If you’re considering forming a company in the UK, you will be in good company. As one of the leading business locations in the world and the number one destination for foreign direct investment in Europe, by establishing your company here, you are well placed to take advantage of the opportunities a major international business centre brings.
1. What is a company?
1.1 – A company is a legal entity which has a legal personality separate to those who own or run it on a day to day basis.
1.2 – Although there are different types of company, such as public limited companies and private companies limited by guarantee, by far the most common and popular business entity in the UK is the private company limited by shares. In the majority of cases, therefore, this is the business entity you will more than likely wish to adopt in taking the next steps in the development and formalisation of your business. As such, and hereafter, reference to a “company” will be to a private company limited by shares.
2. Why form a company?
2.1 – Although other business structures exist, such as carrying on business as a sole trader or forming a partnership, the primary reason you should consider forming a company is that the liabilities of the owners and directors of the company are distinct from those of the company. Your personal exposure to creditors of the business and litigation against the business is, therefore, limited.
2.2 – Forming a company may bring other advantages too; you may find it easier to raise finance, and you can formalise ownership and voting arrangements with those who are involved in the business.
2.3 – A further legal and administrative benefit of forming a company is that the legal and regulatory framework governing the operation of the business is comprehensively dealt with for the most part in one place: the Companies Act 2006 (“Companies Act”).
3. How to form a company
3.1 – A company is formed by filing a series of documents with the Registrar of Companies at Companies House (part of the Department for Business, Innovation and Skills), in accordance with the main piece of legislation governing company law: the Companies Act. A company is officially brought into existence when a certificate of incorporation for the company is issued.
3.2 – The documents to be filed with Companies House include:
(a) Form IN01 (which requires certain basic company information be provided, such as the company name, who the initial directors and company secretary will be, and who the shareholders of the company will be);
(b) Memorandum of Association; and
(c) Articles of Association.
4. Company Name
4.1 – One of the first things to consider when thinking about forming a company is the name you want to use. Before you make a final decision, however, there a certain number of boxes which need to be ticked in order to avoid your name choice being rejected by the Registrar of Companies:
(a) the name of a private company must end with the word “Limited”;
(b) no two English companies can have the same (or very similar sounding) name (the Companies House website has a service allowing you to check this); and
(c) a company name cannot contain any sensitive or offensive words.
4.2 – When choosing a name for your company it is also important to remember that if the name of your company is too similar to that of another trademark, you may be in breach of trademark.
5. Shareholders and share capital
5.1 – One of the advantages of forming a company is that it allows you to further formalise the ownership structure of your business. This is done through shareholdings.
5.2 – A company must have at least one shareholder (also known as a “member”), who must hold at least one share of at least £0.01. Subject to this minimum requirement, there are no restrictions on the number of shareholders, shares or the denomination of shares.
5.3 – It would also be worth considering at this stage the possibility of having more than one “class” of share. Having different classes of share allows different shareholders to have different rights, in respect of, for example, dividends, voting and the ability to transfer shares. The ability to create an ownership structure with different classes of share is especially useful if you are looking to attract private investment as investors may require different rights to attach to their shares.
6. Directors
6.1 – One of the most important components of any company is the board of directors which is comprised of those persons who carry out the day to day management of a company. When forming a company, you will need to consider who to appoint as the initial directors of the company. In doing so, the following considerations should be borne in mind:
(a) the minimum number of directors required to form a company is usually two (although it is permissible to have a sole director provided such sole director is an individual and not a corporate entity);
(b) there is no maximum permissible number of directors, although it could be inconvenient for a small company to have a large number of directors that have to be involved in management decisions;
(c) a director who is an individual must be at least 16 years old;
(d) English law does not have any nationality or residence requirements in respect of directors;
(e) it’s also advisable to have directors’ and officers’ insurance in place to protect directors from claims of wrongdoing that could be personally liable on.
6.2 You should also be aware that:
(a) directors are subject to detailed duties and responsibilities under the Companies Act;
(b) one of the initial directors should be appointed Chairman of the board of directors. The Chairman will then also usually act as Chairman at any General Meetings of shareholders;
(c) directors must give written consent to act as a director of the company (which means they will need to sign Form IN01 upon formation of the company); and
(d) if you are obtaining funding from a third party investor such as an angel investor, venture capital or private equity firm, it is likely that the investor will want to appoint their own director to the board to ensure they are involved with the day-to-day running of the company.
7. Secretary
7.1 – When forming a company you will also need to consider whether you would like to appoint a Secretary of the company.
7.2 – A UK company may have a Secretary, but there is no longer a requirement for a private company to have one. The secretary may be, but does not have to be, one of the directors, and another individual or company may act as Secretary.
One of the factors to consider when deciding whether to appoint a Secretary is that English law imposes a significant number of duties on the Secretary, including the maintenance of minute books and registers. Despite having these duties, from the company’s perspective, a Secretary can be a useful appointment in order to ensure the company’s administrative requirements are met, and that the company does not find itself in breach of the Companies Act.
8. Registered Office
8.1 – As part of the company formation process, you will also be required to state the intended registered address of the company. A UK company must have a registered office in England or Wales. This will be the address for formal service of legal proceedings and other formal documents. It does not need to be (although in practice it frequently is) the principal, or indeed any, place at which your company carries on business.
8.2 – As a practical matter, it is often convenient that the Secretary should be based at either the registered office or the principal place of business. If you are unsure as to where the office should be, it should be noted that the company’s registered office can be easily changed at any time by a Board resolution and a form which is filed at Companies House.
9. Constitutional documents
9.1 – The two key constitutional documents which companies are required by the Companies Act to have on incorporation are the Memorandum of Association and Articles of Association.
9.2 – The Memorandum of Association (which must be in a standard form) simply states that the initial subscribers for the shares in the company wish to form a company under the Companies Act and have agreed to become members.
9.3 – The Articles of Association are essentially a contract between the company and each shareholder and regulate the way in which the company is conducted. They deal with matters such as the payment of dividends, appointment/removal of directors, transfers of shares and how meetings of the directors and shareholders are conducted.
9.4 – Articles of Association often incorporate the statutory “Model Articles”, which are the model articles prescribed by regulations made under the Companies Act, and amend certain provisions accordingly. The unaltered form of Model Articles is automatically adopted by a company in cases where a company does not submit any other Articles of Association with Form IN01.
9.5 – When deciding whether to rely on the Model Articles alone, consideration should be given to the wide range of uses the Articles of Association can be put to, and how they can meet the needs of your company. As the document which governs the proceedings of the company, the Articles of Association can include provisions to cover all manner of subjects such as voting rights, dividend rights, termination of directorships, and the sale of shares. This can be particularly important if an equity investor is involved. It may be equally important when considering who will be the members of the new company. For example, it may be important to a potential shareholder that they have an equal number of shares to you. However, through the Articles of Association, you can agree that you retain a majority of the shareholder votes despite having an equal number of shares.
9.6 – A further document which you may wish to consider creating (albeit one to which the company may not necessarily be a party), is a shareholders agreement. Rather than governing the relationship between the shareholders and the company, this document governs the relationship between shareholders. This can be another useful document when determining what rights different shareholders are to have.