UK Company Law

by Marcis Liors Skadmanis, Lawyer

Contents:

1. Introduction

2. Company formation & trading structure

3. The Sole trader (Self-Employed)

4. Partnership (Self-Employed)

5. Partnership Agreement

6. Limited liability partnerships (LLPs)

7. Private limited company

8. Single member companies

9. Type of share

10. Shareholders’ agreement

11. Private company limited by guarantee

12. Private unlimited company

13. Public limited company (plc)

14. Community Interest Companies (CICS)

15. Listed companies

Source

1. Introduction-

The United Kingdom has enjoyed a system of company registration since 1844. In these days, company registration matters are dealt with in law, by the Companies Act 1985 and the updating legislation contained in the Companies Act 1989. Companies’ Acts have been around for the last 150 years, and are designed to set the framework in which companies with limited liability must work. The Companies Act 2006 received Royal Assent on 8th November 2006 and effectively replaced existing company legislation by re-writing, updating and modernizing company law.

Business today is often a multi-national activity. British companies may carry on activities in other states and companies from other jurisdictions may carry on business in the United Kingdom.

English law provides two main types of organization for those who wish to associate in order to carry on business for gain: partnerships and companies.

Public companies are permitted to invite the general public to subscribe for the shares, whereas private companies are not. The shares of a public company may be officially listed for trading on a recognized investment exchange for example, the London Stock Exchange. The shares of a private company may not.

The term “Company” implies an association of a number of people for some common object or objects.

2. Company formation & trading structure-

When starting a business, it important to select the most appropriate trading structure. There are four main trading structures available:

Sole trader (Self-Employed)

Partnership (Self-Employed)

Limited liability partnerships (LLPs)

Private limited company (Ltd)

Public limited company (plc) (including “listed companies”).

3. The Sole trader (Self-Employed)-

The sole trader is the amoeba of the business organization world. As the name suggests, the sole trader operates alone and, as such, is the simplest form of trading structure. The liability of the sole trader is total. This means all financial risks are taken by that person and all that person’s assets are included in that risk. Legally there is no distinction between the sole trader’s personal and business assets and so if the business goes badly the creditors can go after his/her home, car or other assets in satisfaction of business debt. The risk to the sole trader of doing business is large but there is no need for a formal organizational structure. Without insurance you could lose everything.

Accountability and regulation – there is very little regulation and official accountability associated with sole trader status. Because they are not registered with Companies House, sole traders are not required to file annual accounts or reports (other than for the payment of income tax).

4. Partnership (Self-Employed) -

Partnership is the relation which between person carrying on a business in common with a view of profit” (s. 1(1) of the Partnership Act 1890 (PA 1890)), there must be at least two persons, and “business” includes any “trade, profession or occupation”: PA 1890,s.45. The partnership is not a separate legal person, and partners have unlimited joint liability for the firm’s debts and obligations (PA 1890,s.9); and joint and several liability for torts (PA 1890,s.12). There is no distinction between the assets of the partnership and the assets of the individual partners. The partners can be pursed personally for the debts of the partnership.

A partnership is a very risky type of business to get involved in, just because of all the potential for conflict, and the financial effect conflict between partners would be likely to have on the business. However, now the Limited Liability Partnerships Act has received Royal Approval and will become Law by the end of the year.

Law firms in particular have very complex partnership agreements governing their operation. This means that the management structure, profit sharing and the life of the partnership can be made to fit any situation. The obligations are the same as for a Sole Trader.

Accountability and regulation- As with the sole trader, there is relatively little accountability or regulation attached to a partnership and no requirement to file reports and accounts with any official regulator.  You will need to keep records for Inland Revenue (and also for VAT if you are VAT registered), but there are no other legal requirements. Each partner should submit a P/SE/1 and you are taxed as an individual. If you leave the partenership your tax liability will follow you (unlike in the past when the remaining partner had to pay it). The workload can be shared.

