FORMATION, CLASSIFICATION AND

REGISTRATION OF COMPANIES
S7 Companies Act – to form a registered company, all that is required is one person
and a lawful purpose

S16(2) – once the formalities are completed correctly, the registrar of companies
issues a certificate of incorporation whereupon the company comes into existence

When there is more than one owner, both owners have complete flexibility as to the
amount of money that they put into the company in the form of share capital (eg
1000 £1 shares = £1000) and the value, called the nominal value, they wish to
assign to the shares (eg £1 per share).

While uniformity of identity between shareholders and directors is very common in

small companies, that need not be the case. Indeed, one of the advantages of
incorporation is that it allows the ownership of the company to be separated from the
management of the business. It is possible to be a shareholder without being a
director, and vice versa.

Key players of company law:

 Directors – provide management of company
 Shareholders – owners of the company with ultimate control of the company
through their shareholdings
 Stakeholders
 Employees & creditors – employment, contract, insolvency law, not company
law

Incorporation brings with it a changed set of legal roles and responsibilities for
directors and shareholders.

ALTERNATIVE STRUCTURES TO THE REGISTERED COMPANY

SOLE TRADER
 Carrying on business as an individual
 Low issued share capital

Advantages:
 Privacy – no obligation to register any information (business, financial
position) with public registry
 Independence
 Minimal formalities

Disadvantages:
  Unlimited liability – personal assets at risk
 Personal income tax
 Limitations in attracting investment

PARTNERSHIP
S1 Partnership Act 1890 – the relation between persons carrying on business in
common with a view to profit

 Governed by Partnership Act 1890, but most partnerships draw up their own
partnership agreements which override the Act
 Not separate legal entities
 Partners do not have limited liability

Advantages:
 Business affairs entirely private, no obligation to register financial or
partnership information at public registry
 Independence
 Few formalities – flexibility
 More capital (compared to sole trader)
 Partners to share management load and tasks

Disadvantages:
 Unlimited liability – partners personally liable with their assets
 Personal income tax
 Dissolution when one partner leaves/dies

LIMITED LIABILITY PARTNERSHIP

 Hybrid between company and partnership
 Body corporate with legal personality separate from its members
 Registered at Companies House
 Governed by Limited Liability Partnerships Act 2000

 To register LLP, there must be two or more persons associated for carrying
on a lawful business with a view to profit
 LLP does not have a share capital – no shareholders
 Details of registered office and members must be provided

 The constitution of LLP (the members’ internal agreement dealing with such
matters as the division of management powers and profits) is not registered
 Members of LLP retain some of the essential privacy of a partnership
 A considerable level of financial disclosure is required

 The liability of members is limited to the amount they have agreed internally to
contribute to the debts of LLP
  On insolvency, all the corporate insolvency regimes are available and
applicable to LLP, which remains liable to its creditors to the full amount of its
assets
 However, unlimited liability in tort of personal negligence (Merrett v Babb)

COMPANY
Advantages of registered company:
 Separate legal status of company
 Limited liability of shareholders
 Possible separation of ownership and management
 Perpetual succession
 Permits investment and growth
 Easy transfer of “ownership”
 Tax regime can be beneficial

Disadvantages:
 Formalities
 Company law restrictions
 Some regulatory costs
 Contracting around limited liability – can be excluded by contract

REGISTRATION OF COMPANY

S9(1) CA – an application for registration must be accompanied by a memorandum

of association

S8(1) – the memorandum is a short prescribed document stating that the subscribers
wish to form a company under the CA 2006 and agree to become members of the
company and, in the case of a company with a share capital, they agree to take at
least one share each

Previously, the memorandum was an important external-facing document telling the

outside world the key facts about the company. Now, the memorandum simply
records the identity of the original founders of the company and indicates how many
shares they took on formation.

