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.

How to register a new company?

How to register a new company?

 

How to register a new company?

 

Note: This guide describes the process of UK limited company registration.

 

The countless number of companies are being registered globally every year. In the United Kingdom in the 12 months to the end of March 2017, there were 644,750 company registrations.

Registering as a company in the UK has never been so easy.

No paperwork, long waiting times or expensive fees.

There is no need for an accountant or lawyer for registering a company nowadays. Everybody (absolutely everyone in the world) can go online and register a UK limited company electronically in about 3 hours.

As company registration process is now super fast and simple, more and more people every day decide to incorporate.

The most popular corporate body in the UK is a private limited company. Since 2007, private limited companies have consistently accounted for over 96% of all corporate body types.

The major reason for this is that the Ltd perfectly meets the initial needs that new small and medium size businesses usually have. Limited companies provide protection to shareholders. They also provide access to all essential legal rights.

In this guide, we will walk you through the necessary steps for setting up a limited company in the UK. Moreover, we will describe every part of company registration process in detail. If you want to start your business journey with forming a UK company read on and see how quick and easy this can be.

 

Basically, in order to register a UK limited company you need the following:

  • An appropriate company name
  • UK address for the company
  • At least one director
  • At least one shareholder
  • SIC code (Standard industrial classification of economic activities) – this identifies what your company does

 

Let’s take a closer look at each step:

 

1. Do you need to register a company?

 

The mere fact that you run a business does not mean that you must form a company.

Depending on the circumstances operating as a sole trader can be a good option to the certain extent. However, there are specific differences between a limited company and sole trader that matter.

Usually, as your business grows you inevitably reach the point where you need to switch from sole trader to the limited company. Limited company registration, in this case, can be slightly different. You can read about the exact procedure in our previous article.

 

Related: How to Change from Sole Trader to Limited Company?

 

However, everything depends on your current position. If you feel like a limited company is the best option for you then it is a good idea to go ahead and register with Companies House.

2. Choose your company name

 

You need a unique name for your new UK limited company. This must be a name that has not been yet registered for another company.

However, this is not the only requirement for company names in the UK. For the successful company registration with Companies House, your new company name must meet specific requirements. Most of these requirements are generic, but it is a good thing to know them in advance. We suggest checking the full details of the acceptable company names before you start the company registration process.

 

Related: What Names Are Acceptable for UK Limited Companies?

 

On top of that, remember that a good company name is an invaluable asset. The great company name will always help you along the way.

 

Related: How to choose a great company name? (ranking table included)

 

As soon as you find the suitable company name you can check if it is available using our company name checker. This tool is harmonized with the Company House records and functions in real time. If your company name is available you can proceed and start forming your company right away.

Remember that you can use a different name for trading. Your trading name (also called business name) can be different from your registered company name.

Additionally, you need to take into account that you’ll need to register your trading name (business name) as a trade mark if you want to stop people from trading under your business name. You also can’t use another company’s trademark as your business name.

3. Company address

 

All UK companies must have an address in the UK. This is a mandatory requirement. You must provide the company address during the incorporation process. You need the company address for official communications, for example, letters from Companies House.

 

Below are the requirements for a UK company address:

  • It must be a physical existing address in the UK;
  • It must be in a country where you want to register a new company e.g. company registered in Scotland must have an address in Scotland;
  • You can use PO Box. However, you still need to provide a physical address and postcode.

 

If you want so, you can use your home address or even the address of the person who will be managing your Corporation Tax.

Remember, that your company address will be publicly available on the online register.

If you do not have an address in the UK or want to keep your home address private you can get UK address online here.

4. Appoint directors (and company secretaries)

 

UK limited companies must have minimum one director. Directors are legally bound to carry the load of running the company and ensuring company accounts/reports are accurately prepared.

The minimum allowed age for directors is 16. The director must not be disqualified.

Legal entity (another company) can be a director of UK limited company, but at least one of the company’s directors must be a person.

