How do you form a company?
Articles of association and memorandum of association
The company must have articles of association. The articles are the document which governs the company's internal workings and will set out a range of procedures to deal with various matters including dividend and capital rights attaching to shares, directors' powers, proceedings at shareholder meetings and voting rights. Usually the articles are not contentious; however, in the event of an investment by an independent third party, the articles will often be one of the main focuses for negotiation in respect of liquidation and dividend rights.
The articles need to be registered at Companies House unless the company simply relies on the "Model Articles", which apply by default if no others are registered by the company. The Model Articles for Private Companies Limited by Shares ("Model Articles") are set out in Schedule 1 to the Companies (Model Articles) Regulations 2008 (SI 2008 No 3229).
The Model Articles may not be suitable for every company and will generally require alteration to meet the needs of the company, especially (as referred to above) if there are any third party investors. There are no compulsory clauses which must be contained in the articles although they should always contain an express limitation of the liability of shareholders. It is good practice for a company to have its articles reviewed by its professional advisers every few years. The articles can be altered by special resolution.
Form IN01 allows a new company to indicate whether it is adopting Model Articles in their entirety or with amendment or whether it is adopting entirely bespoke articles. Where the company intends to amend the Model Articles in some way or is adopting bespoke articles, a copy of the amendments or bespoke articles (as applicable) must accompany the application for registration.
A separate document, the memorandum of association, must also be submitted. This simply states that the subscribers wish to form a company under the Companies Act and have agreed to become members (shareholders) and to take at least one share each.
A company is required at all times to have a registered office to which all communications and notices may be addressed. Service of a document on a company is effective if it is sent to the company's registered office.
A company may change its registered office by giving notice to Companies House. The change takes effect when the notice is registered. There is a 14-day period after the date of registration of the notice where a person may validly serve documents at the company's previous registered office.
The statement of initial shareholdings in Form IN01 must state the total shares taken by the subscribers on formation including the number, class and the aggregate nominal value of those shares as well as the amount paid up or the amount to be unpaid on each of the subscriber's shares.
A statement of capital is also required, which sets out each class of shares in the company, the number of shares in each class, the aggregate nominal value of the class and the amount paid up or unpaid on each share. The statement must also contain details of the rights attaching to each class of shares of the company, namely the voting rights, rights to dividend, rights on a capital distribution (including on a winding up of the company) and any redemption rights.
To incorporate the company the following documents must be filed with Companies House:
- application to register a company (Form IN01) and the fee;
- memorandum of association;
- articles of association (unless Model Articles are adopted in their entirety); and
- additional information if the application includes a sensitive word or expression (see Name of company).
Form IN01 requires the following information:
- the proposed company name;
- the situation of the company’s registered office i.e. whether it is in England and Wales, Wales, Scotland or Northern Ireland;
- the address of the registered office;
- whether the company will be private, public or unlimited;
- choice of articles of association;
- details of the proposed director(s), and the secretary if it has one;
- directors’ service and residential addresses;
- a statement of capital and initial shareholdings;
- if the proposed name contains a sensitive word and, of so, details of confirmation requested of the views of a government department or other body; and
- a statement of compliance with the requirements for setting up a company.
These items can be filed in paper form by sending them to Companies House in Cardiff (for companies to be incorporated in England and Wales). Hand delivery is also possible during office hours, for which the branch of Companies House in London may also be used. Registration normally takes seven days if the application for registration is made using the normal service for which the fee is £40. An expedited service of incorporation within 24 hours is available and costs £100.
They can also be filed electronically if an electronic filing service account is set up. The fee is £13 (£30 for the same day).
Alternatively, the Companies House web incorporation service can be used. This allows people to set up a simple private limited company, using Model Articles, for a fee of £15. Customers access the service via the Business Link website (www.businesslink.gov.uk).
The company is brought into existence when the Registrar of Companies issues the certificate of incorporation. This is evidence that the company is properly constituted and that the requirements under the Companies Act in respect of registration have been complied with.
On incorporation, the subscriber(s) to the memorandum are deemed member(s) (i.e. shareholder(s)) of the company. The director(s) and secretary (if any) named in Form IN01 are deemed appointed respectively as director(s) and secretary of the company.
