How do you form a company?
A company is a legal entity with a separate identity from those who own or run it. This note explains what is needed to form a new English private limited company and the main points of administration required after that to comply with legal requirements.
Getting the legal formalities right at the outset and getting into good habits of administration can prevent difficult questions arising later on, for example on a fund raising, bringing in new partners or realising value.
It is worth bearing in mind that businesses can also be run as a sole trader or a partnership. Those approaches do not allow the business to be owned by a separate legal entity or provide limitation of exposure to the debts and other liabilities of the business in the way that a limited liability company does.
Other possibilities include a limited liability partnership (LLP) which is similar to a limited company in providing limitation of liability and a separate legal entity. A LLP is not viewed as an entity in its own right in the same way as a company for tax purposes.
In any collaboration where ownership of a business is shared, we recommend taking early legal advice to make sure things are set up on the right footing between the owners. Matters such as who owns which IP rights, how an owner can sell out and how major decisions are made can become a big issue later on, if not agreed and formalised at the start.
A company is registered by filing the necessary documents (including Form IN01) and paying the required fee at Companies House. The company is brought into existence when the Registrar of Companies issues the certificate of incorporation.
The prospective owners of the company can either register a new company with documents that are specifically tailored to their requirements (a tailor-made company) or buy a company that has already been incorporated but has not yet traded (a shelf company) and modify its constitutional documents to meet their needs. Law firms, law stationers and company formation agents register shelf companies with standard provisions in their constitutions for this purpose.
It is possible to proceed without legal advice or the support of a company formation agent at this stage. Where any complexity in ownership of the company or the make-up of its business is involved, we recommend that legal advice should be obtained.
A fundamental question is who will own the company (that is to say its shares). Related to this is working out if the company should have different types of shares in addition to an initial class of ordinary shares, for example additional classes of ordinary shares or preference shares. This means considering economic rights (income and capital), voting rights and other matters such as transferability, ability to redeem and ability to convert into other classes of shares at particular times.
Questions may also arise as to the extent of equity and debt funding and the issue of options and warrants to subscribe for shares.
Often it will make sense to set out rights and obligations of shareholders in an investment agreement or shareholders agreement, to supplement what is in the company’s articles of association.
Multiple share ownership can be a complex area with potentially far-reaching consequences later in the life of a company. We therefore recommend that legal advice is obtained on this at the earliest opportunity if ownership of a company is to be shared.
An early decision to make is who will be the initial director(s) of the company. The board of directors is responsible for the day to day running of the business. A private company needs to have at least one director. The company’s articles of association can impose a higher minimum requirement. At least one director must be an individual and all directors must be at least 16 years of age.
Each director to be appointed must consent to act as a director and that consent must be provided to Companies House either in written form or electronically, together with certain other details.
For initial directors this consent is required in Form IN01, which also sets out the following particulars that must be provided:
- full name and title including any former names;
- date of birth;
- country or state of residence;
- occupation (if any); and
- service and usual residential addresses.
Directors must give a service address and their usual residential address if different from the service address. A director does not have to disclose his residential address on the public register at Companies House. A different address, for example the address of the company's registered office, can be used as their service address. Every company must keep a register of directors' residential addresses but it will not be on the public register unless the director specifies his residential address as his service address. Companies House will only provide residential address information to credit reference agencies and specified public authorities.
For a director to supply consent to act electronically, the electronic equivalent of a signature is needed. This can either be a pre-arranged six digit personal authentication code for each director or the provision of three items from a list of seven items of personal information (place of birth, telephone number, national insurance number, passport number, mother's maiden name, eye colour or father's first forename).
A private company does not need to have a secretary (unless the company’s articles of association require it). It can be useful to appoint a company secretary, to have one person who takes care of the legal administrative requirements. Some law firms and other service providers can provide people to act as company secretary or provide support of a company secretarial nature.
As with directors, the secretary must consent to act by signing the Form IN01 where indicated. Particulars to be stated are the full name, title and any former names and the service address for the secretary (which does not have to be their residential address).
The role of a company secretary is not specifically set out in legislation but would typically include matters such as:
- maintaining the statutory registers and other legal records;
- ensuring that statutory filing requirements are met;
- providing shareholders and directors with notice of meetings;
- providing shareholders with proposed written resolutions and auditors with any resolutions passed;
- supplying a copy of the accounts to every shareholder and others entitled to receive them;
- facilitating inspection of company records by those entitled;
- execution of certain documents (together with a director) by a company; and
- signing or otherwise authenticating forms for submission to Companies House.