There is no requirement for directors to live in the UK (although companies still must have a UK registered office address).

Please note that directors’ names and addresses are also publicly available.

As for the company secretaries, there is no requirement to appoint them for a private limited company. But some companies appoint them to carry on some of the director’s responsibilities.

Even if there is an appointed company secretary, the directors are still legally responsible for the company.

If you register a company with us you can appoint the company director electronically during the company registration process.

5. Shares and Shareholders

 

Limited companies are usually limited by shares.

Shareholders hold the company shares and this allows them to control the company. The liability of each shareholder is limited to his/her shares in the company. This is exactly the way shares limit the responsibility of shareholders.

At least one shareholder must hold shares in the company limited by shares. This can be a director.

If there is only one shareholder, then he/she owns 100% of the company.

As for the maximum number of shareholders, there is no such limit currently in place.

You need to set the price of an individual share which can be any amount. There is no minimum share amount requirement for UK limited companies. Share amounts can be as low as £1 (by the way this is a popular choice and in most cases the reasonable amount to limit the shareholders’ liability).

During company registration process the information about the shares has to be provided. This is also known as “statement of capital”. The following information must be provided:

  • the number of shares, their types and value – known as the company’s ‘share capital’;
  • Shareholders (also known as ‘subscribers’ or ‘members’) details – their names and addresses.

 

You also need to set the class for shares. The class of the share defines the rights it gives to the shareholder. This is known as “prescribed particulars” and must specify:

  • the share of dividends it gets
  • share exchange (‘redeem’) details
  • vote details

6. Find your SIC code

 

Check what your SIC code is. SIC (Standard Industrial Classification of Economic Activities) code identifies what your company does. You can find the appropriate SIC code in the condensed version of the full list of codes provided by Companies House.

7. Memorandum and Articles of Association

 

Memorandum of association is a legal statement signed by all initial shareholders expressing their consent to register the company.

Articles of association are rules governing the process of running and operating the company. These rules are presented in a written form and agreed by the directors, the company secretary, and shareholders.

Both documents must be provided in order to register a limited company.

Usually, there is no need to draft these documents in a standard case. There is a memorandum of association template and model articles available for an immediate use. If you register your company with Mill you’ll have all these ready in our system for you. You can also draft your own articles of association, but if you do so you won’t be able to form your company online.

8. File the incorporation with Companies House

 

Once you have everything ready you can start the company registration process. This can be done in different ways:

  • You can register a new company online with Companies House. In this case, you must register a company that is limited by shares and uses standard articles of association.
  • You can register by post. This application takes between 8 to 10 days. There is also an option to register the company on the same day if you get your application to Companies House by 3 pm and pay £100. In this case, you must mark the envelope as “same day service” in the top left-hand corner.
  • You can register a new company online with us. This is the easiest option. You will get everything set up for you in our system and will be able to get your company registered with Companies House in just 3 hours (in most cases).

 

How much does it cost to set up a limited company?

The company registration cost depends on the method you choose:

  • Online company registration fee with Companies House is £12;
  • Company registration by post with Companies House costs £40 (You can pay this fee by cheque made out to Companies House);
  • Registering a company through our system costs £29 (Companies House fee is included).

 

9. Register for Corporation Tax

 

Once you have completed the company registration process you will receive the official “certificate of registration” (certificate of incorporation). This document is the proof that your company legally exists. It contains your official company number and date of incorporation.

After you company has been registered and is ready to trade you can register for corporation tax within 3 months of starting to do business. Starting to do business also includes buying, selling, advertising, renting a property and employing people. If you doubt whether you have started to do business or not you may consult this comprehensive resource to determine your position.

You can register for corporation tax online with HMRC.

10. Start trading with your newly registered company

 

Once you complete all mentioned steps you will have an officially registered UK company that is ready to trade.

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What is the company Annual Return (AR01 Form)?

What is the company Annual Return (AR01 Form)?

What is the Annual Return (AR01)?

 

Filing the annual return is a legal requirement in the UK.

