It is very seldom that a person decides to start a business and organise it as a company at the same time. It is more likely that a person will start as a sole proprietor and after running the business successfully for a period, may consider setting up a company.
A company is a more complex and relatively expensive form of establishing a business. It involves the creation of a separate legal entity with a name, an address, articles of incorporation and directors.
The first step is to have the planned name of the company approved by making a formal application to the Corporate Affairs and Intellectual Property Office, CAIPO. The proposed name must end with Limited,  Incorporated or Corporation, sometimes shortened to Ltd or Inc. Thus the name of a business lets everyone know that it is an incorporated business – a limited liability.
This is the great advantage which an incorporated business has over a sole proprietorship or a partnership: it limits the liability of its owners to the amount invested in the business.  Â
Once the name of the company is approved, then the incorporation is achieved by filing and having approved four other CAIPO forms:
• Articles of Incorporation: this form requires specifics of the possible scope of the business, the number of directors, the shares of the business and any other special provisions;
• Notice of Directors: this form sets out the full names, addresses and occupations of the directors;
• Notice of Address: this provides the registered address of the business;
• A Declaration by an attorney about the legal fitness of the person to incorporate a business.
Once the filing of these completed documents is approved, then CAIPO will issue a certificate of incorporation and the company comes into being. In many ways, it is similar to the birth of a baby because the company becomes a separate legal entity to its owner, a separate person in law.
The company raises funds by the issuance of shares for cash or assets such as buildings, furniture, equipment, stock of goods and so on. The persons who fund the company are called the shareholders. The directors oversee the management of the company and may be executive directors (when they serve as day-to-day managers of the business) or non-executive (when they have very limited involvement in the day-to-day management of the business and serve to determine the operating policies).
A company may have one or more shareholders as well as one or more directors. A director may also be a shareholder. Thus as a sole proprietor changes to an incorporated business, he can be the sole shareholder, the sole director and the managing director as well.
In getting to the point of incorporation, the business owner would be forced to make longer term decisions and choices about the business than he may have done as a sole proprietorship. In addition, the services of an attorney at law are essential (at a cost) in making the statutory declaration required for filing with the other incorporation documents.
However, the business owner will now have a limited liability vehicle for operating his business – a company that can enter into contract, be liable for obligations and pay taxes on its earnings completely independent of the owner. The company will pay corporation tax on its earnings; the owner will pay personal income tax on his income.
Other complexities, advantages and disadvantages of this way of organising a business will be examined more fully in the next article. Â
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
