As a startup founder, you’re no doubt very busy, trying to balance several plates at once. However, being a company director comes with significant legal responsibilities that should be high on your priority list.
But understanding these responsibilities isn’t just about staying compliant; it’s about setting the foundation for long-term business success. In this guide, we’ll demystify the key responsibilities of directors, common pitfalls to avoid, and offer practical advice to help you navigate this important role.
1. Acting in the company’s best interests
As a director, your primary legal duty is to act in the best interests of the company according to the Companies Act 2006. This means making decisions that benefit the business and its shareholders, rather than pursuing your personal interests. Specifically, you must:
- You must act with the care and skill that you would expect another company director to have. You should therefore stay informed of your company’s operations and potential risks. Be especially careful with your financial reporting to avoid mistakes.
- Directors must avoid situations where personal interests conflict with those of the company. If a conflict arises, you must disclose it and act in the best interests of the company and your shareholders.
- You must act in a way that promotes the company’s long-term success, not just short-term gains. Your decision-making should reflect strategic planning, ensuring that the company remains viable and sustainable over time.
2. Financial record-keeping and reporting obligations
As a company director, you are responsible for ensuring that your company’s financial records are accurate and up to date. This means implementing robust systems for accounting and regularly reviewing financial reports. And even if you hire an accountant to help, you’re still ultimately responsible for everything they do – the buck stops with you.
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- Accounting and reporting: Your company must maintain proper accounting records and file annual financial statements. These are typically submitted to Companies House. Failing to file your statements can lead to fines, penalties, or even disqualification as a director.
- Tax compliance: Directors are also responsible for ensuring the company complies with tax regulations, including VAT, income tax, and payroll taxes. This often involves working closely with accountants to ensure the company’s taxes are filed on time and accurately.
- Audits: Certain larger companies must arrange an audit. Make sure that you understand the audit thresholds.
3. Common pitfalls: personal liability risks
While being a company director can be rewarding, it’s also fraught with potential pitfalls. Some of the most common issues that startup directors face include:
1. Personal liability risks
One risk is personal liability for some debts. While you have far more protection from liability as a company director than a sole trader, for example, you can still be held liable under certain conditions:
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- Personal guarantee: Where directors provide a personal guarantee to acquire loan funding, they will have to pay if the company cannot.
- Shareholder agreements: Some shareholder agreements can require directors to personally provide security for company debts.
- Overdrawn directors’ current account: If a company starts to struggle but directors continue to withdraw dividends, the tax rate of the payments effectively becomes higher.
- Fraudulent means to accumulate debts: If, for example, a company obtains finance by using inaccurate information, the directors may be liable to repay the debt.
2. Failing to properly manage governance
As your startup grows, your attention is inevitably going to return to the company, its products/services and its clients. But you must stay on top of the particulars of your corporate governance to prevent financial mismanagement, tax issues, fraud, operational inefficiencies and more at all times.
3. Forgetting shareholder expectations
Never forget about your shareholders. Always maintain transparent communication with them, keep them informed and fulfil your duties to them. Failing to do so can lead to disputes, shareholder dissatisfaction, and even legal action.
Balancing your duties with the day-to-day
Balancing your company’s long-term strategy and your daily governance can be tough, especially as the business grows. The key is to find a balance between strategic decision-making (setting goals, raising capital, etc) and managing your company’s financial health and compliance.
A strong leadership team and board of directors will help, as with them, you can distribute the decision-making and governance responsibilities among those with the expertise to navigate them in the most effective way.
You should also implement and stick to monitoring systems for financial monitoring and compliance checks. Regular checks are extremely important – slight fixes are easier to make than wholesale course corrections.
Setting the foundation for long-term success
Understanding your role as a director and fulfilling your legal responsibilities isn’t just about getting things right — it’s about building a strong foundation for your startup’s future success.
By acting with integrity, maintaining good governance, and staying compliant with your financial and legal obligations, you’re setting up your business for sustainable growth and long-term viability.
Need help with your corporate governance? Get in touch with us to access our expertise and services.
