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Basic principles of company law

This article is based on UK law as at 1st February 2010, unless otherwise stated. Companies come in many different shapes and sizes; there are key differences in what they can and cannot do, and th...

This article is based on UK law as at 1st February 2010, unless otherwise stated.

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. Many a corporate swindler has been pursued through the courts for forgetting 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.

These basic principles underlie much of what follows in this book. But 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: Different types of company, an OUT-LAW guide.