferred on shareholders in s 561 of the CA 2006 but some
listed companies may have disapplied their pre-emption rights (this is however
likely to make such a company unpopular with investors). Once a company is
listed further capital raising is more straightforward without the complication of
the initial listing process.

The Financial Conduct Authority and the London Stock

Exchange
11. 5.11 Until May 2000 the LSE carried out the role of the UK’s ‘competent authority
for listing’ with responsibility for admitting securities to listing, making the Listing
Rules and polic- ing compliance with them. Following enactment of the Financial
Services and Markets Act 2000 (hereafter, the FSMA), which replaced the
Financial Services Act 1986, that function passed to the Financial Services
Authority (FSA) (FSMA, s 72), which remained the UK Listing Authority until 2013.
As a result of the continuing regulatory reforms deemed necessary to deal with
the impact of the financial crisis that unfolded from 2007 onwards, in 2013, with
the introduction of the Financial Services Act 2012, the FSA was split into two new
regulatory bodies: the Prudential Regulatory Authority (PRA) and the Financial
Conduct Authority (FCA). The PRA has primary responsibility for banking and
insurance and the FCA has responsibility for retail and wholesale financial
The Financial Conduct Authority and the London Stock Exchange 67

markets. As such, the FCA is now the UK Listing Authority and works closely with the LSE
to ensure the proper functioning of the listed market. In doing so the FCA does this
through:

• monitoring market disclosures by issuers and others and through enforcing com-
pliance with the FCA Disclosure and Transparency Rules;

• reviewing and approving of prospectuses published by issuers and offerors of secu-

rities and through enforcing the FCA Prospectus Rules;

• operating the UK listing regime which requires listed issuers to comply with the FCA
Listing Rules, and which gives investors an accreditation indicating that those issuers
adhere to a range of standards on governance and investor protection.

12. 5.12 Reform has also occurred at the EU level because of regulatory failures
within EU insti- tutions, with the creation of the European Securities and Markets
 Authority (ESMA). ESMA is an independent EU Authority tasked with protecting the
stability of the Euro- pean Union’s financial system by ensuring the integrity,
transparency, efficiency, and orderly functioning of securities markets, as well as
enhancing investor protection. To achieve its task it is provided with a range of
powers, from issuing guidance to compul- sion of individuals and national level
supervisory authorities. As such, for the first time the FCA, and in turn the PRA,
will have a single EU regulatory authority to work with (see
https://www.esma.europa.eu/about-esma/who-we-are).
13. 5.13 The UK Listing Authority (the FCA) has primary responsibility for granting
listed status to companies. To gain a listing a company must comply with the
Listing Rules which are made in accordance with Part VI of the FSMA which is in
turn based on a number of EU Directives (see the Consolidated Admissions and
Reporting Direc- tive (2001/34/EC)). The status of the LSE as a ‘Recognised
Investment Exchange’ (RIE) under the Financial Services Act 1986 was continued
in the FSMA. It is thus exempt from the general prohibition against carrying on a
‘regulated activity’ in the UK with- out authorisation or having obtained exemption
(FSMA, s 19). An activity is ‘regu- lated’ if it is of a specified kind which is carried
on by way of business or relates to an investment of a specified kind or is a
specified activity carried on in relation to prop- erty of any kind (s 22; see the
FSMA (Regulated Activities) Order 2001 (SI 2001/544)). The phrase ‘by way of
business’ was also contained in the 1986 Act and was construed by Hobhouse J as
meaning a business transaction as opposed to ‘something personal or casual’ (see
Morgan Grenfell v Welwyn Hatfield District Council (1995) and Helden v
Strathmore Limited (2011)).
14. 5.14 The LSE is therefore the principal RIE for trading securities of UK and foreign
compa- nies, government stocks, and options to trade company securities. To
become an RIE an exchange must satisfy the FCA that it has sufficient financial
resources, that it is a fit and proper body, that it can operate an orderly market,
and can secure appropriate protection for investors (FSMA, s 285–290). The LSE’s
statutory obligation to operate

68 Raising capital: equity and its consequences

an orderly market also obliges it to monitor listed companies on an ongoing basis. As a

result, when a company has obtained a listing by complying with the Listing Rules it can
only maintain listed status if it complies with the continuing obligation specified in the
Listing Rules and monitored by the LSE. Of course the fact the LSE is itself a listed com-
pany subject to the Listing Rules means it is in effect regulating itself. This odd situa- tion
has been compounded by the consistent attempts by US and Continental European
exchanges to take over the LSE by buying its shares. If for example the New York Stock
Exchange was successful in taking over the LSE (it has been trying for some time to buy
the LSE) in effect UK listed companies will be partly regulated from the USA.

introduction
Sole proprietorships and ordinary partnerships can be brought into existence very easily and with
minimal state involvement. Conversely, companies (and LLPs) are brought into existence at the discretion
of the state via a formal process known as ‘incorporation’. The word ‘incorporation’ is used because
successful incorporation brings into existence a ‘corpo ration’ (or as s 16(2) of the CA 2006 terms it, a
‘body corporate’). In this chapter, the process of incorporation and the advantages and disadvantages of
conducting business through a company will be discussed.

