Company formation

This note is a snapshot guide and should be read in conjunction with the relevant legalisation or subject to professional advice

This notes sets out the requirements for the incorporation of private limited companies, public limited companies and un-limited companies. The note refers to the major differences between types of company, the documents required for their formation, shareholders, capital and officers and secretary. It does not look in detail at the question of company names. Certain words under English law suggest a particular thing and some names are proscribed from use unless the company is involved in a particular activity. A company with a phrase “holding” must have subsidiaries within the group either in the UK or abroad. For further information on this aspect please contact us.

Following formation there are obligations that require you to amend the public records of the company. If the company`s circumstances change, if its address changes or if the officers change, these changes must be registered at Companies House.

The relevant law is set out in the Companies Act 1985 (as amended by Acts in 1989 and later), and in addition, for RTM (Right to manage) companies and commonhold associations, in the Commonhold and Leasehold Reform Act 2002 and related legislation.

When you set up a company in the United Kingdom you become responsible for many obligations and it is always worthwhile taking advice from a qualified professional as to the best way a business should be run.

New Companies.

Under United Kingdom law there are four types of company that can be registered.

• Private companies limited by shares – the liability of any share holder cannot be more than the amount that is unpaid on shares held by them. This includes those community interest companies (CICs) which are private companies limited by shares. When shares are issued, there are a certain number of shares in any company. There is a particular face value on each share and , say 100 shares comprise the share capital of the company. Two may be issued and fully paid up and a balance of 98, namely Ј98 is the extent of the liability in relation to the company.
• Private Company Limited by Guarantee – the liability of any members/shareholders is limited to the amount that they have agreed to contribute to the company`s assets if it is wound up. This type of company is generally only used for charitable work and cannot be used as a company trading for profit.
• Private Unlimited Company – this is a private company with no limit as to members liability.
• Public Limited Company (plc) – the shares in a plc may be offered for sale to the general public but the liability of shareholders as with private limited companies cannot exceed the amount unpaid on shares held by them. This also includes community interest public limited companies (CICs which are PLCs).

Who may establish a company?

In general legislation allows only people to form a company for any lawful purpose if they establish a memorandum of association. A public company or an unlimited company must have at least two shareholders.

How is a company formed?

Companies are formed by creating a Memorandum and Articles of Association. The Memorandum sets out the company`s name, the situation of the registered office of the company (this is the office to which all correspondence will be sent). It must be in England, Wales or Scotland and also describes what it will do. Many Memoranda contain general clauses allowing a company to undertake a variety of commercial purposes. The other clauses within the memorandum depend on what sort of company is being incorporated. The Memorandum must be signed by each shareholder in front of a witness and the form is then lodged with Companies House.

The Articles of Association set out the rules for the running of a company and its internal affairs.

It is also necessary to register details of the first director(s) and/or secretary and the proposed address of the registered office. As well as providing names and address, any company director must give their date of birth, profession/occupation and a list of other directorships of UK companies that they have held in the past 5 years. Any officer appointed and/or shareholder (or their respective agents) must date and sign the relevant form. A person may act as both director and company secretary provided they are not a sole director of the company.

The registered office of a company is the address to which any correspondence or formal reminders from Companies House will be sent. A registered office can be anywhere in England and Wales and it must be a proper address for the delivery of documents to the company. It is important to avoid delays and ensure that correspondence is dealt with promptly. Any company that changes its registered office following its establishment must notify Companies House of a new address.

When forming a CIC the following documents are required in addition to those listed in 3 above: a community interest statement and an excluded company declaration. These documents must be in a form approved by the CICs Regulator.

How many officers must a company have?

Every company must have officers formally appointed at all times. A private limited company requires at least one director and a company secretary. There must therefore be two officers as a sole director cannot also be company secretary.

A public limited company must have at least 2 directors and one secretary who is formally qualified to carry out the role.

All officers of companies have broad responsibilities under legalisation but these are dealt with in a separate note.

If a new director or secretary is appointed; a director or secretary resigns or a director or secretary changes their name or address or other details, then a form must be sent to Companies House.

What requirements are there to be a company director?

Generally, any person may be a company director. People may not act as directors if any of the following apply:

They are undischarged bankrupts or otherwise disqualified by an English Court from holding a directorship

For PLC`s people over the age of 70 may not be appointed or re-appointed unless a resolution of the company in general meeting preceded by special notice has been carried.
There is no minimum age limit for a director but they must be of sufficient age to consent to their appointment. In Scotland the Registrar does not accept people under 16 years of age as having sufficient capacity to accept a directorship.

What name can I choose?

The use of names for a company does have restrictions. Firstly, Companies House will not register a name which is the same as that of another company. Certain words may not be used for companies unless particular circumstances apply and further no name may be registered that may cause offence.
It is also important to check whether any name is similar to any other names already on the register. There is a provision that within 12 months of registration a company may be directed by the Secretary of State to change the company`s name.

