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Updated on Jun 6, 2024
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Company formation

Company formation is the legal process of creating a new corporate entity, establishing it as a separate legal person from its owners.
Written by
Reviewed by
Updated on Jun 6, 2024
Reading time 3 minutes

3 Key Takeaways

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  • Company formation involves registering the company with the relevant authorities.
  • It defines the company’s structure, ownership, and governance.
  • The process varies depending on the jurisdiction and the type of company being formed.

What is Company Formation?

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Company formation, also known as company registration or incorporation, is the process of establishing a new business as a legal entity separate from its owners (shareholders or members). This involves registering the company with the appropriate government agency, such as Companies House in the UK, and complying with the relevant legal requirements. The formation process defines the company’s structure, ownership, management, and liability.

Importance of Company Formation

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  • Limited Liability: One of the key benefits of forming a company is that it provides limited liability to its owners. This means that the owners are not personally liable for the company’s debts and obligations beyond their investment in the company.
  • Legal Recognition: A registered company is a legal person in its own right, allowing it to enter into contracts, own assets, and sue or be sued in its own name.
  • Credibility and Trust: Forming a company can enhance the credibility and trustworthiness of a business in the eyes of customers, suppliers, and investors.
  • Access to Funding: Companies may find it easier to raise capital from investors or financial institutions compared to unincorporated businesses.

How Company Formation Works

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The process of company formation typically involves the following steps:

  1. Choosing a Company Name: The name must be unique and comply with the naming regulations of the jurisdiction.
  2. Preparing the Company’s Constitution: This includes drafting the articles of association, which set out the company’s internal rules and regulations.
  3. Appointing Directors and Shareholders: The company must have at least one director and one shareholder.
  4. Registering the Company: This involves submitting the required documents, such as the memorandum of association and articles of association, to the relevant government agency.
  5. Obtaining a Certificate of Incorporation: Once the registration is approved, the company will receive a certificate of incorporation, confirming its legal existence.

Examples of Different Company Structures

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  • Private Limited Company (Ltd): A common type of company with limited liability and shares that are not publicly traded.
  • Public Limited Company (PLC): A company whose shares can be offered to the public and traded on a stock exchange.
  • Limited Liability Partnership (LLP): A partnership structure where the partners have limited liability for the partnership’s debts.

Real-World Applications

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Company formation is a fundamental step in starting a new business. It provides a legal framework for the business to operate, protects the owners from personal liability, and opens up opportunities for growth and expansion. Whether it’s a small startup or a large multinational corporation, the process of company formation is essential for establishing a solid foundation for future success.


Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...