Company formations debate: The verdict

In recent weeks, two leading company formations agents have been battling for the hearts and minds of AccountingWEB members in an online debate. Find out who landed the most telling blows.

Company formation strategies and how closely accountants get involved in the process featured in AccountingWEB’s debate between leading agents Jordans and Formations Direct. While neither participant can claim to have landed a definitive blow, this final round-up article extracts some of the key points and practical tips that emerged from their discussions.

The company formations debate was prompted partly by Companies House’s £18 web-based formations service. Almost at a stroke, the government agency captured roughly 17% of the formations market. The move provoked a price war among agents and prompted many accountants to consider whether they should stick with their existing agents or switch to cheaper alternatives.

Although they took opposite sides on our motion, “This house believes that accountants need to get more involved with company formations to add value to their client relationships”, both Jordans and Formations Direct agreed on a certain of points, particularly that value rather than price should be the driving criteria for a company formation service.

When it comes to anything more than a very basic formation, they both argued, the Companies House model articles fall short, for example if a company wants to create and issue new classes of shares. The Companies House web incorporation offering may be suitable for one-man band arrangements with no plans for expansion, but it will not suit more ambitious or non-standard companies.

“Essentially we’re on the same side of the fence, we’re just pitched at different heights on that fence,” commented Formation Direct’s Norman Younger.

The differences that did emerge during the debate were instructive.

Jordans: Get involved early

In its opening statement, Jordans put the case for practitioners to get involved as early as possible in the formations process, helping to steer clients towards structures that wouldn’t need to be redone in later years. With an array of advisory services and practitioner-focused tools, the Jordans message was all about using formations as a platform for adding value to client relationships.

According to Jordans, intervening early means the accountant can anticipate issues before they escalate into major problems that require either expensive legal advice or reincorporation to untangle. In once recent case picked up by Jordans’ backroom legal team, two directors assumed that because they held 51% of the shares they were assured control. But details of the share rights showed this was not the case.

Many formation agents work as outsourcing partners for accountancy firms, but where Jordans differentiates itself is by an online environment that allows accountants to manage the service online, for example with “white-label” tools provided by Jordans, but branded with the practice’s name.

Formations Direct: Pay for what you need

In its opposing statement, Formations Direct took a broadly similar stance. Accountants need to prove to their clients that they are more than beancounters and compliance officers, the company argued. Using an agent who understands their needs can smooth that process, without threatening to hijack the relationship.

The commoditisation of the formations market has drawn a sharper focus on price. Formations Direct concentrates on formation and the extras are optional value added tools. “It’s a bit like paying for extra legroom and hold luggage on a budget airline, but not having to pay if you don’t want it, as you might on a flag carrier,” it argued.

“There’s a limit to how much attention accountants can give to a company formation and our advice is to get an expert in to do their part so you can use your time more efficiently.”

Community responses

Playing the role of devil’s advocate, Andrew Driver challenged Formation Direct’s stance on price, arguing that in times of austerity new businesses were right to minimise their costs wherever possible on non-core activities. Both ringi and laronde123 supported his stance. Laronde123 commented: I’m sorry Formations Direct and Jordans, I'm sure you provide a good service for more complicated incorporations. But for straightforward incorporations Companies House can’t be beaten on value and service. No gimmick, no nonsense - just easy to use. As an accountant in practice for 15 years I would rather take the profit from the advice to the client and save on the expensive use of incorporation agents. Welcome to the internet age; things can only get better.”

Jordans’ answer, which was supported to a lesser extent by Formations Direct, was that its approach was designed to help accountants enhance and prolong their relationships with clients as well as expand their fee income around company-related services.

“We were pleased to see that several AccountingWEB members agreed with our outlook. Adamineden, himself a company agent, confirmed that company formations are a starting point to establish a relationship with potential clients and pick up on-going secretarial work,” the company wrote in its debate summary.

AccouuntingWEB member Ryedaleman added: “We could have the same debate about what [accountants] charge for doing tax returns and whether companies do it themselves or outsource.”

This theme was picked up by Formations Direct in its closing statement.

Getting in an expert in to do their part allows you to use your time more efficiently, rather than wasting your time getting involved in complex formations. “Yes you can do a lot of things yourselves, but get it done by someone else. A lean mean operation doesn’t have people doing all the things. Creating a relationship allows you to get more value-add in.”

Jennifer Adams comments

AccountingWEB’s expert on company secretarial matters, Jennifer Adams, pointed out that the number of questions in Any Answers that prompted her Get the details right series of articles confirmed that  accountants are already deeply involved in company secretarial activity. But, she added, accountants should know their limitations and know where to go if stuck for an answer.

She also backed Jordans’ assertion that the cost of getting it wrong at the beginning can be high.

“We’ve all come across this scenario: friends set up in business and everything goes fine until something happens and they end up not speaking to each other. In a marriage there are divorce lawyers. In a company there are only the articles and if the particular problem is not covered then it can be very expensive untying the knot.”

Using a formations partner, she added, will “also be cheaper than consulting a specialist solicitor”.

Also see

The Company Secretary - discussion group

Company secretarial articles - including 'Get the details right' checklists from Jennifer Adams