5. Partnership Agreement Form-

(The aim of the agreement is to provide a written structure of your business with respect to each partner’s responsibility, rights, profit/liability sharing, and also the terms on which the partnership can be terminated.) This agreement is based on a full partnership and therefore some changes may need to be made in the structure if you wish to set up a Limited Partnership.

Content: 1) The name of the business/partners 2) Commencement of the partnership 3) Nature of the business 4) Business location 5) Set-up investment; 6) Contribution  7) Ownership Role of the partners 9) Decision making and voting rights 10) Profit and loss sharing 11) Liability sharing 12) Business bank account/cash management 13) Accounts 14) Holiday entitlement 15) Illness and incapability 16) Retirement 17) The introduction of new partners; 18) Drawings and direct expenses; 19) Dissolution of the partnership 20) The death of a partner 21) Unfair competition 22) Dismissal of a partner 23) Signatures.

6. Limited liability partnerships (LLPs)

The Limited Liability Partnerships Act 2000 allows for partners to achieve limited liability up to a point. It allows liability to be limited for general trading debts but individual partners will not be able to limit their personal liability for negligence. This type of partnership (LLP) was designed to allow large professional partnerships (law and accountancy firms) to achieve some protection from large negligence actions. Created by registration under the Limited liability Partnership Act 2000, they are regulated by the Companies Act 2006 as private limited companies except that the management structure is fixed by the partnership agreement. They have the benefit of being able to secure loans by floating charge.

The business is controlled by the ‘designated members’ (who have a similar responsibility to a directors / secretary of a Ltd Company) and the ‘members’. Capital is provided by the members, LLP’s are similar to ‘Partnerships’ or ‘Sole Traders’ in this respect. Incomes derived by the members will be closer to that of a ‘Partnership’ than to the dividends paid by companies. The members will provide working capital and share any profits. An LLP will be taxed as a partnership. The internal structure of the LLP will be similar to that of a partnership. The members will provide working capital and will share any profits. Income derived by the members from the LLP will be closer to that of a partnership than to the dividends paid by companies. The Bill also provides that any partnership converting to an LLP will receive relief from stamp duty on any property transferred in the first year, subject to conditions. Members will be liable to pay Class 2 and Class 4 National Insurance contributions.

The LLP legislation does not allow for a ‘conversion process’ – in the way that a limited company can convert to PLC status under the Companies Act!

7. Private limited company –

The private limited company is the most common trading structure and is the central focus of company law. The company is created by a process of incorporation by individuals known as the promoters. Unlike a Sole Trader or a Partnership, the Limited company is legally a separate entity in its own right. The directors and shareholders have limited liability. When a limited company is created it will have an Authorised Shareholding which specifies the limit of a shareholders liability. If all shares have been issued then shareholders are not liable for any more debts that the company may accrue. This is definitely the most sensible option if capital is being put into the business by anyone who is not involved in running it.

Most limited companies are owned by “members” who each own a number of shares in the company. Usually, each share has a vote attached to it and so the members are able to vote on important decisions affecting the company, although the day-to-day management of the company is left to the directors.

However, it is possible that all of the shareholders of a very small company are also the directors and, following the introduction of the Companies (Single Member Private Limited Companies) Regulation 1992, it is even possible to have a single person who is both the sole shareholder and the sole director of the company.

A limited company always has staff, because a director of a company is considered an employee of the company, and a limited company must have at least 1 director, and a company secretary.

Accountability- You have to hold an Annual General Meeting (AGM) for all the share holders, within 18 months of setting up the company, and at least every 15 months after that. These meetings must receive, and approve, Annual Reports from directors and auditors. These reports must include summaries of the accounts, names of the directors, details about the shareholders, and other information. At these meetings the shareholders must also elect directors and auditors.

You must also submit an Annual Return to the Companies Registration Office, summarising the information included in the Annual Reports. These details are displayed at Companies House, where they are available for public inspection.

As a Limited Company, you will have to pay Corporation Tax on all profits.

