A company is one of the many forms you can choose to do business with. You can also opt for other vehicles like a sole proprietorship or partnership. A company is a creation of the law and is a separate legal person. It can enter into a contract, and it can sue and be sued separately from its owners. A company can also own its own assets and liabilities. In Uganda, companies are regulated under the Companies Act. A company can be created by registering it with the Registrar of Companies.
There are different types of companies. Companies may be private or public. They may also have limited or unlimited liability. Private companies have a maximum of 100 members while public companies have no limit to membership. Transfer of shares in a private company is restricted whereas you can freely trade your shares in a public company. Limited liability means the members are only liable to the extent of their outstanding share capital. This means the members are not held personally liable for company losses.
There are several advantages to using a company to transact business:
- Separate legal person. A company is a separate entity from the owner. This means the company can enter into contracts. This enables a clear separation between personal and business matters. Many small ventures find themselves entangled with the owner’s affairs which causes lots of confusion. Creating a separate company can help to solve this problem.
- Limited liability. A company can shield the owner in risky transactions especially if the company is a limited company. The owners are only liable for the unpaid share capital. So if the business goes bankrupt, the owners personal assets cannot be touched.
- Lower taxes. The corporate tax rate is typically lower than the individual tax rates. Moreover, you only pay corporate taxes when you make a profit. As an individual, you pay taxes on your gross earnings before allowing for any expenses. So it is cheaper to transact as a company.
- Attract financing. A company can easily attract financing compared to an individual. You can raise capital by selling shares or borrowing. Most institutions would generally prefer to deal with a company. Owning a company also demonstrates that the business is a bit organised and has some systems in place. This easier access to financing can accelerate growth.
- Perpetual existence. A company can exist beyond its owners because its a separate legal entity. Unlike your job which disappears when your contract ends, a company can exist for so many years. A company is a good vehicle for transmitting generational wealth.
There are however some challenges with owning a company. There are additional costs to be incurred in registering the company. There are also more compliance requirements like filing annual returns, tax registration, etc. However, the advantages outweigh the disadvantages. Make sure you talk to your lawyer to understand the best type of company or vehicle you should use for your business.
In conclusion, it’s advisable to transact business with a company because you limit your risk and also allow the business to grow and exist in perpetuity.