SETTING UP A NEW BUSINESS - FREQUENTLY ASKED QUESTIONS
The following questions are those we are most frequently asked by clients who are setting up a new business. They may not answer the questions you have, but if not, just get in touch. Our experienced and friendly staff are here to help.
1. I am setting up a new business, do I have to register
a company?
The short answer is 'No'. A business does not have to be a limited company.
Someone setting up in business on their own has the choice of setting up
as a self-employed person (a 'sole trader'), or of having a limited company.
If there are two or more people involved in the business then they have
the choice of trading as a partnership or of forming a limited company or
a limited liability partnership (LLP). For further information see our company
choice and LLP pages.
2. What is a limited company?
A limited company is registered at Companies House. It must operate within
the Companies Acts and is governed by its own memorandum and articles of
association. There are different types of limited company but they all have
these things in common. Once registered, a company has corporate personality.
It is a legal entity (or legal person) with its own rights and obligations,
separate and distinct from those of its members. The company's property
is its own and is not treated as belonging to the company's shareholders
and directors. The company itself can enter into contracts, employ people,
sue and be sued and can be liable if it commits criminal offences. When
the company incurs debts, the company itself is liable for them and the
directors and shareholders are not (see below).
There are different types of companies used for different purposes, but
for a trading business the only real options are the private company limited
by shares and the LLP. See also our company
choice, LLP and
specialist companies pages.
3. How does limited liability work?
The basis of limited liability is that all debts incurred by a company are
the company's own liabilities and not directly the legal liability of the
shareholders or of the directors. The company is a separate legal person
from the shareholders and the directors. The company incurs debts in the
course of its business and only the company is liable for those.
The shareholders' obligation is to pay the company for the shares they have
taken in it. Once the shares are fully paid for (and this would usually
be the case with a private limited company) no further money is payable
by the shareholders. So, if two people set up a company and take, say, one
£1 share in it each, their only liability as shareholders is to pay
£1 each to the company for their shares.
The directors incur no personal liability as all their acts are undertaken
as agents for the company. However, there are certain circumstances where
liability may be imposed by the court, particularly in respect of wrongful
or fraudulent trading.
4. How is a company registered?
At Incorporation Services Limited we register all our standard companies
by electronic registration by arrangement with Companies House. This ensures
the quickest possible registration time, usually within a few hours. For
more details visit our company formations
page. It is also possible to register by sending forms and documents to
Companies House. This has to be done for LLPs, as there is no electronic
registration facility at Companies House, and is sometimes done in other,
specialised circumstances.
5. What are the pros and cons of setting up a limited
company or trading as a sole trader or partnership?
These are covered on our separate company
choice page.
6. What name may be used for a company?
See our company names page.
7. What are the memorandum and articles?
See our memorandum and articles
page.
8. What is Companies House?
Companies House is the government body responsible for registering companies
in the UK. There are separate branches in Cardiff (for England and Wales)
and Scotland.When a company is registered, documents and forms (and the
registration fee) is sent to Companies House which, if everything is in
order, will issue the company's certificate of incorporation. Most registrations
are now done electronically.
9. What information must a company send to Companies
House?
On first registration
When a company is first registered it must send its memorandum and articles
of association and a form showing the address of the registered office and
details of its directors and company secretary. The information required
for registration is set out in our page entitled Information required to
register a company.
When there are changes
After that, each year the company must send its annual return and accounts.
The annual return is a standard form sent out by Companies House, which
must be updated and returned with the registration fee. Most annual returns
are now sent electronically, when the fee is £15. They can still be
submitted as paper forms, but the fee is £30. The annual return states
much of the information currently on file at Companies House (registered
office, directors, shareholders, industry classification).
Accounts and annual returns
All limited companies also have to register their annual accounts. Bigger
companies have to file full accounts comprising a balance sheet, profit
and loss account, directors' report and auditors' report. Small and medium
sized companies can send 'modified accounts', containing less detail. There
are exemptions from audit for smaller companies.
If the company does any of a long list of things, the right form must be
sent to Companies House. Common examples are changes to the directors or
company secretary, or the registered office, or when shares are allotted.
Some of these changes are quite straightforward. In other cases they are
more technical than people realise. All official forms are available from
Companies House
website, and many simpler matters can be registered electronically.
All information registered at Companies House is available for public inspection
and registering this information is the price of being granted the privilege
of corporate personality and limited liability. Part of our business is
obtaining information about companies (doing a 'company search'), so if
you need information about another company, let us know. Copies of forms
and documents registered by every company at Companies House can be accessed
from the Companies
House website. Some information is free, in other cases a fee is payable.
