Are you a one-man-band? For now, maybe the answer is “yes”. But do you want to bring in other investors in future? Do you have a co-founder and you are going into business together? Would you like to keep this business separate from your personal assets or other businesses you are involved in?
What are the benefits of incorporating a company?
A company has an entirely separate existence from any of the people involved in it, whether they be shareholders, directors or employees. This separate existence means that the main benefit of incorporation for founders, who will probably be the shareholders in the company, is that shareholders are not legally liable for the company’s debts and obligations. Other reasons why incorporating a company is attractive for founders include:
• Longevity: the existence of a company is not dependent on the life of one individual or group. Unless the founders choose otherwise, or other circumstances arise (e.g. merger or liquidation), a company will carry on indefinitely.
• Flexibility: a founder’s ownership interest in the company can be transferred (whether by sale, gift or otherwise) to another person in a relatively straightforward manner. If all the assets of your business were held in one of the founder’s names, it can be time consuming and expensive to transfer each asset to a new owner. For example, transferring leased premises may involve terminating the lease and arranging for a new one to be entered into in the name of the buyer, along with any municipality registrations and utilities accounts.
• Desirability: if you are looking to pull new investors into your business, the limited liability of, and ability to transfer shares in, a company are both attractive and well understood. There is plenty of material available, and advisors that can be engaged, to guide business owners and their team on corporate governance (please see below).
Cash is tight. Can we hold off incorporating for now?
You could postpone the process but one of the most valuable assets of your business is likely to be the ownership of its intellectual property rights. The earlier a company is incorporated, the earlier it can acquire ownership of those intellectual property rights from the founders or inventors. Trying to achieve this later, possibly after the original creator has left the business, can be problematic.
If you’d like to know more, please see PROTECT my business for information on intellectual property.
As a practical matter, some free zones may only accept applications from companies (and other corporate vehicles) for registration in those jurisdictions. It may not be possible to get a commercial licence in those free zones as an individual operator (e.g. ADGM and DIFC).
Having a company will come with lots of admin.
A company comes with record keeping requirements, registration and licensing obligations and other administrative matters which must be managed. Annual fees are payable. The upcoming VAT regime in the UAE may bring an additional layer of recording and reporting for your company.
OK, we’ve incorporated our company so we can relax now.
Not quite. Setting up a company and enjoying the benefits of limited liability does not, by itself, protect founders from all possible claims. The company must follow the rules of incorporation to preserve its separation from its shareholders. For example, keeping financial activities of the company separate from its owners, entering into contracts in the name of the company, making it clear to third parties that each founder is a shareholder/director/officer of a company (and is not acting as a stand-alone individual).
The concept of limited liability applies to your shareholding in your company but it does not extend to your position as a director of that company. A director owes a number of duties to the company and its creditors. Good corporate governance is essential to ensure that the company is operated with appropriate systems and controls which allow directors to fulfil those duties.
If you’d like to know more, please see START my business for information on corporate governance.