Setting Up And Forming Your Company
Robert Browning is a chartered accountant formerly in public practice, with many years' experience of advising small businesses. He is based in Ware, Herts.
Now that you have made up your mind that you are going to run your business through a company this chapter tells you what to think about and how to plan it and includes:
- creating a separate entity
- deciding your objects
- acquiring your company
- deciding your share capital requirements
- issuing shares.
CREATING A SEPARATE ENTITY
This is fundamental.
What is a company?
In Chapter 1 you read how the concept of partnership came about and how as trade increased there was more and more of a burden on the individual partners. The property and the debts of the firm were considered to be the property and debts of the individual partners. In the nature of things partners died and, as they were no longer partners, the partnership ceased to exist.
By the mid 19th century a more permanent form of partnership evolved, known as the joint stock company.
This meant that a company could hold property, incur debts and sue and be sued in its own name. This was known as ‘limited liability’ and meant that the members (partners) were no longer personally liable for the debts of the company.
As a result of this the company exists permanently and is in effect an ‘artificial’ person, quite separate from the individual members of the company.
From now on whenever the word ‘company’ is used please remember this important principle. All detailed legislation relating to limited companies is contained in the Companies Act 1985, with amendements in the Companies Act 1989. This is now the main statutory framework for UK company law.
DECIDING YOUR OBJECTS
Any company must define what it is and what it is for. This is done in a document known as the Memorandum of Association.
The Memorandum, in a form specified by regulations, must be submitted to the Registrar of Companies and will state, amongst other things:
- the company’s name
- the place of the registered office of the company
- the objects of the company
- that the liability of the members is limited
- the amount of the share capital and its division into shares.
Let us briefly deal with each of these in turn.
Choosing the name
You can choose any name you wish, subject to a few obvious conditions. You may not choose a name if:
- (a)It is already registered by someone else.
- (b)It requires the approval of the Secretary of State because it is ‘sensitive’. This could be so if, for example, it contains the words, International, British, European, etc.
- (c)It contains words which other relevant bodies might object to: for example, Police, Royal, Charity, etc.
This list is by no means exhaustive but you can see the difficulties that may arise if your intended name is too similar to that of another company or gives the impression that it is something which it is not. Watch this carefully as that other company could object and your company be directed to change its name with the additional expense that entails.
Chapman Security Ltd.
Police Security Systems Ltd.
Locating the registered office
This is the ‘official’ address of the company where anyone can get in touch and where certain statutory information is held. The Memorandum only asks you to state whether it is in England and Wales, or in Wales, or in Scotland. Once this ‘domicile’, as it is known, is established the actual address can be moved within that domicile but not outside it. For example, if the domicile is England the address can be changed from Liverpool to London but not Liverpool to Glasgow.
The Registered Office of the company will be situate in England.
Defining the objects
Although a company can, as a separate legal person, acquire rights and incur liabilities, its powers are slightly less extensive than a real person. A real person can do anything not prohibited by law but a company can only do what is authorised by the objects clause in its Memorandum.
It is not, however, necessary to go into great detail here as it is generally recognised that the main object of the business can be defined by a very general trading clause which will
not inhibit the company from carrying out any of the objects it wishes.
In other words, for all intents and purposes, you will be able to do anything you wish within reason and within the law.
The objects for which the Company is established are:
- (a)To carry on business as a general commercial company.
- (b)To carry on any other business of any description whatsoever which may seem to the company or in the opinion of the Board of Directors thereof to be advantageously carried on in connection with or ancillary to the objects of the company or any of them and calculated directly or indirectly to render more profitable the company’s business.
- (c)... to ... (x) Clauses ... To cover all those normal business transactions and dealings carried out by the majority of companies.
Limiting your liability
The fourth clause of a Memorandum provides that the liability of the members shall be limited. What does this actually mean?
In simple terms it states that no member, meaning a shareholder, is liable to contribute any more than the nominal value of his shares. Once you have paid for your shares that is the extent of your liability. This is obviously a comforting thought if anything goes wrong.
The liability of the members is limited.
Calculating your capital
The Memorandum must state the amount of the authorised capital, sometimes known as the nominal capital, and the division of that capital into shares showing the value of each. There can be different classes of shares but for this purpose we will assume there is only one.
The Share Capital of the company is £1,000 divided into 1,000 Ordinary Shares of £1 each.
ACQUIRING YOUR COMPANY
There are two ways of setting yourself up in business. You can do this by:
- starting a business on your own or in partnership
- buying an existing business.
Either of these can be put into a company and, indeed, the latter may already exist as a company.
Starting your own business
If you are setting up your business on your own you may wish to start with a brand new company. This can be done in two ways.
- 1.Buy a new or custom made company with your own choice of name. Various forms will have to be signed.
- 2.Buy a ready made company which has never traded. This is known as buying a company off the shelf.
Both of these methods can most easily be done through a company formation or registration agent. A telephone call to one of them will set the ball rolling but you must have your company name and address ready. Alternatively the agent will have a bank of ready made companies already named for you to choose from if you wish.
The agent will then send you the details of the company with your chosen name. He or she will probably arrange for themselves to be company secretary and for the original subscriber shares to be issued. There are usually two subscriber shares, but a company may exist with only one. The shares are normally put in the agent’s and a colleague’s name for convenience as it saves having to get your signature every time something needs to be done.
Once he or she is satisfied that the company is properly formed you will be sent:
- Form 10 which you will complete with names of the first directors and the intended address of the registered office (see Figure 2).
- Form 288c which will change the particulars of the secretary from the agent to your chosen name (see Figure 3).
What about the cost?
You will at this stage have to pay an amount between roughly £100 and £300 depending on the amount contained in the agent’s package. This may be an economy package containing the basic legal requirements with a simple register of the company ‘s history at say £110. It may be a regular package with additional copies of your Memorandum and Articles and a better register at say £140 or it may be a de luxe package with a brass name plate and your Certificate of Incorporation in a frame. It will be your choice but you should have more, rather than fewer, copies of the Memorandum and Articles as these may become useful when dealing with banks and other funders who may wish to see or retain a copy.
Once all the forms have been signed and sent to the Registrar of Companies and you have received your Certificate of Incorporation (see Figure 4) you are ready to trade.
Buying an existing business
The purchase of an existing company has many facets to be considered:
- What are you buying?
- Is it what you want?
- Do you only want the assets of the business?
- Is there any goodwill?
- How much are the shares?
Remember the company is a legal entity on its own so when you buy it you buy all its debts and liabilities as well as its assets. Now note the legal requirements of purchasing an existing company.
If you buy an existing business which is in a company you will not have to go through as much formality. The company is already in existence with an acceptable name. All you have to do from a legal viewpoint, therefore, is to transfer the shares into the names of your intended shareholders and submit to the Registrar of Companies the changes in directors, secretary and registered office.
You are now ready to commence trading with your newly acquired company.
ACTION POINTS AND REMINDERS
- 1.List three possible names you could choose for your company.
- 2.Decide who you will ask to be shareholders.
- 3.Consider who you would choose as co-directors.
- 4.Decide who you would like to be company secretary bearing in mind the legal obligations of that office. You may like to do it yourself.
- 5.Decide how much capital the company will need.
- 6.Have you decided how many shares do you intend to hold yourself?
- 7.Where do you intend your registered office to be? (It can be your home address, your business premises, your accountant’s address (with his/her permission) or any other address which you feel would be convenient.)
- 8.You must now find a company agent who can help you form your company.