How do I know if a company is legitimate?

[Toblerone345]

I'm considering applying for a job, but as it's with a fairly small company I've done a bit of digging around online - I don't want to change jobs only to end up not getting paid or for the company going bankrupt in a couple of months.

I've looked up the director on Companies House he has been a director of a few businesses, some dissolved, some still ongoing. I've checked the company accounts and they don't seem to have made much profit, but as I understand it this is fairly normal for a business in the first few years of its life. Does anyone know how I can make sense of this or am I going to have to take a leap of faith?

I thought you were looking for info about a company to buy something from. Maybe I'm being naive but it's never really occurred to me to check out a company I'm applying to. You will obviously have a chance to look at the employment contract before you sign it. If you didn't get paid, that's something you'd then have a legal right to pursue.

As for a company going bankrupt that could happen to any company, even a giant one.

@BertieBotts I'm probably being a bit over the top! I'm a bit of a worrywart and can't do anything without considering all things that might go wrong.

Good point about big companies going bankrupt. For some reason they seem a bit safer to me, but big name brands go bust all the time.

Seems a very sensible thing to do. One approach might be to ask the Director directly. If they're offended by the question then it's probably a red flag.

Can you apply and see if you get an interview and then get an offer? At least then you may have got a good feeling?
Is the business something that's needed at the moment? Do they offer their product at a good price, get good reviews? Other staff been there since the start? What are their plans for the future?
I guess you can never tell the future anywhere.

What sort of industry/sector is the business in? Could it have been badly affected over recent months, or is the product/service something in continued demand?

@SisyphusDad That would be good but I've no idea how to phrase that without making it incredibly awkward.

@Cuddling57 I think it's something that's always needed - it's service based and I think provides something people need even in an economic downturn. No reviews online but I currently work for a much larger company and we don't have any reviews either so I won't read into that too much. Not too sure about the staff - it may only be 2 or 3 people.

@bitofasleuth Finance. Not sure about this specific company but I know where I work at the moment it's pretty much business as usual as people still need pensions etc.

There is @ company called BvD (Bureau van Dyke) and the6 run reports on companies. We can access these through a platform called fame. They provide Indications of credit ratings.

I don’t know if these are accessible without an account.

@AuditAngel I've had a look but it looks like it's for business use. There is a free trial but they want your company name and I doubt work would be too impressed! Thanks for the suggestion, though.

I see you've been on Companies House already and looked at the profit. Might I suggest you now look at the balance sheet and pay particular attention to the figure of 'net current assets' as that is a better indication of whether the business is financially sound and able to meets its obligations in the short term.

If you have a gut feeling I wouldn’t ignore it.

@bitofasleuth Net current assets isn't looking too good, but is that unusual for a very small company towards the start of its life?
@breakfastclubb I'm wary of relying on my gut feeling because it's usually wrong - I think it gets hijacked by the part of my brain that's prone to worrying too much about things. I've been absolutely convinced the plane I'm on is going to crash and all sorts of stupid things like that and it's never happened.

I would be thinking about more practical things like pension provision and hours of work. Tiny companies rarely give the same benefits as larger ones do. I would look at the benefits of this job vs staying with your present company. The small company might do well but at the moment that’s not a given. But that applies to most companies unless they are supplying food or are nhs related right now!

@My0My It's not bad on that front. The hours are better, the pay is better and qualifications are funded, unlike where I currently work. I'm assuming the pension is a bit pants as it's such a small company, but my current workplace only contributes the bare minimum they can legally get away with so I wouldn't be any worse off in that respect.

@Toblerone345

Well, the net current assets being relatively small would 't be a problem unless it is disproportionately titchy compared with the other figures. Not really easy to explain in isolation.

@bitofasleuth The other figures are also fairly small - I know nothing about accounts so not sure how to read into it!

The main worry with the director having been a director of dissolved companies is where there is a pattern of what are called phoenix companies. A company runs up debts and due to financial mismanagement instead of working their way out of debt over time, the director(s) dissolve the company and start another one, usually running the same kind of business and often from the same address. Look at who the shareholders are and dividend payments.

@wowfudge That's the sort of thing I was worried about, but I can't really make head nor tail of the information. At first glance it looked like quite a few dissolved companies, but upon further investigation some of them seemed to be instances where the company was taken over or merged with another company, which I guess isn't a problem. No dividend payments that I can find and I believe there is only one shareholder.

Dividend payments might be shown as "distributions". There might be a table in the accounts called a Statement of Changes in Equity which will show whether shares have been issued, etc. "Distributions to members" would be another way of expressing dividend payments to shareholders. Have a look for Statement of Capital on the Companies House beta service website as that will show if there has been share movement.

@wowfudge I can't see anything like that. The accounts are 'micro company accounts' - do companies below a certain size have exemptions from declaring that sort of information?

I'm pretty sure the number of shares and any distributions to shareholders would need to be stated whatever the size of the company.

[quote Toblerone345]@wowfudge I can't see anything like that. The accounts are 'micro company accounts' - do companies below a certain size have exemptions from declaring that sort of information?[/quote]
Yes. Basically any company with a turnover under a certain amount. (Turnover is another word for income).

Movements in shares or share related payments still have to be declared though because the balance sheet shows assets, liabilities and equity.

Micro-entity accounts don't have to give any information about share movements or dividends. They are basically not worth the paper they are written on!

Okay, but doesn't the company need to file a statement of share capital if it issues more shares or there are share movements?