The following are typical reasons why someone might choose to form a company instead of another business type:
Limited liability– the company is liable for all of the obligations it incurs, not the shareholders. By comparison, a sole trader or a person involved with a partnership will be personally liable for any business debts that cannot be paid by the business. This is the primary reason people choose the company structure.
Shareholder control – the Companies Act allows a good degree of shareholder control through the power of the shareholder to vote on certain decisions, such as removing directors. The shareholder can control the company without the need to be involved with the day-to-day business.
Continuity of existence– a company will usually survive changes of ownership, and will continue to exist until it is removed from the company register. A partnership often ends on retirement or death of a partner.
Shares can be transferred– It is easier to sell and transfer shares in a company than it is to sell or transfer a partnership interest.
A company will also give the business credibility towards third parties, such as lenders and other people it does business with, because certain information is made available to the public and it has to abide by clear rules under the Companies Act.
Under the Companies Act, one person can form a company, by being the only shareholder and the only director. This way they can exercise full control over their business, but also enjoy the above benefits of having a company.
Note | This information is intended as a guide only – it is not intended as legal advice. For more detailed information please refer to the legislation or seek legal advice.