REQUIREMENTS OF FORMING A COMPANY

S7 CA – At least yourself (as a shareholder)

Application for registration to Companies House:

 Name
 Address of registered office
 Whether limited liability – by shares or guarantee
 Type of company – public or private (s9(2))
  Statement of initial capital and initial shareholdings (ltd by shares), statement
of guarantee (ltd by guarantee)
 Statement of company officers (Directors, Company Secretary)
 Statement of compliance (with formal requirements)

Company’s Articles OR Model Articles (by default)

Memorandum of Association (signed)

EFFECTS OF REGISTRATION

S15 CA – once all the required documents are submitted together with the
registration fee, and assuming there has been proper compliance with the formalities
and no problems about the company name, the registrar issues a certificate of
incorporation of the company which is conclusive evidence that there has been
compliance with the requirements of CA in respect of registration

S16(2) – from the date of incorporation mentioned in the certificate, the subscribers
to the memorandum, together with such other persons as may from time to time
become members of the company, are a body corporate

Once incorporated, the company is a separate legal entity from the shareholders,
which means that it is the company which conducts the business, owns property,
hires employees, incurs debts, makes profits etc.

The separate existence of the company means that the membership may be
constantly changing (eg shareholders transfer or sell their shares) but the business
of the company is unaffected. The members enjoy limited liability and are not
required to participate in the management of the company, which is a matter for the
directors.

COMPANIES LIMITED BY SHARES

 Liability of its members limited by its constitution to the amount unpaid on the
shares held by them (s3(2) CA 2006)
 If company owes £25,000 debt to creditor, A has taken £70 shares, B has
taken £30 shares, A and B’s liabilities limited to £70 and £30 respectively due
on their shares
 If A and B have already paid the sums due at the time the company issues
shares to them, no further payments can be required from them to meet the
company’s liabilities to its creditors

COMPANIES LIMITED BY GUARANTEE

 Liability of its members limited by its constitution to such amount (usually very
small) as the members undertake to contribute to the assets of the company
in the event of its being wound up
  Does not have a share capital (no contribution from members required until
winding up) – no shareholders, only members
 Given the absence of share capital, such companies must be private and not
public
 Predominantly not-for-profit and are widely used for community and charitable
purposes

PRIVATE AND PUBLIC COMPANIES

S4 – definition of private and public company
 Private – company which is not a public company
 Public – company limited by shares/guarantee, has a share capital, whose
certificate of incorporation states that it is a public company, and which has
complied with the requirements of Companies Acts in relation ot public
companies

Differences (s4(4)):

PRIVATE COMPANY PUBLIC COMPANY

(s755) cannot offer securities/shares to Offers securities/shares to public
public

Regulation of private companies not as Regulation of public companies is stricter

strict
 Do not cross the threshold which
would justify and require
additional regulation
Can trade immediately on incorporation
without need for trading certificate
 There is no minimum share
capital
Ltd
 Because of the possibility of offering
its shares to public
 Public interest is taken into
consideration, to protect investors
 Additional req: minimum capital,
fuller accounts, more formal
corporate governance
Cannot commence trading without a
trading certificate issued by registrar
 Nominal value of company’s share
capital must not be less than
authorised minimum: £50,000 (s763)
Plc
 Cannot qualify for accounting and audit
exemptions available to small/medium-
sized companies

Shorter period within which to deliver their

accounts to registrar

Penalties for late filing are more substantial

Requires only 1 director (s154) Must have at least 2 directors

Must have a company secretary (ss270,
271)
Not required to hold annual general Must hold an annual general meeting
meetings (s336)

Expected to use written resolutions May not use written resolutions (s281(2))
rather than hold meetings (s281(1))

GROUPS OF COMPANIES
It is common for larger enterprises to organise their affairs through a group of
companies made up of a holding company and subsidiaries and myriad
combinations thereof.

S1159(1) – defines a company as a subsidiary of another company, its holding

company, if that other company (holding):
(a) Holds a majority of the voting rights in it, or (voting power)
(b) Is a member of it and has the right to appoint or remove a majority of its board
of directors, or (control over board)
(c) Is a member of it and controls alone, pursuant to an agreement with other
shareholders or members, a majority of the voting rights in it, or if it is a
subsidiary of a company which is itself a subsidiary of that other company
(where a member does not have control of a company on paper, but does
have control as the result of some agreement with other shareholders)

A company is a wholly-owned subsidiary (s1159(2)) where Company A (holding

company) is the only shareholder in Company B – B is a wholly-owned subsidiary.

Reasons for group structures:

 Administratively convenient and economically efficient to divide activities
between subsidiaries
 It may make geographic sense depending on nature of business
 Financially appropriate – allowing assets and liabilities to be allocated
efficiently and it may facilitate external borrowing