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The UK was one of the first countries to regulate companies by introducing the Companies Act 2006. The Act regulates the activities of companies in the UK, sets out the legal duties incumbent upon directors, the process of forming a company and a wide range of other statutory provisions, to ensure effective operation. It is said that the Companies Act is one of the largest pieces of law to be introduced.
This article will outline the role of shareholders and directors, explain the different types of companies and highlight the steps taken to incorporate a Limited company.
What is the role of shareholders and directors?
A shareholder is an individual or another company that owns a share of the company. Shareholders, as the owners of the company, are entitled to certain rights and benefits. The Companies Act 2006 is the first legislation to clarify and highlight these rights and responsibilities, as below:
- The right to vote and attend general meetings and extraordinary general meetings
- The right to have the proxy to attend a meeting on their behalf if they are unable to go
- The right to receive a share of the company’s profits through the payment of dividends
- The right to access certain company documents such as annual reports and accounting and finance records.
- The right to inspect company documents and statutory books
- The right to distribution of profit if the company winds up
Directors are those who are responsible for the day to day operations of a company. The Companies Act lays down several rules and responsibilities directors must follow, as below:
- To act within their powers as mentioned in the company’s memorandum and articles of association
- To act in good faith to promote and work towards the success of a company. This is done by considering the long-term impact and the interests of your employees when making decisions
- To act fairly between all members of the company
- To exercise independent judgment in all company matters
- To exercise reasonable care, skill and diligence in all company matters
- To avoid any conflicts of interest in all situations and act in the best interests of the company
- To not accept any benefits from third parties
What happens if the director breaches their responsibilities?
If the director breaches any of their duties, they will face certain consequences. In most cases, the company itself takes action against the director, or the shareholders collectively claim against the director.
The consequences can range from removing them from their position and an interim injunction being sought to prevent further damage.
Directors may also be required to pay damages for the losses caused to the company. The HMRC can also impose a fine.
For example, the HMRC may fine or disqualify a director if they fail to keep financial and account records and send reports back to the Companies House on time.
How do I register a Limited company in the UK?
The most common company structure in the UK is a private limited company. There are two different types of private limited companies; a private company limited by shares and a private company limited by guarantee.
- Private Limited Company by Shares
A private company limited by shares has a share capital. This means that each member’s liability is limited to the number of shares held in the company, in accordance with their investment. The concept of limited liability allows shareholders and directors to be protected from any liability due to the ‘the corporate veil’. The corporate veil is a legal concept that separates the rights and liabilities of the business from the people who run it. This means that the business owners are not personally liable for the debts owed by the company.
- Private Limited Company by Guarantee
A private company limited by guarantee is usually a charity or a not for profit. They reinvest their profits back into the company as opposed to distributing profits among their members. Here, the company benefits from limited liability. This means that the company is a separate legal entity from those who run it and has separate finances from the owner’s finances. Each guarantor’s liability is limited to a ‘guaranteed amount’ and they are obliged to pay this amount if the company is ever dissolved or wound up.
Step 1: Identifying the right company type
There is a wide range of companies that have different obligations from one another. The first step for anyone wanting to start a business is to decide which company they wish to register. It is crucial that the right type of company is chosen, as it will impact what rights they have, how tax is to be paid, and how the finances are to be managed.
The following are the most common types of companies:
- Sole Trader
A Sole trader is a simplest and easiest business to register. As a sole trader, the business is run by you and you will need to register with the HMRC. As a sole trader, you are entitled to keep all of your income as profit but you will have to fill in a self-assessment form annually to pay tax. There is no maximum amount you can earn as a sole trader but you will be personally responsible for all liabilities, such as any debts the company incurs.
As a sole trader, you can choose to trade using your name or create another name for your business. However, if you choose to do this you must include both your name and business name on official documents. All sole trader names cannot include ‘limited’, ‘Ltd’, or ‘LLP’ in their name and must not be the same name as one that already exists.
A partnership is where two or more people have shared ownership, control and responsibility. The profits and liabilities are equally divided as there is equal involvement with running the business between each partner. All partners personally share responsibility for the business which includes incurring any losses and paying for business expenses such as equipment and stock.
Moreover, a partner does not have to be a real person and can simply be a legal entity such as a limited company or an organisation. To register a partnership, you need to choose a name, a ‘nominated partner’ and register online with the HMRC here. A ‘nominated partner’ is responsible for filing all tax returns, managing and keeping business accounts and records.
- Limited Liability Partnership
A limited liability partnership is a type of company structure where each partner’s ownership, control and responsibility corresponds to the amount of investment they have made into the business. While there is no maximum requirement of the number of partners, there is a minimum requirement of two partners.
To set up a limited liability partnership, you need to choose a name and have a registered address that is available to the public. You will also need to have an LLP agreement that outlines how the partnership is to be run and managed. Lastly, you will need to register the partnership with the Companies House either electronically using third-party software, by post or through an agent.
- Public Limited Company
A public limited company sells its shares to the general public on the stock exchange. Since company shares can be sold to the public, additional requirements must be met, including needing a trading certificate from the Companies House which states its minimum share capital to conduct any business activity.
Step 2: Choosing a name, director and a company secretary
Once identifying which Company type is right for your business, you need to decide certain aspects of your company before proceeding with the registration process online. You need to provide the name, address and personal contact details of at least one director and shareholder. You also have the choice to appoint a company secretary.
There are certain rules in place when choosing a name for a private limited company.
- The company name cannot be the same as another registered company’s name
- You may be asked to change your company name if it is similar to an already registered company’s name
- The company name must end in either ‘Limited’ or ‘Ltd’
- The company name must not be offensive
More guidelines on how to choose an appropriate company name can be found here.
Once these details are decided you can start your application register your company online here.
Step 3: Submitting the right documents
Moving forward, you will need to submit the articles and memorandum of association of the company to register it. The memorandum of association is a legal document signed by all parties involved at the start of the registration process who wish to incorporate the company.
The articles of association refer to the company’s constitution and set out the rules and regulations involving the company’s operations that have been agreed upon by the shareholders and directors. You can find more information regarding creating the articles and memorandum of association here.
You can also choose to use ‘model articles’ if you do not create your memorandum of association.
Step 4: Checking what records need to be kept
It is essential to keep proper company, financial and accounting records. You may choose to hire an accountant to help with filing tax returns and maintaining company books as the HMRC may check your records to make sure you are paying your taxes and that it is the right amount.
Moreover, the personal contact details of the company directors, shareholders and company secretaries need to be updated and recorded along with the results of shareholder votes and decisions. Accounting records such as details of all assets, liabilities, stocks and goods bought and sold needs to be maintained including the details of all buyers and sellers involved in those transactions.
Lastly, you must report to the Companies House if you are keeping company records anywhere other than the company’s previously registered office address. All changes to company details must be reported here.
Step 5: Registering the company with the Companies House
The official company address, along with a SIC code, will need to be registered. The SIC code is the ‘standard industrial classification’ of economic activities which provides the Companies House with a description of the company and the nature of its business. It is a four-digit number used by the Companies House to identify what type of company you have. A full list of codes available from the Office of National Statistics can be found here.
The address needs to be a physical one in the UK and must be in the same country you plan to register your company. You may use the PO Box to register your address. However, you will still need to include a physical address with a postcode. The address will be available to the public on the online registration and the address cannot be removed.
However, if you want to keep your address private you can use a different one. This can be the address of the individual who deals with your Corporation Tax. Alternatively, you can appoint an agent who can provide office address services.
After completing the registration process online, you will receive a certificate of incorporation which costs £12 and can be paid online.
This article is intended for guidance only and must not be relied upon for specific advice.