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.

Example

Acceptable	–	Chapman Security Ltd.
Not acceptable	–	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.

Example

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.

Example

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.

Example

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.

Example

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.

DECIDING YOUR SHARE CAPITAL REQUIREMENTS

You will recall from earlier in the chapter that the Capital Clause forms part of your Memorandum. In it you state the amount of your authorised capital or nominal capital. This is the maximum amount of shares you can issue to your shareholders.

Example

Your authorised capital is 1,000 ordinary shares of £1 each. Two are normally issued to start with and these are transferred from the agent to yourself and your other shareholder. (It is possible, but not unusual, for a company to be formed with only one shareholder.) This leaves a further 998 shares to be issued. You may decide to issue 498 of those, split between yourself and the other shareholder so that you finish up with 400 and he holds 100. This is known as issued or paid up capital. This gives you control of the company (more fully described in Chapter 4).

	You	Other
Subscriber shares	1	1
Allotment	399	99
Final shareholding	400	100
Authorised capital still to be issued	500 shares

Note that the authorised capital of a company can only be changed or increased in accordance with the Articles of the company.

The Articles of Association

The Articles of Association have not been defined yet, but:

• the Memorandum defines the powers and objectives of the company
• the Articles describe the procedure by which the powers are to be exercised or the objects of the company achieved.

This is necessary because of the company’s artificial existence and it is necessary to define the powers of the shareholders and the directors and the manner in which they can be exercised.

ISSUING SHARES

The concept of issuing shares is simple. Shares have a nominal value of, say, £1 each and when they are issued to a prospective shareholder he pays £1 for them. That is the limit of his liability towards the debts and obligations of the company.

Example

• 1.You buy 500 shares of £1 each for £500 and the money goes into the company’s bank account as part of its assets.
• 2.You will not have to buy any more if you do not wish but the implications of doing so are discussed in Chapter 8 under raising money.
• 3.This capital will remain fixed within the company and will be repayable to you as a shareholder only when the company is closed down (when you will receive, for each of your shares, the value of the company’s assets divided by the number of shares issued) or in certain circumstances, when the company may wish to buy back the shares from you.
• 4.You are, of course, at liberty to sell the shares to another person and this can be at any price you negotiate between you and not necessarily at the £1 you originally purchased them for.

Control

The control of the company, which is the power to decide who are the directors and what the business does, rests with the shareholders. Each share they hold gives them a vote or say in the affairs of the company and therefore the more you hold the greater the say. It follows that if you hold more than half the shares you will have more than half the say and 51 per cent of the shares in a company gives you effective control of it.

In practice the shareholders normally elect the directors and it is they who decide on the day to day running of the company. Only in exceptional circumstances will the shareholders exercise their right to overturn a decision of the directors. There are some decisions that require 75 per cent of the voting members, but these are rare and fundamental to the organisation of the company.

It is therefore important to issue your shares with these thoughts in mind. If you want complete control of your company you must have more than 75 per cent of the shares.

The issue of shares in a new company is done by means of an allotment of the shares to the first shareholders. A Form 88(2) showing how they have been allotted must be submitted to the Registrar of Companies (see Figure 5). This shows the total number of shares allotted, the names and addresses of the shareholders and must be signed and submitted by a

director or the secretary within 21 days of the allotment. There is no limit to the number of shareholders except that there cannot be more than the number of shares in issue. However, joint shareholders are permitted.

The receipt of the shareholder’s money is acknowledged by the preparation of a ‘share certificate’ (see Figure 6). This gives ownership or title to the shares which must be passed back to the company for re-issue if the shares change hands.

When shares change hands it is done by means of a stock transfer form (see Figure 7) which is lodged with the company secretary, who will then issue the certificate to the new shareholder.

Case study: Dean wants it all

Dean wanted to trade through a company because he would have to hold quite a bit of stock in his security business and was worried about the liability he might have if it did not move quickly enough. He has been in touch with a company registration agent and has decided to call his company Chapman Security Ltd. The name has been cleared by the Registrar as there is no similar name on the files. He has discussed shareholdings with his accountant and being unmarried has decided to hold most of the shares himself. He has persuaded his father to hold one share and be a director and his mother to hold the post of Secretary to the company. He will have the rest of the shares, namely 999 shares, which gives him complete control of the company and ensures that his statutory obligations have been met. He pays in his £1,000 (he is paying £1 for his father’s share as well) and he’s ready to go.

Case study: Hannah and Usha share it

Hannah and Usha felt they had not known each other long enough to form an ordinary partnership with the prospect of being responsible for each other’s debts. On advice they decided to form a company, having half the shares each and taking out money, when available, and sharing it equally. The company was set up with £2,000 of ordinary shares of £1 each and they each put in £1,000 to purchase their half of the share capital. Hannah has agreed to be company secretary as well as a director.

Case study: Harry learns how to spread the load

Harry has always been his own master and controlled the finances of his own enterprises. But he had to come to terms with the concept of forming a company in which each of the buyers of his apartments had one share each in the company. Like all property transactions the sales took some time and he had to hold some of the shares himself until the sales actually took place. There were eleven apartments and so the company was formed with an authorised capital of £100 but only eleven shares were issued. As the sale of each apartment was completed part of the deal was that the owners purchased one share and became part of the management committee whose responsibility was to manage the communal areas of the whole property. These were the outside painting and decoration of the building and perhaps more importantly the roof. It also included the hallways, the stairs, the gardens and the parking area. A form of annual subscription would be devised by the committee to cover all these costs. There would therefore be eleven directors and one of them would become Secretary when the committee agreed.

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.