It is vitally important to establish your customer's correct legal status.

Ultimately if you do require to take court action to recover what is due to you the court's judgment will be useless unless it can be enforced against the correct legal person. For example if you have opened an account with John Smith & Co whereas your actual customer's legal status is John Smith & Co Limited, any judgment against john Smith & Co will be without effect as that entity does not legally exist.

The following are the legal entities with whom you are likely to trade:-

Public Limited Company (PLC)

To be validly constituted a public limited company is required to display the letters "plc" after its name. Its minimum paid up share capital must be £50,000.00 out of which 25% must be paid up before the company commences trading.

Whilst the plc has a reasonable amount of issued share capital, which should give some comfort to creditors, simply because a company is a "plc" does not necessarily make it a good credit risk. The company may or may not be listed on the stock exchange. However, there will be a reasonable amount of information lodged with the registrar or companies disclosing such items as the company's directors, shareholders and secured borrowings.

Private Limited Company (LTD)

Private limited companies are not permitted to trade shares on the stock exchange. Their issued share capital may be as little as £1.00. This means before you commence trading with a private limited company you should establish what the issued share capital is. However, more importantly the identity of the directors and shareholders of the company should be verified. It may be if you are not satisfied as to the company's credit risk you should seek personal guarantees from the company's directors or shareholders.

What is the main effect of limited liability? From a credit point of view the whole concept behind limited liability, and this applies to both plcs and private limited companies, is that the liability of the company's shareholders is limited to the money invested in the company. Basically what this means is that in the event of the company becoming insolvent to the extent of £100,000, and shareholders have invested £2,000.00 in the company by way of paid up share capital the shareholder's loss is only the £2,000.00. You, as a supplier to the company, are not able to look to the shareholders or the company's directors for satisfaction of the debt due by the limited company. The limited company is a separate legal personality and it is to the company to whom you will have to look for payment. There are limited exceptions to the rule whereby the company directors and its shareholders are personally responsible and liable for the debts of the company as outlined in the Insolvency Act 1986 and the Company Directors Disqualification Act 1986. However, the Insolvency legislation should never be seen as a means whereby you will be able to effectively recover cash due by a limited company from its directors and shareholders.

If you are concerned about offering credit to a limited company then you must seek guarantees in the form of third party guarantees, directors' guarantees or cross company guarantees.

Sole trader

Individuals running their own businesses have personal responsibility for the debts of the business they run. Credit checking against them will be an important factor.

Partnership

Two or more people trading together with a common business goal will be deemed to be trading in partnership. Whilst there may or may not be a formal deed of partnership in any event individual partners are jointly and severally liable for the debts of the partnership.