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Company Formation

All aspects of forming a Company are considered and in the process (if necessary) consideration is given as to whether trading as a Company is preferable to a Partnership arrangement.

Often, businesses wish to trade under a limited liability company, in an attempt to avoid personal liability being imposed upon shareholders directly.  Often, shareholders of the company will find that notwithstanding their effort to side step personal liability Banks and suppliers will, nevertheless, require a personal guarantee which, in effect, overreaches one of the principle reasons for trading as a limited liability company.

If it is decided to proceed on the basis of a limited liability company there are a number of points that need to be considered.  These include:-

  1. Clarity as to what is expected of the shareholders if they are to also provide their services;
  2. Whether there should be restrictions on the shareholders being able to dispose of their interest in the business and/or whether there should be rights of first refusal to the continuing shareholders;
  3. Whether there should be any restrictions imposed on the issue of new shares in the company.  In the case of small companies, it is often advisable to have an absolute restriction on the issue of any additional shares in the company without the prior written consent of all shareholders, to avoid a scenario where one shareholder’s interest is watered down by the issue of additional shares to the other shareholders;
  4. Clarity as to what happens in the event of there being a disagreement as to whether or not a dividend should be issued or whether the profits should be reinvested into the company;
  5. What happens if a key employee or shareholder who is expected to provide services to the company becomes insolvent, or suffer some sort of mental impairment;
  6. What happens in the event of one of the shareholders wishing to dispose of his interest in the business, or perhaps suffer an acrimonious divorce;
  7. What happens in the event of the death of a shareholder in respect of his shares in the company?  A well draft Shareholders Agreement would contain cross options whereby surviving shareholders can require the Estate of the deceased shareholder to sell his/her shares, or in the alternative the Estate of the deceased shareholder may be able to require the surviving shareholders to buy the interest of the deceased shareholder.  This needs to be dealt with by way of cross options, as the benefit afforded by business property relief for inheritance tax purposes may otherwise be lost (if applicable in the first place);
  8. There needs to be a mechanism for determining the value of shares where continuing shareholders are acquiring the interest of another shareholder.

 

 

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