The subscribers can exercise all the functions of an incorporated company from the date of incorporation. It is important that the prospective owners or directors of the company do not trade on behalf of the company before the certificate of incorporation is issued because any person who purports to act for, or as agent of, a company before the company has been formed will be personally liable for any contract they make on behalf of the company.
The incorporation formalities should be completed at a meeting of the board of directors as soon as possible after receipt of the certificate of incorporation. This should include making various appointments and approving arrangements needed for the business to function.
Matters that should be dealt with at the first board meeting therefore include the following:
Completion of incorporation formalities
- Report on incorporation of the company.
- Adoption of company seal, if the company is to have one (see company seal).
- Adoption of accounting reference date (see accounting reference date).
- Adoption of a business name (see business name).
- Arrangements for company stationery and statutory books (see stationery, websites, emails and signage).
- Appointment of chairman of the board (see board meetings).
- Appointment of further directors.
- Approval of directors' service contracts. (Also, shareholder approval is required for a service contract for a term of longer than two years.)
- Appointment of auditors (if required) (see auditors).
- Appointment of solicitors.
- Appointment of bankers and approval of signatories to cheques.
- Approval of registration of subscribers to the memorandum as shareholders on receipt of payment for the shares.
- Approval of applications for shares and allotment of further shares.
- Authorisation of the issue and, if a seal has been adopted, the sealing of share certificates and entry of shareholders’ names in the company’s register of members.
If the company is a private company and only has one class of shares, the directors will not need to seek authority from the company to allot shares unless the articles of association otherwise restrict this power to allot.
If the company has more than one class of shares or the articles require further authorisation to allot shares, authorisation from the company to allot shares will be required. In the case of shares issued for cash consideration, suspension of the statutory pre-emption rights requires shareholder approval unless the authority to do so is contained in the articles of association or the articles exclude the statutory pre-emption rights.
A letter of application for shares should be used for persons wishing to subscribe for shares. A private company must ensure that distribution of any such letter is not regarded as an invitation to the public to subscribe for shares.
Where the company is to carry on an existing business, it will need to acquire the business from the shareholders/directors. If this is the case, we recommend that legal advice is obtained so that this is documented correctly. The acquisition agreement and its execution by the directors on behalf of the company will require approval. Also, this is likely to be a "substantial property transaction" involving a director or directors for the purposes of the Companies Act, requiring shareholder approval.
There may be business contracts to approve, subject to the requirement for shareholder approval of "substantial property transactions" involving directors.
A number of other registrations and arrangements may need to be approved, depending on the nature of the business, for example:
- arrangements for registration for VAT and PAYE purposes;
- arrangements for registration of trade marks, registered design or patents; and
- arrangements for insurance.
A general meeting or written resolutions of shareholders of the company will be necessary if shareholder approval of any of the proposed resolutions is required, in which case the board meeting should be adjourned to obtain that approval before completing certain transactions.
After the first board meeting and first general meeting or shareholders’ written resolutions where appropriate, the following forms and resolutions should be filed at Companies House:
- copies of any special resolutions of shareholders (within 15 days);
- copies of any resolutions of shareholders to allot shares (within 15 days);
- Form SH01 (return of allotment of shares) if shares are allotted, with a statement of capital (within a month of allotment). In addition, the allotment of shares must be registered in the register of members as soon as practicable and in any event within two months of the date of allotment;
- Form AA01 (change of accounting reference date), if needed. This must be filed before expiry of the period for laying and delivering accounts and reports under the previous accounting reference date;
- Forms AP01 (appointment of director) and AP02 (appointment of a corporate director), if needed (within 14 days); and
- Forms AD02 (notification of single alternative inspection location) and AD03 (change of location of the company records to single alternative inspection location) must be filed within 14 days if the company records and registers are to be located anywhere other than the registered office.
"The company is brought into existence when the Registrar of Companies issues the certificate of incorporation. This is evidence that the company is properly constituted and that the requirements under the Companies Act in respect of registration have been complied with. "
"The company must have articles of association. The articles are the document which governs the company's internal workings and will set out a range of procedures to deal with various matters."