If you are running a company in the UK, you must operate in accordance with the applicable legislation (e.g. Companies Act 2006). There are certain statutory annual requirements that you should comply with including:

  • Filing Annual Returns
  • Self-Assessment Tax Returns
  • Annual Accounts
  • Pay as you Earn (PAYE)
  • Corporation Tax
  • Quarterly VAT Returns

 

Of interest to this article is the annual return (AR01 form, part 24 of the Companies Act 2006).

Notably, from 30th June 2016, the name changed from annual returns to a confirmation statement. Nevertheless, there is no much change in substance. The phrase “annual return” is still widely used (so we will use both terms in this article).

 

The Meaning of Annual Return

 

An annual return is a statement that you file at the Companies House to confirm that the information that they hold about your company is correct.

You must file annual returns at least once every 12 months.

Failing to file the confirmation statement while your company is in operation is a criminal offense and entails serious consequences. So, if you fail to file the confirmation statement within the stipulated time, you may face one of the following actions depending on the case circumstances:

  1. Removal from the position of director of the company;
  2. Prosecution (if you fail to file a confirmation statement at all);
  3. Companies House may strike the company off the register of companies assuming that your company isn’t carrying on business or in operation. If this happens then your company will cease to exist and all its assets will become Crown property.

 

Filing Annual Return/Confirmation Statement

 

Confirmation Statements (Annual Return) should be filed online through the Companies House web filing service or by paper form which may be sent by post. In either case, you will need to fill form CS01 (previously form AR01).

However, the amount of fees is different; you will pay £40 if you file your company’s confirmation statement on paper and £13 if you file electronically. Most people prefer filing the confirmation statements through the online portal. You should note that you cannot use paper form to file confirmation statement for your company if:

  • The company is in the protected online filing scheme (PROOF)
  • You need to file form 363

 

Details that Must be Provided in a Confirmation Statement (Annual Return)

 

  • Company name and number
  • Registered office address
  • Made-up date of the return – date at which all information must be correct
  • Alternative inspection location (SAIL address), if you use one
  • Officers (directors and company secretary)
  • Persons with significant control (PSCs)

 

Responsibility for Filing Annual Return/Confirmation Statements

 

The legal responsibility for filing the confirmation statement (annual return) of a company lies with the directors. If you have a company secretary, you may delegate the responsibility to him or her but always have in mind that you are ultimately liable.

You must ensure that you file at least one confirmation statement every 12 months. However, you may file as many confirmation statements as you wish within the 12 months so long as you give an interval of 24 hours between any two consecutive confirmation statements. If you have just registered your company, you will have to wait for at least 48 hours before filing its first confirmation statement.

Although you are not required to pay more than once in a year even where you opt to file several confirmation statements, companies rarely file more than the mandatory one confirmation statement in a year-probably in the interest of time.

 

The Importance of the Annual Return/Confirmation Statement

 

While filing a confirmation statement is a statutory requirement, it is not meant to merely increase your responsibilities as a director. It serves several important functions including:

  • Keeping your company’s information on the official register up to date;
  • Improving the quality of information on the official register;
  • The fees paid when filing confirmation statements is an important source of revenue for the Companies House which needs money to maintain the register and to offer other services;

 

How does a Confirmation Statement (CS01 Form) Differ from an Annual Return (AR01 Form)

 

As noted above, confirmation statements replaced annual returns. This change took effect on 30th June 2016.

While there is no much difference, the following are worth noting:

Previously, the requirement was to include a full list of shareholders every three years. This is no longer a requirement with the confirmation statement. As a result, you avail the information to the Companies House whenever you want to ensure that your information is up to date and correct.

Moreover, now instead of having to provide a snapshot of your company data annually, you are only required to check and confirm that the information held by the Companies House is accurate and up to date. With the annual return, you were required to file within 28 days from the anniversary of the incorporation of your company. This period is now 14 days.

Finally, there is the introduction of the requirement to provide a list of people with significant control (PSC) at the time of filing your first confirmation statement.

