We have already written a number of articles that mention incorporation as a possible route for your business, particularly with reference to associates as a response to changes brought about by Covid-19.
While it is easy to see the potential benefits of incorporation, such advantages, as is usually the case, come with responsibilities.
When you incorporate, you cease to be a sole trader or a partner in a partnership and instead become a director and shareholder of your shiny new company. A limited company is a legal entity and any roles associated with it have defined legal responsibilities.
Here is the difference between the two roles:
The role of a shareholder is simple – you are an investor who will, hopefully, receive a return on that investment each year in the form of a dividend – more on this later.
The role of a director is more involved and carries with it some responsibilities, as summarised below.
- As a legal entity, there are more reporting requirements for a company among other things, an annual Confirmation Statement outlining the current details of the company and the annual accounts must both be submitted to Companies House by specified deadlines; any changes to the people involved in the company must also be notified; the written rules on how the company is run must be adhered to. Directors need to act in the best interests of the company and to the benefit of its shareholders – when you are both director and shareholder this is straightforward, but it must still be done within the legal requirements.
- Directors are also responsible for keeping appropriate accounting records that are both accurate and up to date, so that the financial position for the company can be assessed at any time with reasonable accuracy. It can be a criminal offence not to keep such records.
- Directors also have responsibility for declaring interim dividends – that return on investment that the shareholder is anticipating. Whether a company has sufficient funds to pay out a dividend is a calculation that the directors must carry out each time before declaring an interim dividend.
The duties of a director may seem onerous, but it is possible to obtain support from other professionals to help with them. However, ultimately a director remains legally responsible for the company’s records, accounts and performance.
If you would like to find out more about incorporation, the responsibilities that go with it, and how we can help you, please get in touch.