Methods of incorporation
There are three principal methods by which a company can be incorporated:
 1. incorporation by Act of Parliament;
2. incorporation by Royal Charter;
3. incorporation by registration.

It should be noted that the provisions of the CA 2006 generally apply only to companies incor porated by
registration (known as registered companies), although they can be extended to cover unregistered
companies (i.e. companies incorporated by Act of Parliament or Royal Charter). The vast majority of
companies incorporated in the UK are registered, but it is still worth briefly highlighting the two methods of
creating an unregistered company.

Incorporation by Act of Parliament

Parliament can create a company by passing an Act of Parliament. For example, organ izing the London
2012 Olympic and Paralympic Games was the responsibility of a company called the Olympic Delivery
Authority, which was created by the London Olympic Games and Paralympic Games Act 2006.

Incorporation by Royal Charter

A company can be created by Royal Charter. Historically, such so-called chartered compa nies were created
personally by the monarch through the exercise of the Royal Prerogative, but today are created by the
monarch upon advice from the Privy Council. Prominent exam ples of companies incorporated by Royal
Charter include the Bank of England, the Law Society, and the BBC. Today, very few companies are created
by Royal Charter (in 2019, only three such companies were created) with modern charters being granted
almost exclusively to bodies engaged in educational or charitable work (with the most noteworthy recent
char tered company being the Recognition Panel, which is the approved regulator of the media

recommended by the Leveson Report).

18 Concentrate Company Law

Incorporation by registration
Petitioning Parliament or the monarch is not the most accessible or efficient way of creat ing a company.
Accordingly, a simpler and quicker method of incorporation was created by the Joint Stock Companies Act
1844, namely incorporation by registration. Today, the over whelming majority of new companies are
incorporated by registration (in 2018/19, 631,590 companies were incorporated by registration).

The registration process

Incorporation by registration is so called because it involves registering ‘registration docu ments’ with
Companies House. These documents, once registered and authorized, bring a registered company into
existence. Section 9 of the CA 2006 provides that the required docu ments are the memorandum of
association (discussed at p 45, ‘The memorandum of asso ciation’), an application for registration, and a
statement of compliance. The application for registration (known as Form IN01) will provide certain
information, including:

 the company’s proposed name;

 the address of the company’s registered office;
 whether the company is to be public or private;
 whether the members’ liability is to be limited or unlimited and, if limited, whether it is to be
limited by shares or by guarantee;
 if the members' liability is to be limited by guarantee, then a statement of guarantee must be
included;
 if the company is to have a share capital, a statement of capital and initial sharehold ings must be
included;
 a statement identifying the company’s proposed officers (i.e. the first director(s) and, if applicable,
the first company secretary).

A statement of compliance must be registered which states that the statutory requirements
regarding registration have been met. In addition, the Small Business, Enterprise and Employment
Act 2015 (SBEEA 2015) amended the CA 2006 so that companies must also provide:

 a statement identifying persons who have significant control over the company, and
 if the company is private, and the promoters have elected to have Companies House keep its
statutory registers, then a notice indicating this must be delivered to Companies

House upon registration.

If the registrar of companies is satisfied that the documents are complete and accurate, he will,
upon payment of the registration fee, issue a certificate of incorporation, which provides conclusive
proof that the company is validly registered under the CA 2006 (CA 2006, s 15(4)). From this date,
the company has all the powers and obligations of a registered

Methods of incorporation

if -Jf -J: -4: * *

Chapter 2 incorporation 19
Advantages and disadvantages of incorporation

4?4c4c4c4c4c4c
company, and the proposed directors will formally become directors, subject to a range of

statutory duties (discussed at p 69, ‘Directors’ duties’).

You would do well to be aware of the practicalities of incorporating a company (e.g. methods of incorporation by registration,
costs of incorporation, etc.) and how practice in this area is changing. For example, Companies House has stated that it
eventually intends for all incorporations to be completed electronically and strongly encourages paperless incorporation via the
registration fee, which is notably less for electronic registration than for paper registration. A wealth of practical and up-to-date
information relating to the process of incorporation and the number of incorporations can be found at
www.gov.uk/government/organisations/companies-house .

