Before you set up a company
How companies are structured and decisions you need to make
Every company has certain basic elements:
- a name
- rules, either model rules as per schedules 2, 3 and 4 of the Companies Act 2006 (the Act) or if the rules differ from model rules a copy of the rules adopted by the company.
- at least one director for a private company, a minimum of 2 directors for a public company
- at least one issued share and one shareholder
- addresses (both physical and postal) for the registered office.
A company comes into existence after it is incorporated under the Act. Once incorporated it is recognised in law as an independent legal entity (a Body Corporate). This means it is treated as being a separate “person” from its directors and shareholders. It can, therefore, do many of the same things as a natural person – e.g. hold property in its own name, enter contracts, sue and be sued, etc.
Choosing your company name
You need to choose a company name when you form a company. Registration of a company name provides limited name protection – that is, it will prevent another company being incorporated under an identical or almost identical name.
The name of a company must end with the word “Limited”.
A company name will not be entered on the register –
- that is identical or almost identical to the name of another company; or
- the use of which would contravene any enactment in relation to the use of names; or
- that contravenes regulations made under the Companies Act in relation to company names; or that the Registrar considers to be offensive.
Always search the Companies Register to see if the name you have in mind is available. Search the register for a company
Directors are responsible for managing the company’s day-to-day business and may or may not be shareholders. Directors owe duties to the company, to its shareholders, and to others dealing with the company.
Directors must act honestly in what they believe to be the best interests of the company and with such care as may reasonably be expected of them in all the circumstances.
Directors must not carry on the business in a manner likely to create a substantial risk of serious loss to the company’s creditors (also called “reckless trading”).
Who can not be a director?
A person can not be a director of a company if he/she is:
- under 21 years of age
- an undischarged bankrupt
- prohibited from being a director or promoter of or being concerned or taking part in the management of a company under the Act
- a person in respect of whom a trustee order is in force under section 501 of the Niue Act 1966, or in respect of whom an order of medical custody is in force under section 602 of that Act
- not eligible because of requirements contained in the company’s rules.
Notifying director changes
Any changes in the director(s) of a company or information relating to the director(s) must be notified to the Registrar.
A new director must consent to act as a director and certify that he or she is not disqualified from being appointed or holding office as a director. A director must provide a physical and postal address.
How many directors should a company have?
A company must have at least one director. However, when you form a company you can choose to appoint as many directors as you like. It is worth bearing in mind that people who accept directorships should be aware of the responsibilities that go with directorships. They need to know in particular what is meant by reckless trading.
The solvency test
The Companies Act requires directors to abide by a 2-step test at all times:
- The company must own more assets than liabilities.
- The company must be able to pay all its accounts as they fall due.
Shares and shareholders
Shareholders are investors in the company. They pay money into the company in return for shares. The number of shares they own determines the level of control they have over the company. For example, if a shareholder owns 750 shares out of a total of 1,000 company shares, that shareholder owns 75% of the company since each share represents a vote in the company.
Shareholders vote on the appointment of directors that manage (provide direction for) the company. Shareholders do not make decisions on running the company unless they are also directors. In small businesses it is common for the major shareholder to be the managing director of the company.
Every company must have at least one shareholder.
What value should I set for my company shares?
When you register your company, you can set any value you choose for your company shares. The value of a share when it is first issued is called its Nominal value.
You then assign them in any proportion agreed by the company director(s).
For example, 500 shares at .50 cents each, (total company capital: $250) split between 2 directors:
- Director A: 400 shares ($200)
- Director B: 50 shares ($50)
What are company shares worth?
When you form your company, you decide how many shares should be issued for that company, and what their value will be. The shares at the start are worth the issue value you set on them (for example, 1 cent, 25 cents or $1 per share). This is called the nominal value of the share.
However, as your business grows, becomes more profitable and acquires more assets, the real or market value of the shares is also likely to grow. When it comes time to sell or pass on your business, you can negotiate the sale value of the shares based on an agreed valuation for each share. Calling in an expert outside opinion in the form of a registered valuer can help you determine the current worth of the shares. For example, a share originally valued at 25 cents (the Nominal value) may now be worth far more.
What is the difference between the nominal and paid up capital of a company?
When you form your company, you choose the number of shares and their value, for example, 10,000 shares at $1 each. The nominal capital of the company’s shares is therefore $10,000.
In most cases, the shareholders allotted these shares pay for them immediately by cash or cheque into the new company, so these shares become fully 'Paid Up'.
However, shareholders may decide only to pay up only a portion of these shares at the beginning, for instance, only 10% or $1,000, intending to pay up the balance later. The Balance Sheet will continue to show that the shareholders owe the company the balance of $9,000 for the unpaid portion of their allotted shares.
Any lenders who ask to see your company Balance Sheet before advancing funds will note that the nominal capital of the company looks impressive at $10,000, but that the shareholder(s) have only paid up $1,000 of this. They will take this in account when advancing funds to you. For instance, they may require the shareholders to invest more money in the business before they will offer more funding.
What are shareholders liable for if the company goes into liquidation?
The limited liability structure of a company limits the liability of shareholders to the capital they own in the company. Shareholders are liable for any unpaid portion of this capital.
Take the situation of a company that is put into liquidation owing more to creditors than the company owns in net assets. The liability of shareholders in such a liquidation position is limited to the fully paid up portion of shares they own.
For example, if a shareholder owns 1,000 shares in a company with a value of $1 each, the shareholder is liable for the full $1,000. However, if the shareholder has only paid up $250 towards the 1,000 shares issued to that shareholder (value $1 each), then the shareholder remains liable to creditors for the balance of $750 in unpaid capital.
Exception to limited liability
If a shareholder is also a director (as is often the case) then as a director that person has special obligations under the Companies Act to trade responsibly.
This means making sure that at all times the company is solvent and can meet its debts. If the director has been guilty of reckless trading then the director can be held financially liable for any debts incurred while the company was trading recklessly. This can put privately owned assets at risk (such as a house or car).
Every company must have a Registered Office with a physical and postal address in Niue. These addresses are first notified to the Registrar on the application for incorporation.
- The physical address of a Registered Office need not be at the company's place of business, nor in the same place. It must be at a physical location not a postal centre or document exchange.
- The postal address can either be a physical or postal address.
If a company wishes to change its Registered Office address (physical and/or postal), the change, and the date upon which it is to take effect, must be notified to the Registrar. The notice must be registered at least 5 working days before the change takes effect.