A company - properly called a joint stock company - is where a group of individuals put their money together to make a 'joint stock' of capital. The people who put up the money are called shareholders. They all own a share of the company, and expect to receive a share of its profits.



The shareholders are also called 'members' because they are part of the company, but the company is a legal entity quite separate from the members who own it. In law, a company is regarded as an individual in its own right. It can make a profit or a loss; it can be held responsible for the actions of its employees; it can be sued; and, if the worst comes to the worst, it can go bankrupt (though in the case of companies this is called 'going into liquidation').

The amount of the company each shareholder owns is directly proportional to the money he puts in. The shares of large companies are bought and sold on the stock exchange. Such companies are called public companies, and anybody can buy their shares through a stockbroker or bank. The shares of many smaller companies, however, are owned entirely by the people who work in them.

Limited Liability

Nowadays nearly every joint stock company in the world is formed on the principle of limited liability. Limited liability means that if a company fails and has to close down, the individual shareholders will not be held responsible for the company's debts. Each shareholder only loses the money he spent on buying his shares. Unlike a sole trader or a partner, his personal possessions cannot be sold to pay the company's debts; his liability is limited to the amount he invested (hence the term 'limited liability').

Because of the principle of limited liability, establishing your new business as a company may appear an attractive option. Potential lenders and creditors are very well aware of the principle and its implications as well, however. If you apply for a loan or credit terms, they will naturally want to ensure that their money is returned in the event of your company failing. Particularly if you are setting up a new business, therefore, they may require you to personally guarantee any debts, e.g. by allowing them to place a legal charge on your property In this case, if your company does subsequently fail, the creditor can still pursue you personally for any debts outstanding.

Company Directors

Although a company is regarded in law as a separate person, it cannot carry out any business by itself. People must be appointed to manage and run the business, and these people are called the company directors. The minimum number of directors in a private company is one (though in this case someone else must fulfil the role of company secretary). A public limited company must have at least two directors.

In a small company, such as a family business, the shareholders are often themselves the company directors; they both own the company and run it. With larger companies it is usual for shareholders to appoint directors with the necessary skills to manage the company on their behalf. The shareholders meet just once a year, at an annual general meeting, to express their approval or disapproval of the way the directors are managing the business; to appoint new directors if required; and to accept or reject the directors' recommendations on how the profits are to be distributed.

Again, in a small company all or most of the directors will be closely involved in the running of the business. In a larger company many of the directors may only work part-time for the company, simply attending board meetings at which general policy decisions are taken. They leave the day-to-day running of the company to one director, known as the managing director, or a small number of executive directors. Unless they are also shareholders, directors are not entitled to a share of the profits. However, they are entitled to a fee for the work they do for the company, plus their expenses. The managing director and executive directors, who work full-time for the company, also receive a salary, just like any other employee.

The directors may employ staff to work for them and managers to supervise those staff, but the directors have the overall responsibility and are answerable to the shareholders for the success or failure of the enterprise. The shareholders have the right to demand not only that the directors act in good faith, but also that they exercise skill and care in managing the business.