The Legitimacy of a Company Account vs. a Business Account
There is a subtle but significant difference between a business account and a company account. Understanding this distinction is crucial for both business owners and potential investors. This article will explore the characteristics and implications of both types of accounts, focusing on the ramifications of corporate structure and liability.
Understanding a Company Account
A company account, such as a Limited Company by Shares or Guarantee, involves a leadership structure known as directorship. Directors are responsible for overseeing the shares and, consequently, the overall responsibility of the company. This means that the number of issued shares and their nominal value (e.g., 10p per share) multiplied by the number of shares they own equates to their liability towards the company.
Liability in the Event of Insolvency
In the event of insolvency or a bankruptcy proceeding, also known as Chapter 11 in the United States, directors can be held accountable for the company’s liabilities. Specifically, if the company is wound up (liquidated) and it is determined that the assets, including copyrights and patents, combined with the money held by the directors as shareholdings, are insufficient to cover all debts, the remaining balance will be distributed among unsecured shareholders according to the poundage principle.
Significant Consequences for Directors
Directors holding shares in a limited company face severe consequences if the company cannot fulfill its obligations. The shareholders’ roles and deposits are considered a form of security. If insolvency proceedings are initiated and the liabilities cannot be met, the administrators may seize the shareholdings, effectively liquidating the company.
Characteristics of a General Trading Business
In contrast to a company account, a general trading business, such as Fred J. Bloggs trading as ABC Motors, does not offer the protection of limited liability. Meaning, when setting up the company, the individual (e.g., Fred J. Bloggs) must personally commit to paying into the “pot” if the company is unable to meet its financial obligations.
Limited Liability and Separate Legal Entity
A limited company acts as a separate legal entity, providing a layer of protection against personal liability. While the business may owe millions upon petition for bankruptcy, the directors' personal assets are not automatically at risk. Once a company is wound up, and limited liability has been satisfied (i.e., creditors are paid from the liquidation of assets), any remaining shortfall would be distributed among unsecured shareholders based on the poundage principle.
Personal Risk and Liability
However, it is important to note that if a director engages in fraudulent activities, such as deliberately running the business with the intention of defrauding creditors, the consequences can be severe, including imprisonment. In such cases, a company’s limited liability structure does not protect the director from personal accountability.
Conclusion
In summary, a company account offers limited liability protection, ensuring that directors are not personally liable for the company’s debts beyond their shareholdings. This protection is vital for entrepreneurs and growing businesses. On the other hand, a general trading business lacks this protection, placing personal assets at risk in the event of insolvency.