8. Single member companies-

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

A single member – present in person or by proxy – constitutes a quorum in these circumstances. If you hold such a meeting you must record it in the minutes. If, as a sole member you take a decision, except by written resolution of the company, you must give a written record of the decision to the company. (This is to ensure continuity of records if you sell some or all of your interest in the company.)

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 director’s meeting.

A company’s register of members must accurately record its members. The register of members of a single member company must contain an express statement to the effect that the company has only one member and state the date upon which the company became a single member company.

If the company originally had more than one member and the membership reduces to one, then the register must contain an express statement to the effect that the company has only one member and state the date upon which the company became a single member company.

If the membership of a single member company later increases, you must record the details of the new member in the register of members.  You should enter an express statement to the effect that the company is no longer a single member company and the date on which that event occurred.

9. Type of share-

Ordinary shares will usually carry one vote per share on a poll. The dividend is that recommended by the directors, and the amount payable on a distribution of assets on a winding up proportional to the nominal value of the shares.

Preference shares usually entitle the holder to a dividend of a fixed amount per share to be paid in priority to other shareholders. However, that there is no entitlement until the dividend is declared. Preference shares may be: a) cumulative: if the dividend is not paid in one year, then the shareholder will be entitled to receive the arrears from profits in subsequent years. Unless the articles or terms of issue provide otherwise, preference shares are cumulative; b) non-cumulative: the dividend will lapse if the company is unable to pay it in any one year.

Preference shares may also entitle the holder to prior return of capital on a winding up where the company is solvent.

Deferred shares (sometime called founders’ shares) are now rare. Promoters used to take shares which would not qualify for a dividend until the ordinary shareholders had received one.

Redeemable share are issued with a provision that they may be bought back by the company at a later date, at the option of either the company or the shareholder.

Non-voting shares carry similar rights to ordinary shareholders, but no rights to vote.

10. Shareholders’ agreement-

A shareholder’s agreement is a contract between the shareholders of a company in which they agree how the company will be run. They all agree that they will use their voting power in the company to ensure that the terms of the agreement are complied with for as long as they are all shareholders.

For example a Shareholders Agreement includes the following clauses: 1) company details, 2) shareholder details, 3) business of the company, 4) directors’ meetings, 5) management decisions, 6) appointment of directors, 7) transfer of shares, dividend policy, 9) winding up, 10) termination, 11) confidentiality 12) no assignment and 13) communications.

11. Private company limited by guarantee –

In this type of company, members do not make any contribution to the capital during its lifetime as they do not purchase shares. The members’ liability is limited to the amount that they each agree to contribute to the company’s assets if it is wound up.

There are three different types of Limited by Guarantee Companies:

a) Club / Association, b) Charity, c) Flat Management etc.

12. Private unlimited company –

This type of company may or may not have a share capital and there is no limit to the members’ liability. Because there is no limitation on members’ liability, the company has to disclose less information than other types of company.

13. Public limited company (plc)-

This type of company has a share capital and, the liability of each member is limited to the amount unpaid on shares that a member holds. A public limited company may offer its shares for sale to the general public and may also be quoted on the stock exchange.

A limited company with a share capital is a public company if:

a) it has been registered or re-registered as a public company on or after 22 December 1980;

b) its memorandum states that it is a public company;

c) its name ends with ‘Public Limited Company’ or ‘PLC’ or if it is a Welsh company,  – that is, a company the memorandum of which says that its registered office must be in Wales –  it may use the Welsh equivalents, namely ‘Cwmni Cyfyngedig Cyhoeddus’ or ‘CCC’;

d) it has an authorised share capital of at least £50,000 or at least €65,600 and states this in its memorandum.

Note- A Community Interest Public Limited Company: its name must end with ‘community interest public limited company’ or ‘community interest p.l.c.’ (or, if it is a Welsh company, it may use the Welsh equivalents, namely ‘cwmni buddiant cymunedol cyhoeddus cyfyngedig’ or ‘cwmni buddiant cymunedol c.c.c’);

A newly formed public company cannot commence business activities or exercise any borrowing powers until Companies House has issued a trading certificate under section 761 of the Companies Act 2006 (previously under section 117 of the Companies Act 1985).

