Companies and Limited Liability

What is a Company?
A company a legal structure a business owner can use to run their business through. It is the one legal entity that has more to do with complying with regulations and other aspects of the law than other business structures.

A company is known as a separate legal entity, which simply means it is recognised under law as a separate person. The company is separate from the shareholders (the people who have shares in it), so the company itself is a person, while the shareholders are separate people.

All owners or investors in a company are known as shareholders and they are generally not liable for the debts of the company. Their liability will be limited to the amounts still unpaid on the shares that they have taken out in the company.

What is a Limited Liability Company?
A limited liability company is a company which has limited liability. This means that the personal liability of the people involved in the business is limited to the extent granted by law. In the case of shareholders, their liability is limited to the amount still unpaid on the shares they have taken in the company. In the case of directors and officers of the company, their liability is limited to the extent where there is no liability provided they have complied with all the requirements set down under company law, as to their duties and responsibilities.

The limited company is treated as a person in law, so it is responsible for its own debts. Creditors can claim the assets owned by the limited liability company, but not the assets of the officers of the company, nor its shareholders. Only the property of the limited liability company can be used to clear the debts if it becomes insolvent and eventually wound up.

The officers and shareholders of the company, employees and investors in the company cannot be made to contribute to the debts of the company. This ensures that they cannot be made personally bankrupt because the company fails. This limitation of liability does not extend to a business structure such as a sole trader or partnership where creditors can claim all the assets belonging to the owners of those businesses if their debts have not been satisfied. It means the owners of a business trading as a sole trader or partnership can be made personally liable and therefore personally bankrupt if the business fails and creditors are owed money.

Companies are Legal Entities
A company is a legal entity controlled by the regulations under the Companies Act 1993. It is one of the business structures available for use by a business owner and for security or safety reasons (that is, security or safety of the personal assets of the business owner) this structure is preferred.

There are 2 types of legal entity where companies are concerned:

  1. Public companies.
    These are usually large-scale business enterprises in which members of the public and other organisations are able to invest and hold part ownership in. These companies have their shares listed on the stock exchange, which means that investors in these companies can buy or sell the shares in their company freely, as long as these transactions are handled within the regulations.

  2. Private companies.
    Private companies are generally small and medium sized businesses that are not public companies. These companies are not open to the public for investment, as such, and they do not have their shares listed on the stock exchange. As the name implies, they are private and the ownership is usually with a small number of investors or shareholders that generally have some involvement in the operations of that company. The private company is the most common type of company structure used in New Zealand.

In addition to these types, the company may also be a holding company or a subsidiary company. Where a company owns more than 50% of another company, then the owner is the holding company and the business owned is the subsidiary.