Basic principles of company law
This article is based on UK law. It was last updated in
August 2008.
Companies come in many different shapes and sizes; there are key
differences in what they can and cannot do, and the purpose for
which each is designed. But all are separate legal
persons independent of their directors and shareholders.
Only rarely will the law look behind a company and treat it as
being the same person as those who control it.
This concept of a company as a separate legal personality has
two consequences:
- a company’s property belongs to it and not to its directors,
management or shareholders. Even if you are a sole director and a
100 per cent shareholder, you can still be found guilty of stealing
from your own company. Liquidators and future owners will have an
interest in pursuing claims for theft or misuse of assets where a
company has been plundered by those in day to day control. Robert
Maxwell was only one of the most prominent company chairmen to
forget this basic principle.
- a company is responsible for its own debts and liabilities. The
shareholders and, as a general rule, directors cannot be forced to
pay them.
That second point is why 'limited' companies give their
shareholders 'limited liability'. A
limited company may be sued until all its assets
have been exhausted, but no creditor can turn to the shareholders
and ask them to meet any deficit. Once a company has received at
least the nominal value of its issued shares (£1 for a £1 share
etc), the shares are 'fully paid' and the shareholder has no
further liability. Shares may be issued 'partly paid': a £1 share
may be issued with 25p payable on issue and 75p at some future date
or on an earlier liquidation. But once those amounts are paid in
full, the shareholder has no further liability for the company’s
debts.
It is important to remember they are principles of company law.
In the field of tax in particular, many inroads have been made by
both statute and the courts that allow the authorities to look
behind company structures at who really owns and controls the
entity.
Most companies are 'limited by shares', and they may be
'private' or 'public' companies. Public companies may have their
shares 'listed' or traded on a stock exchange – although they are
under no obligation to do so.
If a company is not limited by shares, it may be 'limited by
guarantee', or it may be unlimited. All of these different types of
company are explained in our OUT-LAW guide to The different types of company.