In addition if there is a trade mark registration or application for or including a trade mark which is identical or similar to the company name you have chosen you may face legal action for a trade mark infringement. You can check the trade marks register at The Patent Office before registering a name at Companies House.

Public Limited Companies

A Public Limited Company must comply with the following:

• Both its memorandum and its name must refer to the fact it is a Public Limited Company or PLC
• For public limited companies that are also community interest companies (CICs) the name must end with `community interest public limited company` or `community interest p.l.c.`.
• There must be Memorandum in a specified form
• It must have an authorised share capital of at least £50,000 and before business may be commenced at least one quarter of them must be paid up.

A plc can only commence its commercial activities or borrow monies from financial institutions when it has a Certificate issued under Section 117 of the Companies Act 1985 (as amended in 1989 and later) confirming that at least the statutory minimum share capital has been issued.

There are four main restrictions on a plc:

A plc must have at least 2 directors and at least 2 shareholders. These may be the same person. It must also have appointed a secretary who is capable of fulfilling the relevant functions and is deemed sufficiently qualified.

Unlike a limited company a plc will only have 7 months following the end of its financial year to submit accounts to the Registrar at Companies House. If the accounts are late a civil penalty will be incurred. This will involve a fine. Hopefully none of our clients will be in that situation.

In addition a plc may not take advantage of any provisions or exemptions that apply to private limited companies or to small private companies and further, it may not apply for a voluntary strikeoff.

The main advantage of a plc is that it may offer its shares for sale to the public through a stock exchange. It may also advertise its shares for sale to the public. A private limited company may not offer to sell shares in itself to the public.

If trading goes well, a private limited company may re-register as a plc. It must pass a special resolution and send a copy of the resolution with the relevant application forms to the registrar.

A plc may also revert back to being a private limited company but it must pass a special resolution to do so. The share capital will need to be reduced and it may be necessary for the shares to be redeemed or repurchased if they are in the public domain.

Single member companies
What is a single member company?

A single member company is a private company, limited by shares or by guarantee, which is incorporated with one member, or whose membership is reduced to one person.

Can a single member run the company?

No. The company must still have at least one director and a secretary who cannot also be the sole director.

How can a single member hold general meetings?

Unless the company`s articles of association specify anything to the contrary, a single member – present in person or by proxy – constitutes a quorum. If such a meeting is held, it must be recorded in the minutes.

If a single member takes a decision, except by written resolution, then the decision must be given to the company in writing.

How should a company record an unwritten contract with a sole member?

If the company enters into an unwritten contract with the sole member who is also a director of the company (and the contract is not in the ordinary course of the company`s business), the company must ensure that the terms of the contract are set out in a memorandum or are recorded in the minutes of the next directors` meeting.

What about the register of members?

A company`s register of members must accurately record its members. If a company is incorporated with one member, then the register must reflect this. If the company originally had more than one member and the membership reduces, then the register must show when this happened. Similarly, the appropriate entries must be made in the register of members if the number of members later increases.

Re-registration of a company and also conversion of a company to a CIC

Can a private company convert to a PLC?

Yes. Both a private company limited by shares and an unlimited company with a share capital may re-register as a PLC, but a company without a share capital cannot do so.

A private company must pass a special resolution that it be so re-registered and deliver a copy of the resolution together with an application form to the Registrar. The resolution must also:

• alter the company`s memorandum so that it states that the company is to be a public limited company;
• make any other alterations to the memorandum so that it conforms to that required for a public limited company;
• make any required alterations to the articles of association of the company.

The application must be on Form 43(3), be signed by a director or secretary of the company, and be accompanied by the following documents:

• a copy of the memorandum and articles of association of the company altered in accordance with the resolution above;
• a copy of a balance sheet prepared not more than seven months before the application date and containing an unqualified report by the company`s auditors;
• a special report by the auditors regarding the net assets of the company at the balance sheet date in relation to the company`s called-up share capital and its undistributable reserves;
• a valuation report on any shares issued as fully or partly paid up except in cash after the balance sheet date;
• a statutory declaration on Form 43(3)(e) confirming that the resolution has been passed, and that there has been no change in the company`s financial position causing its net assets to be reduced to less than its called-up share capital and undistributable reserves.

An unlimited company, in addition to the above, must:

• include a statement in the resolution that the liability of the members is limited and what the company`s share capital is to be;
• make such alterations to the memorandum and articles of association as are necessary for them to conform to those of a company limited by shares.

Company Stationery

It is required that all company paper, compliment slips etc must give certain information about itself. The company must display its name outside of every office or place where business is carried on. The name must be legible and able to be seen. The company`s name must also be displayed on all letterheads, notices other official publications. Cheques, orders for moneys, bills of exchange etc.

The company must also show its place of registration and registered number together with its name and address.

The letterheads may show the names of directors but if a company chooses to have directors names on its letterhead them it must show all directors and not select between them.