What is the Companies Act 2006?

What is the Companies Act 2006?

The Companies Act 2006


The Companies Act 2006 (“the Act”) is one of the UK’s largest pieces of legislation. The Act includes 1,300 sections and 16 schedules. It covers many facets of the running and structure of a company as well as corporate governance.

It can be a confusing piece of legislation to follow at times. So, it’s fair to say it doesn’t make for easy bedtime reading.

Well, unless you’re looking for something to send you to sleep.

But don’t let that put you off.

Once you’ve got your head around how to use the Act and its purpose, it can be a crucial reference tool for you.

The Act allows to easily check up on your rights and responsibilities as an employee or company director.

This article aims to provide an overview of the Act, its contents and key provisions that demonstrate its importance in today’s corporate and commercial sectors.


The contents of the Companies Act 2006


The Act is one of the longest pieces of legislation ever enacted in the UK. Thus, reading the Companies Act 2006 requires a little navigation.

Fortunately, it sounds more daunting than it is.

The Companies Act 2006 has 47 Parts; the 16 schedules are separate. Most Parts contain several chapters which serve as headings to narrow the scope of the provisions down into relevant sections. This is to enable users to navigate the Act as quickly and as smoothly as possible.

The most used Parts of the Act:

  • set out the requirements for forming a company;
  • regulate the conduct of company directors;
  • make provisions for the disclosure of business accounts, audits and executive remuneration packages and any bonuses and regulate against fraud.


 Purpose of the Companies Act 2006


The context of the Act demonstrates its importance. The Act came into force in 2006, amending and reinstating much of the Companies Act 1985. The final provisions of the Act came into force in October 2009, after eight years of consultation.

A lot has happened in business since 1985. So the legislation was in dire need of a makeover to appropriately regulate the current sector.

Law primarily reflects the times we live in, or at least it should. The legislation is redundant if it doesn’t do the job it’s designed for.

Thus, the Act updated and modernised much of the original enactments relating to all components of companies, organisations and other forms of business.

2006 was an unforgettable year for global business and not for reasons we’d like to remember. It was the beginning of the Global Financial Crisis (GFC).

Leading up to the GFC, it became apparent that company law and corporate governance regulations needed tightening up – a change that took over four years in the making and came a little too late.

The purpose of company law and corporate governance is to promote enterprise and stimulate investment.

If individuals are better financially protected by the law and there is more accountability for those engaging in foul play, more people are likely to invest. In turn, this encourages businesses to flourish.

The revisions also streamline the company formation process with clearly defined legal parameters and regulations.


The importance of the Companies Act 2006 in today’s commercial sector


While some of the tricky bits are better left to the lawyers, the Companies Act 2006 is now more reader friendly for non-legal persons and the general public than it’s ever been.

One of the main focuses of the legislatures was to create a statute that operated in favour of a transparent and integral business community.

Traditionally, the mission of any company is to maximise the profit and economic value of shares for holders and members.

Other objectives tend to be ancillary to this.

It is no longer practical or acceptable for businesses to operate with a single minded approach towards business. The Act aims to reflect a more modern business practice, that is, companies are now required to have a greater external awareness as well as internal focus to consider the impact of their conduct on employees, trade unions, and the environment. In many ways, this welcomed change has been a response to the multitude of court cases that have arisen over the years, as well as complaints from the business community, consequently concluding that companies and directors need to take a more responsible approach to the impact their decisions are having on the business as a whole.


Effect of the Companies Act 2006 on Company Directors


The Companies Act 2006 has made directors personally liable for gross misconduct in some circumstances, including liability for directors who misappropriated company funds, committed unlawful acts in commerce or who have generally abused their positions.

Before this development, company directors were more easily able to use the company as a shield to protect their wrongdoing and identity, and as such avoided responsibility for significant company losses that detrimentally affected employees, employee retirement schemes and company shareholders.

The new amendments better regulate and prevent such conduct.

Further, directors are now required to have all of their remuneration packages and any bonuses paid disclosed to an external body. The external body then can review payments at any time.

This procedure aims to stop directors paying themselves large bonuses without any connection to company performance.

Widening the scope of an individual director’s potential liability operates in the broader interests of the business community. It is the first time there has been a codification of company directors’ duties.

Directors’ duties are not as onerous as they seem to be. They consist of a general obligation of directors to act in the best interests of the company, in good faith and with reasonable care, skill, and diligence expected of a person carrying out the functions conducted by the director of the company.

The new amendments to the Act are welcomed changes for company law in the UK. Corporate responsibility and personal accountability for director misdemeanours are crucial in keeping business practices honest.

With that in mind, we can forgive the legislatures for creating an Act with 1,300 sections – even if it still makes for a difficult bedtime read.


You can access the full text of the Companies Act 2006 by following this link.

Difference Between Firm and Company

Difference Between Firm and Company

Difference between firm and company?

This question arises quite often. It even may cause an earnest confusion.