Companies House will issue a Trading Certificate to a public company if the value of the company’s allotted share capital is not less than £50,000 or €65,600. This requirement must be wholly satisfied either in sterling or in euros, as a mixture of both will not be sufficient to meet the legal requirements. (This does not prevent the rest of the company’s capital being in a mixture of sterling, euros and even other currencies).

A PLC must have at least two members and a minimum of two company Directors. The Company Secretary must be a person who appears to the directors to have the necessary knowledge and ability to fulfil the functions or is a member of any of the following bodies:

the Institute of Chartered Accountants in England and Wales;

the Institute of Chartered Accountants of Scotland;

the Institute of Chartered Accountants in Ireland;

the Institute of Chartered Secretaries and Administrators;

the Chartered Association of Certified Accountants;

the Chartered Institute of Management Accountants (formerly known as the Institute of Cost and Management Accountants); or

the Chartered Institute of Public Finance and Accountancy.

14. Community Interest Companies (CICS)-

Community interest companies (CIC) are a new type of limited company designed specifically for those wishing to operate for the benefit of the community rather than for the benefit of the owners of the company. This means that a CIC cannot be formed or used solely for the personal gain of a particular person, or group of people.  CICs can be limited by shares, or by guarantee, and will have a statutory “Asset Lock” to prevent the assets and profits being distributed, except as permitted by legislation. This ensures the assets and profits are retained within the CIC for community purposes, or transferred to another asset-locked organisation, such as another CIC or charity.

A CIC cannot be formed to support political activities and a company that is a charity cannot be a CIC, unless it gives up its charitable status. However, a charity may apply to register a CIC as a subsidiary company.

The Regulator – the companies (Audit, Investigations and Community Enterprise) Act 2004 “the Act” established the Regulator as an independent public office holder appointed by the Secretary of State for Trade and Industry. The appointment was subject to an open public recruitment process monitored by the Office of the Commissioner for Public Appointments. The Regulator is an independent official and her powers are set out in the Act and the Community Interest Company Regulations 2005. The Act requires her to discharge her functions in accordance with good regulatory practice. In particular, she must have regard to:

The likely impact of her actions on those affected The results of consultation with stakeholders The efficient and economic use of her resources

The Government expects the Regulator to be a “light touch regulator” who will encourage the development of the CIC brand and provide guidance and assistance on matters relating to CICs.

15. Listed companies-

Those public limited companies which wish to trade their shares are “listed” on the London Stock Exchange.

Shareholders in listed companies enjoy the same protection of “limited liability” afforded to members of other public (and private) companies. As with other public companies, there is a gulf between the small number of directors and potentially thousands of shareholders and this is even more pronounced I listed companies, where shareholder may live anywhere in the world.

Source:

Partnership Act 1890

Companies Act 2006

Gower and Davies: The Principles of Modern Company Law (Paperback)  by L.C.B. Gower, Sweet&Maxwell, 2008

Alan Dignam, John Lowry „Company Law”, Oxford University Press, 2006

Stephen Judge „Company Law 2008 and 2009” , Oxford University Press, 2008

Jacqueline Martin, Chris Turner „Company Law 2009-2010 edition”, Hodder Education, 2009

Chris Taylor „Company Law”, Pearson Longman, 2009

Derek French, Stephen Mayson, Christopher Ryan „Mayson, French and Ryan on Company Law”Oxford University Press, 2007

Companies House || http://www.companieshouse.gov.uk

Fast Link Solutions || http://www.fastlinksolutions.co.uk

Community interest companies || www.cicregulator.gov.uk

- Marcis Liors Skadmanis LL.M.

Lawyer

Practice areas:

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5) Inheritance Law

6) Investments Law

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