Incorporation describes the process of forming a new legal entity (a company) that is recognised at law as a separate legal person.

A company is treated as separate and distinct from its owners (shareholders) and from those who carry on its operations (directors). A company can buy and sell property, contract with others and bring lawsuits all in its own name.

In Bermuda, the law governing the incorporation of a limited liability company is set out in the Companies Act 1981. The legislation can be easily accessed for free online at www.bermudalaws.bm.

There are two types of limited liability companies in Bermuda — local companies and exempted companies.

Bermudians must be the beneficial owners of 60 percent, or more, of the shares in local companies, and the companies are subject to local taxes.

Exempted companies are for the most part owned beneficially by non-Bermudians and are provided a tax exemption by the Minister of Finance valid until 2035.

Local and exempted companies are incorporated in a similar way. However, while a local company is free to trade in Bermuda, an exempted company cannot trade in Bermuda without a licence from the Minister of Finance, unless certain exemptions apply to it, for instance any trade in Bermuda is in furtherance of its business offshore or the business of another exempted company offshore.

Few documents are required to form a company. A company is formed when one or more persons subscribe their name to a Memorandum of Association upon which the person or persons set out the extent to which liability is limited, the value of the shares and the objects for which the company is being formed.

Prior to forming a local company, the intention to do so must be advertised in a local newspaper. There are no minimum share capital requirements for standard local and exempted companies.

The key advantage of forming a limited liability company is that it limits the liability of its shareholders to the unpaid par value, if any, of their shares. A shareholder is not legally liable for the debts and obligations of the company.

In addition to the protection that a limited liability company affords shareholders, there are also other advantages of forming a company that could be beneficial to a business, such as:

— Unlimited duration — unlike proprietorships and partnerships, the duration of a company is not dependant on the life of a particular individual. It can continue indefinitely until it merges with another business or is wound up;

— Transferability of shares — the ownership interest in a company can be readily sold, transferred or given away. This is in contrast with ownership interests in proprietorships and partnerships where transfer of ownership can be more cumbersome (for example property may need to be retitled and new deeds drawn up); and

— Ability to raise investment capital — it is usually much easier to attract new investors into a company because of limited liability and the easy transferability of shares. Shares can be transferred directly to new investors.

There are some disadvantages of incorporation, especially for very small business owners. For example, additional record keeping requirements; the requirement to pay governmental fees; and liability protection isn’t guaranteed in circumstances where shareholders and/or directors of companies are required to personally guarantee loans for the company.

Once the incorporation forms have been submitted, and assuming that there are no compliance issues, the company is duly incorporated in a few days and the Registrar of Companies will issue a certificate of incorporation.

On receipt of the certificate of incorporation, the next step is to hold the provisional directors’ meeting to assign the shares to the shareholders. Then the first annual general meeting of the shareholders is held, at which the first board is appointed. After that, the first board meeting is held.

Now the company is ready to conduct business, open bank accounts, enter into agreements and most importantly trade with limited liability.

Lawyer Sally Penrose is an Associate with the Corporate and Commercial Practice Group at Appleby. A copy of Ms. Penrose’s column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.