10. What are statutory registers?
All companies must maintain a set of statutory registers which are public
documents and may be inspected by any member of the public. They must be
kept at the registered office or some other address notified to Companies
House. Most companies keep the statutory registers in a single bound book
or loose-leaf binder, but they may be kept in any form, e.g. as a computer
record. Our full company formation package contains completed registers
in a loose-leaf file with a slip case (a 'company kit'). In outline, the
registers comprise:
The register of members shows the names and addresses of the shareholders
and the number of shares held by each member. The register of members is
an important public document and the main evidence of who the shareholders
are and how many shares they own. It is very important to the shareholders
of a company that they are registered in this statutory register to be able
to assert their rights on their shares.
Although not strictly required, most companies also keep separate registers
of share allotments and transfers.
The register of directors and secretaries records their names, addresses, etc.
The register of charges shows mortgages or charges on the company's property.
Most company's statutory registers also include a minute book (a company must keep minutes of all board and general meetings) and share certificates. Share certificates are the documents held by the shareholders to show that they own shares in the company and are important documents that must be kept safely.
Completing the statutory registers is one of the first tasks required of a new company, and part of our full company package (but not the cheaper 'basic' package). Once this work is done there are no further routine Companies Acts requirements until the first annual return has to be completed when the company is a year old.
11. What is a company's registered office?
Every company must have a registered office to which all communications
and notices may be sent. It is part of the information required when registering
a company (with the postcode). The address of the registered office must
appear on all business letters, emails, websites, etc.
The registered office must be in the country in which the company is registered:
a Scottish company may not have its registered office in England or vice
versa. There is, of course, nothing to stop a Scottish company having a
place of business in England (or an English company having one in Scotland),
but it must maintain a registered office within the country of its situation.
The address may be changed from time to time but Companies House must always
be notified on the correct form or by web filing.
12. What are a company's objects?
A company's objects are set out in its memorandum of association. They are
a statement of what the company is set up to do. In practice, all modern
trading companies are set up as 'general commercial companies' which can
carry on any trade or business and can do all such things as are incidental
or conducive thereto.
13. Can you explain about shares?
A company limited by shares must have a share capital divided into shares
of a fixed amount (usually £1). Shares are issued to the owners of
the company. To protect the creditors, share capital is locked into the
company and can be returned to the shareholders only subject to strict rules.
The shareholders own the company in proportion to the number of shares they
hold.
A typical example might be that A, B and C set up a company and decide that they will each put in £10,000 as capital. The company would issue 10,000 £1 ordinary shares to each of the three shareholders. The company's issued share capital will be £30,000 divided into 30,000 shares of £1 each. Each shareholder owns one-third of the company, has one-third of the votes and is entitled to one-third of the profits (if any!).
14. What is the authorised share capital?
When a company is set up the amount of the 'authorised' share capital must
be stated in the memorandum. This rule will be abolished from 1st. October
2009. Until then, we need to know this amount to register your company.
The authorised capital is simply an upper limit to the amount of shares
the company can issue. There is no requirement for the company to issue
all its authorised capital and the figure has no implication for the liability
of the members.
e.g. a company may have an authorised capital of £250,000 divided into 250,000 shares of £1 each, but only ever issue, say, two shares. The shareholders' liability is to pay the company for the two shares issued.
There is thus no point in restricting the authorised capital when the company is set up. It should be given sufficient authorised capital to cover all likely future share issues. If a company wants to issue shares beyond its authored capital, the figure must be increased, for which there is a procedure.
15. How many shares should a company have?
There is not a simple answer to this. It depends on the circumstances.
A company set up to run a business will usually have money (and perhaps
other assets) put into it by the shareholders in return for shares.
Take the example above, where A, B and C set up a company and decide that they will each put in £10,000 as starting capital, and they each take 10,000 £1 shares. Putting all the money in as share capital is not the only way. An alternative would be for the three shareholders to take one share each and to lend the money to the company. In this case the company will have an issued share capital of £3, divided into three shares of £1 each.
In many cases, either solution would be appropriate. Either way, each shareholder
is an equal one-third owner of the business. They have one-third of the
votes each, will receive one-third of any dividends and are entitled to
one-third of any net assets remaining if the company winds up. There are,
however, striking legal, taxation and practical differences between the
two approaches.
If the £30,000 is put is as share capital, it is effectively locked
into the company and cannot easily be returned to the shareholders. Companies
can buy back their shares but only in quite restricted circumstances and
subject to quite strict procedures.
Money loaned to the company can be repaid to the lenders at any time. If
the company fails, the shareholders, as lenders, may claim in the liquidation
for the return of their money as creditors of the company. If the loans
have been secured by the company issuing debentures to the three shareholder/directors,
they may rank as secured creditors, which will put them in a more advantageous
position than the ordinary creditors.
There may also be a tax advantage in putting the money in as loans. When
the company starts to make money, the loans can be repaid without there
being any tax payable by the lender on receiving the repayment. Further,
interest may be paid to the lender whether or not the company has made profits.
For all these reasons, money put into a company as capital is often put
in as loans rather than share capital.
There may, however, be good reasons for committing the money as share capital.
