The Advantages of Changing a Business Into a Company Essay

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The Advantages of Changing a Business Into a Company

James wants to change his business into a company; James will receive many benefits if he chooses to take this option. I am going to talk about the main advantages of changing his business into a company which includes the limited liability that James will be entitled to.

A company is a business organisation that is registered under the Companies Act 1965[1], this legislation means that the organisation created is subject to different rules. If James incorporates his business into a company it will have two legal effects. The two legal effects are; the company becomes a separate entity or a legal person and secondly the company has perpetual
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The main advantage of incorporating is the limited liability of the company. Unlike a sole trader where the business owner assumes all of the liability, when a business becomes incorporated an individual shareholder's liability is limited to the amount he or she has invested in the company. As a shareholder you can't be held responsible for the debts of the company unless you have given a personal guarantee.

The principle about the company being liable for the company’s debt will only be followed if the shareholders follow the rules and are not involved in any fraudulent activity. This principle of separate personality of a company was established by the House of Lords in Salomon v Salomon & Co. [1897] A.C.22. Salomon had a leather business which he converted into a company, in which he his wife and family took shares. The company became insolvent and was sued. The unsecured creditors who were owed money claimed that the company was a sham and a mere agent for Salomon. The Courts stated the company was a separate legal entity and consequently the company was the only person liable to pay the debts. They upheld Salomon's corporation as properly formed, and a distinct entity, with no evidence of deception or fraud. As a company is a separate legal person all property it owns is that of the company and not the shareholders and likewise its debts are the debts

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