An auditor must be appointed for each financial year, unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required.
A company's auditor is required to make a report to the company's shareholders on all annual accounts of the company of which copies are, during his tenure of office, to be sent out to shareholders in accordance with the Companies Act 2006 ("Companies Act").
The auditor's report must state clearly whether, in the auditor's opinion, the annual accounts:
- give a true and fair view of the state of affairs of the company as at the end of the financial year and the profit and loss of the company for the financial year;
- have been prepared in accordance with the relevant financial reporting framework used to prepare the accounts; and
- have been prepared in accordance with the requirements of the Companies Act (and, where applicable, the International Accounting Standards regulations).
The auditor of the company has a right of access at all times to the company's books and accounts and is entitled to require from the company's officers such information and explanations as he thinks necessary in order to perform his duties as auditor. A company's auditor is entitled to receive all communications relating to written resolutions of shareholders and notice (and related communications) of all general meetings. An auditor has a right to attend and to be heard at any general meeting on any matter which concerns him as auditor. However this does not give the auditor a right to vote at such general meetings.
Auditors may also be employed by the company for purposes in addition to reporting on the annual accounts, such as keeping the books or compiling the tax return, provided they do not take part in the management of the company.
The directors generally appoint the first auditor of the company. The shareholders can then appoint or re-appoint an auditor each year at a meeting of the company's shareholders, or by written resolution, within 28 days of the directors sending the accounts to the shareholders. If they do not do so for a particular year, however, the appointed auditor remains in office until the shareholders pass a resolution to reappoint him or to remove him as auditor. However, an auditor does not stay in office if the most recent appointment was by the directors or the company’s articles require annual appointment or there is a shareholders notice or resolution to the contrary.
The company's name must end with "limited" or "Ltd".
Before finalising a company name, checks should be run by searching at Companies House (using their WebCHeck service) for names the "same as" an existing name on the index of company names. The Trade Marks Register of the UK Intellectual Property Office should also be checked. This is because:
- no two English companies can have the same name;
- if the name includes the registered trade mark of a third party, the use of that name will automatically breach the registered mark if the intended use is in the same class; and
- if there is confusion in the market place between the corporate names and both companies are in a similar trade, a "passing off" action may be brought by the first company which has built up goodwill in the name, against the second.
Note that in determining whether one name is the "same as" another, Companies House applies a number of rules. These include disregarding, for example:
- a blank space between or after a word, expression, character, sign or symbol;
- punctuation including a full stop, comma, colon, bracket, apostrophe;
- characters "*", "=", "#", "%" and "+" when used as one of the first three characters in a name;
- "s" at the end of a name (irrespective of whether it is a plural) ; and
- "the" and "www" at the beginning of a name.
Also, for example, the following are treated as being the same: "and" and "&", "plus" and "+", "1" and "one".
There are further restrictions under the Companies Act 2006 in relation to:
- names that suggest a connection with Her Majesty’s Government, a devolved government or administration or a specified public authority;
- names that include “sensitive” words and expressions included in regulations;
- names that include words that would constitute an offence; and
- offensive names.
Even after incorporation a company can be required to change its name in the first year if:
- the name is "too like" an existing name on the index;
- misleading information was provided at the time of registration;
- the company’s activities are misleading; or
- the name is too similar to a name in which someone else has goodwill.
In general a name is "too like" an existing name if the differences are so trivial that the public are likely to be confused by the simultaneous appearance of both names on the index; and/or the names look and sound the same.
The "too like" rules apply to any name which appears on the index of company names which includes companies, LLPs and other bodies such as Limited Partnerships, overseas companies and Industrial Provident Societies.
In addition to the basic searches referred to above, to start off on a sound footing other searches can be performed in relation to trading names and trade marks in the UK and abroad and on such other matters as URLs and patents.
"The auditor of the company has a right of access at all times to the company's books and accounts and is entitled to require from the company's officers such information and explanations as he thinks necessary in order to perform his duties as auditor "
"Getting the legal formalities right at the outset and getting into good habits of administration can prevent difficult questions arising later on, for example on a fund raising, bringing in new partners or realising value. "