A company capitalised at £30,000 is clearly more substantial than
one with a nominal £3 share capital. The amount of share capital appears
on the public record at Companies House and it may be important to display
the substance of the company to potential creditors and other business contacts.
In some cases, banks or investors may want to see capital committed as share
capital simply because it is then 'locked in'.
There may also be good reasons as between the three shareholders why they
should want to see that the money committed by the others is in the form
of share capital.
At a more sophisticated level, where substantial investment is being put
into a company, the investors may well want a package of loans and shares,
perhaps requiring different classes of shares to protect different aspects
of their investment and to give them an appropriate package of rights in
the company.
The decision as to the capitalisation of a substantial company should usually be taken only with appropriate legal and accountancy advice.
16. What are classes of shares?
A company can create different classes of shares by giving them different
rights. If a company has only one class of shares they will be ordinary
shares and will carry equal rights. Because in recent years there have been
tax advantages in companies paying profits out as dividends, many companies
now have different classes of shares.
Different classes are typically created by varying the voting, dividend
and capital rights attached to the shares. The rights attached to shares
will usually be set out in the company's articles. This can be done when
a company is first registered, or later, by passing resolutions to alter
the articles.
At Incorporation Services Limited we have many years of experience of drafting
memoranda and articles and can advise as to appropriate classes of shares
to meet individual circumstances. Contact us if you want advice on this
area
17. Can a child own shares?
There is no statutory provision prohibiting a child from owning shares.
In many family owned companies, shares are allotted to children as a means
of providing them with capital assets which may be expected to increase
in value as part of longer term inheritance and capital gains tax planning.
Paying dividends on such shares can also be useful ways of using children's
personal allowances for income tax (and can be useful when supporting older
children through university, etc.) Professional advice should always be
taken when using any such schemes.
18. Can a child be a director?
As from 1st. October 2008 a child under 16 cannot be a director of a UK
registered company.
19. What is the difference between shareholders and
directors?
A company has to have both shareholders and directors. The shareholders
(also called 'members') own the company and the directors manage it. Unless
the articles say so (which is very unusual) a director does not need to
be a shareholder and a shareholder has no right to be a director.
The separation in law between directors and shareholders can sometimes be
confusing. If two or three people set up a company together they will usually
all be both directors and shareholders. The problem with this is that company
law requires some decisions to be made by the directors and others to be
made by the shareholders and, in either case, there are formalities to comply
with. To complicate matters further, some decisions have to be made by the
directors, but only with the shareholders' consent. Having said that, directors
can make most decisions for the day to day running of the company, and only
certain important decisions need to be authorised by the shareholders. We
can advise on any particular problem of this sort.
There is also a difference with regard to remuneration. Directors can be paid wages or salaries by the company for the work they do, just like any other employee. The shareholders, on the other hand, can receive a share of the profits the company makes by being paid a dividend. When the directors and the shareholders are the same people, they may receive some of their money as wages or salary (as directors) and some of it as dividends (as shareholders). There are tax differences between salaries and dividends which can make a substantial difference to the tax paid, so advice should be taken.
When it comes to voting, the usual arrangement is that each director has one vote (at a board meeting - a meeting of the directors), but the shareholders have one vote for each share they own. So a shareholder with lots of shares has lots of votes, but only at general meetings, i.e. meetings of the shareholders. Most decisions are made at board meetings, not general meetings.
20. How can an existing business be turned into a company?
In outline, the process is for the new company to be registered and then
for the sole trader's or partnership business to be sold to the company
at an appropriate value, the consideration for which is the issue of shares
in the company. There are many legal, taxation and practical considerations
to take into account and your accountant's advice is essential
A typical process would be the following. An existing partnership business
worth, say, £30,000 is to be incorporated. The company is registered
and a date chosen for the new company to take over the business. There are
three partners and they own the business as equal partners.
A contract is drawn up between the partners (as vendors) and the company
(as purchaser), under which the partners sell the business assets to the
company for £30,000, to be paid by the company issuing 30,000 £1
ordinary shares to the partners. As they own the business equally, they
get 10,000 shares each.
From the company's point of view, this will be an allotment of shares for non-cash assets, and care must be taken to ensure that all the company law procedures are complied with. Contact us if you need help with this.
21. What is a ready-made company?
A ready-made company is one that has already been registered for re-sale
when required. It is a useful device, enabling a new project to be incorporated
very quickly or a contract entered into in a company's name, etc. without
waiting for the company to be registered. Now that electronic registration
allows a new company to be registered very quickly, ready-made companies
are used to a lesser extent than in the past. All our ready-made company
are brand new and certified as never having conducted any trade or business
and having no liabilities. We always have several in stock and supply them
with the same packages and options as when registering a new company. The
company will, of course, have a company name (which may be changed, though
this involves additional expense) and an authorised share capital of £100.
22. Where can I get advice?
Contact Incorporation Services Limited.
Our friendly, professional staff will be pleased to advise.