'Off-the-shelf' companies
Preparing the registration documents is not unduly burdensome, but it does require knowl edge of the
procedures by which a company is created. Persons who lack such knowledge, or who wish to avoid the time
and effort associated with preparing the registration documents, may instead prefer to take advantage of
the services of an incorporation agent (also known as a company formation agent). Incorporation agents
register the relevant documents and then leave the newly registered company ‘on the shelf’ until such time as
it is purchased from them. When purchased, the agent will notify the registrar of companies of the new
owner’s identity and relevant changes (e.g. change of registered office, change of directors, etc.).

The Company Law Review Steering Group estimated that around 60 per cent of all new companies are initially created as off-
the-shelf companies. Be aware of the importance of this method of obtaining a company, and also the advantages (e.g. speed
and lack of expense) and disadvantages (e.g. the company may not be tailored to the purchaser's needs) of purchasing an off-
the-shelf company.

Advantages and disadvantages

of incorporation
In order to understand the true importance of the company, it is vital that you appreciate the advantages
and disadvantages that arise when conducting business through a company.

Students are often aware of the advantages of incorporation, but frequently are unaware that incorporation carries some
notable disadvantages. Despite the numerous substantial benefits that incorporation brings, it is not suitable for many
businesses, as evidenced by the notable number of sole proprietorships and partnerships.

20 Concentrate Company Law

Advantages

Advantages and disadvantages of incorporation -•#>> #**

Carrying on business though a company has a number of significant benefits over carrying on business
through an unincorporated structure.

Corporate personality

The primary advantage, from which many other advantages flow, is that the company acquires corporate
(or separate, or legal) personality. This means that the company is regarded by the law as a person.
Whereas humans are classed as natural persons, the com pany is a legal person and can therefore do many
things that humans can. As corporate personality is so fundamental, it is discussed in more detail later in this
chapter at p 26, ‘Corporate personality’.
Limited liability

As the company is a separate entity, it follows that the members are not usually personally liable for its
debts and liabilities—the company itself is liable. However, this does not mean that the members are not
liable to contribute anything. Where a company is unlimited, the members ’ liability will also be unlimited.
However, the overwhelming majority of compa nies are limited, and so the liability of the members will also be
limited.

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Students frequently confuse the concepts of limited liability and corporate personality, but it is important to note they are
distinct concepts A consequence of corporate personality is that it is the company itself that is liable for its debts and liabilities,
and the members are not so liable. Limited liability simply provides that, in the event of a company being liquidated, the
members' liability will simply be limited to a specified amount. Limited liability is not about making the members liable for the
company's debts or liabilities upon liquidation.

The operation of limited liability has already been discussed in Chapter 1 at p 11, ‘Limited and unlimited
companies’.

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Limited liability is a powerful incentive to incorporate, but for many smaller companies, it may not provide as substantial a
benefit in practice, when lending to a smaller company, banks will often require that the directors/members sign personal
guarantees, thereby ensuring that, should the company default on the loan, the relevant directors/members may become
personally liable to pay to the bank any part of the loan unpaid by the company. Further, limited companies pay for limited
liability in the form of increased regulation (e.g. disclosure requirements). Students are usually aware of the advantages of
limited liability, but are often unaware of its disadvantages. For an account of the advantages and disadvantages of limited
liability, see Brian R Cheffms, Company Law: Theory, Structure and Operation (Clarendon, 1997) 497-508.

Chapter 2 incorporation 21
Advantages and disadvantages of incorporation

4:

There is little doubt that limited liability minimizes the risk faced by the members and encourages
investment in companies. The problem with limited liability is that, whilst it protects the members, it
arguably weakens the position of the company’s creditors. In a sole proprietorship or ordinary
partnership, the creditors can obtain satisfaction of the debt from the personal assets of the sole
proprietor or partners. In a company, the creditors of the company can only usually look to the company
for payment. It has therefore been argued that limited liability does not so much minimize the members’
risk, but instead shifts it from them and onto the company’s creditors.

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Does limited liability really shift the risk from the members onto the creditors? The answer is undoubtedly yes, but it has been
argued.that the creditor is fully compensated for the increased risk by the interest charged on the loan. However, smaller
creditors may not be powerful enough to negotiate increased interest rates with the company. Further, some creditors are
unable to negotiate with the company at all (e g. persons who are owed compensation from the company as a result of the
company's tortious acts or omissions). For a detailed discussion, see Frank H Easterbrook and Daniel R Fischel, ‘Limited Liability
and the Corporation’ (1985) 52 Uni Chi LR 89.

Perpetual succession

Companies are not subject to the physical weaknesses that natural persons are subject to. Accordingly,
companies can continue forever and there are numerous existing companies that are centuries old.
Members and directors can come and go, but the company remains (see the Australian case of Re Noel
Tedman Holdings Pty Ltd [1967J for a stark example of this). Compare this to a partnership which, upon
the death of a partner, may be dissolved.

Contractual capacity

As the company is a person, it can enter into contracts with persons inside and outside the company.