For the official information on confirmation statements, click here.

 

Related: How to Change from Sole Trader to Limited Company?

 

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Changing From Sole Trader to Limited Company

Changing From Sole Trader to Limited Company

Thinking of Changing From Sole Trader to Limited Company?

 

If you are running your business as a sole trader at some point you may start thinking of changing from Sole Trader to Limited Company.

This is quite common practice. Many businesses start with carrying on their business activities as sole traders. Then some of them change from sole trader to limited company.

This shift usually occurs when a business outgrows the sole trader business structure.

There may be certain reasons for you to think about changing your business structure. They may and may not be sufficient to actually start the process.

Thus, when deciding on such important things as changing the legal structure every business owner must lean on solid facts only and not his personal perceptions. Your ultimate purpose is to derive the greatest benefit for your business from every change you make.

 

Below are the most common reasons to change from Sole Trader to Limited Company:

 

  • Limited Company Formation Process is quick and affordable. Usually you get your new company up and running in 3 hours only.
  • Limited Company structure can help you to save tax.
  • Limited Company is a separate legal entity. It limits the liability of shareholders and directors. This means that your liability as a shareholder for any debts incurred by the company is limited to your shares in that company. Your personal assets cannot be seized to pay company debts.
  • Being a company positively impacts your image in the eyes of your customers, suppliers, partners and basically everyone else. People tend to have more faith in a business if it is a registered company.
  • Legal and financial mechanisms are easily accessible for Limited Companies to get investment and raise capital.
  • It is far easier to expand your business being a company rather than being a sole trader.
  • Your business name will be automatically registered together with your company.

 

Important things to keep in mind:

 

  • You and your limited company are not the same thing/person from a legal perspective.
  • You’ll need to open a new bank account for your limited company.
  • Limited company means more paperwork (but that shouldn’t be a problem as long as you are going big, right?).
  • Company funds are not considered to be your own funds unless they’ve been paid to you in the form of dividends.
  • If you will appoint yourself as a company director you will have certain legal duties to fulfil. For example, you will have to manage your company’s resources and finances.
  • Limited company records (e.g. registered address, directors, etc.) are in the public domain and available for everyone to see. This means less privacy for you.

Obviously, there are some pros and cons of changing from Sole Trader to Limited Company. The good news is that they are pretty straightforward.

In essence, the most important differences are: limited liability (this is actually the nature of Limited Company – the reason why this legal structure actually exists. With a limited company you have a limited liability protection) and access to investment/capital raising mechanisms.

If these reasons coincide with your situation, then you can start with the changing process.

 

Changing from Sole Trader to Limited Company – the step-by-step process:

 

Step 1: Form your limited company

Step 2: Notify HMRC that you have stopped self-employment as a sole trader. (You may use this link for that).

Step 3: If you are registered for VAT, you must notify HMRC within 30 days of the change. Otherwise, you will get a penalty. You can either cancel your VAT and then register a new one or transfer your current VAT registration. You can complete this step using this link or fill in and send this form to HMRC by ordinary post.

Step 4: In case you employ people, you will also need to notify HMRC about the change.

Step 5: Complete your final tax returns as a sole trader.

Step 6: Within 3 months of starting to trade through your company, you must register with HMRC for Corporation Tax. You can do this online.

Step 7: Inform all of your existing customers, suppliers, lenders, service providers and employees that you are going to start trading as a limited company.

Step 8: Update your website, terms and conditions and business stationery with your new details.

Step 9: Leverage the limited company advantages for the benefit of your business (after all you’ve changed from sole trader to a limited company for a good reason, right?).

 

Notes:

This article outlines the process of changing from Sole Trader to Limited Company in the UK. However, this is almost the same or very similar in other countries including Ireland and U.S.
** This article does not constitute a legal or accounting advice and is provided for general information purposes only. For a qualified advice please refer to the certified lawyer or accountant.

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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.

 

Summary

 

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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