Usually, people encounter this question during pre-incorporation stage. And then they need to figure out the difference between firm and company. This is important to decide on further steps.

You have a great business idea. You are motivated. You just can’t wait to start bringing it to the life.

And then you encounter this kind of question.

It is hard to answer this question if you are not a lawyer. Or experienced business professional. This may even pull you back. Decrease your level of motivation.

Well, it’s easy to get an advice from a certified lawyer. But is it worth it?

You do not have to hire a lawyer so early, right? Not for every occasion.

Professional legal advice is expensive. And it’s probably not necessary here.

Yet, it is important to be always clear with your legal affairs. Everything related to law requires a responsible attitude. Poor legal decisions may cause financial loss. They even may harm your business. So, you anyways need to figure this out.

Well, that’s why we are here!

We’ll try to guide you through this question in a detailed manner.


So, what is the difference between firm and company?


While being not a big deal this question must be examined from two main perspectives:


  1. Legal perspective and;
  2. Linguistic perspective.


We agree that this is not a purely legal issue. However, the difference between firm and company first must be analyzed from legal perspective.

Linguistic part of it may actually shed more light. But it is unlikely to carry any monetary value for you. It also won’t result in any serious consequences.

It is the law that sets out the criteria and grounds for us to name certain things in certain ways. And it is again the law that stipulates how those things are dealt with in a real world.

So, what is the firm and what is the company from a legal perspective?


Difference Between Firm And Company From Legal Perspective


As you may know there are certain levels of law. There is a national law and international law. National law is often limited to certain country boundaries. International law has an international coverage.

National laws govern corporate structures. There is no universal international legislation governing this matter on a global scale.

To make a difference between firm and company, we must refer to the particular country (or state) legislation.

However, we have never encountered a firm being anything different than a company in any jurisdiction.

In most of the countries, including the United Kingdom, Continental European Countries and the United States, there are legal structures for running a business. That’s what we call a company, firm etc.

Most popular legal structures are limited companies, partnerships, public companies and corporations. Variety of business structures depends on country.

But there is no such business structure as firm.

None of major English-speaking jurisdictions consider firm as a business structure (e.g. Companies Act 2006 in UK and California Corporations Code do not define a firm as a separate legal structure).

So, from a legal perspective there is no such thing as a firm. At least as a separate business structure. But there is such thing as a company.

Both documents above refer to all business structures as companies.

The same is about Irish Companies Act 2014 and Australian Corporations Act 2001.


Not even a mention of firms in legislation?


Some of the documents may mention “firms” in their provisions. UK Companies Act 2006 and Australian Corporations Act 2001 mention “firms” in their texts.

However, they do not consider firms as separate business structures.

Often, the terms “firm” and “company” are interchangeable in legislation. This happens when legislator refers to specific types of companies. These are firms in their traditional meaning (such as law firms, accounting firms etc.).

Thus, firms and companies are not different from a legal perspective. Legally, there is no such a term as “firm”. Only company.

But, we know that firms do exist. We also know that they differ from companies.

But what is this difference in the end?

Seems like the major difference between firm and company lies in the linguistics.

Let’s see what is the firm and what is the company from a linguistic perspective.


Difference Between Firms And Companies From Linguistic Perspective


To answer this question, we refer to the most authoritative online dictionaries.

Most prominent online dictionaries such as Cambridge Dictionary and the Dictionary by Farlex define firm just like as a company or business.

Similarly, Merriem Webster Dictionary, TheFreedictionary.com, YourDictionary.com and Findlaw.com define firm as a business entity. They also highlight its main element – partnership nature. A company is called a firm when it is a partnership of two or more persons.

So from the linguistic perspective, there is a clear difference between firm and company.

Dictionaries make a difference when a company is a partnership. And then they call it a firm.

From a linguistic point of view company is a broader notion of business entity. The notion of “company” embraces the notion of “firm”.

In simple words, all business entities are usually referred as companies. Only those of companies that are partnerships are usually referred as firms.

In practice people often call certain types of business entities firms.

This takes its roots from traditions and customs. Traditionally, law firms and accounting practices often were established in the form of partnerships.

Today, people still call them firms. They do not pay too much attention to actual business structures. While they may be different.




Thus, there is a soft difference between two notions from the legal perspective. In contrary there is more explicit and straightforward distinction from the linguistics side.

It all depends on the perspective. If you approach this question from a legal perspective, there is only company. No firm as a business entity.

Unlike the legal point of view, if you approach this question from a linguistic perspective, there are both: firms and companies. But they are similar.

In practice though, there is no difference between firms and companies. It is okay to call some types of companies firms. That’s it.

Firms and companies are the same thing in nature.

Difference between them is basically in how you decide to make it. You won’t tangle anyone if you would say company instead of a firm or vice versa.

Likewise, you won’t be able to mess up with your company registration here. There is no available business structure called firm.

So, no worries. 🙂


Further Reading: Changing From Sole Trader to Limited Company

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