Limited Company
A very common legal structure for businesses in the UK is the Limited Company, identified by the nomenclature of “Limited”, “Ltd.” or “PLC” at the end of the company name. A company is recognised in law as being a “legal person”, it can be sued and it can sue and has responsibilities under the law as if it were a private person.
The majority of companies are private; with the name ending “Limited” or “Ltd.” This means that shares in the company cannot be offered to the public. A public company’s name ends with “plc” or “public limited company” and its shares can be traded publicly. There are differing levels of obligations for private companies from public companies.
- Why form a Limited Company?
- Forming a Company
- Key Obligations for a Company
- VAT
- Employing People
- Business Plans & Cash Flow
- Tax & NIC
- Shareholders Agreements
Why form a Limited Company?
The option to form a Limited Company is often taken by a business as they start to grow for one very strong reason; it offers the owners of the business (the Shareholders) protection of personal assets (House, savings, investments etc) from creditors of the company. This is known as limited liability.
There is also a notion of status or gravitas; the public tend to assume (sometimes erroneously) that a company is in some way a more reliable trading partner.
When a business is growing rapidly and further investments are needed, forming a company is a convenient vehicle to bring in other investors. For their cash investments they receive shares in the company.
There may be taxation reasons for forming a company although expert advice should be sought to ensure things turnout as expected.
The protection of trading names may be an additional reason to form a company with that name.
Banks will sometimes prefer to lend to a company particularly if they can take a charge over the assets of the company as security for the loan. It is in this area that in practice for many new companies limited liability is ineffective; banks or other lenders may insist on personal guarantees from Directors of the company. Limited Liability may also not protect Directors if they allow they company to trade whilst knowing it is insolvent or trade in a knowingly fraudulent manner.
The very advantageous benefits of trading as a company do not come without a cost; there are serious obligations to periodically provide information about the state of the company, and this information is in the public domain.
Back to topForming a Company
In essence an individual person or a group of individuals agree to form a company. The participants also agree to provide some funds to the company in return for a proportionate stake in the company. These funds are usually known as equity investment, and for most companies the participating individuals receive share certificates in return and are therefore known as shareholders. Another way of structuring a company’s ownership is limited by guarantee, but issuing shares is by far and away the most common.
So having identified potential shareholders (Note that private companies can not offer shares to the public) and agreed the individual equity investment amounts; the legal process is summarised as follows:
- Submit Documents and Fee to Companies House
- Prepare a Memorandum of Association
- Prepare the Articles of Association
- Complete Form 10 – Identifying the initial Directors, Company Secretary and the Registered Office.
- Complete Form 12 – A Declaration on Application
- Registrar of Companies Issues Certificate of Incorporation
- Hold the First Board Meeting
The Memorandum of Association
All companies must have a Memorandum of Association that must deal with the following matters.
The Company Name
The name of the company must be given, including the ending of Ltd. or Limited (or the Welsh equivalent). Companies House will refuse a name if the name is already in use, if it is offensive or contains “sensitive” words, such as Royal, Crown etc. A name which is similar to an existing name, may not be refused registration, but the other company could object to The Secretary of State for Trade and Industry and ask for the new name to be changed, or the other Company may bring a “passing off” legal action in the Courts to seek a change and perhaps damages if it has been negatively impacted. A Company name may be changed by a special resolution of its shareholders.
Domicile
The location of the Registered Office of the Company must be stated, either England and Wales, Scotland or Northern Ireland. It is also possible to state that the domicile is Wales (rather than England and Wales) allowing for some documents to be delivered in Welsh language. A domicile cannot be changed.
The Objects and Powers
A company must state its Objects – the reason for its existence, the activities it will undertake. Additionally it must list its Powers, such as the power to borrow money, sell parts of its business, or buy a new business. This can be an important area and if unusual transactions are contemplated by a business it is good practice to check the Objects and Powers clauses before hand. The Objects and Powers may be changed by a special resolution of the shareholders.
Statement of Liability
Every company must state that the liability of the shareholders of the Company is limited.
Authorised share capital
The amount of the authorised share capital must be stated. It is usual for the Authorised amount to be greater then the amount initially to be issued, to allow for further issues in the future. The statement must give the number of the shares and the nominal (par) value of each share i.e. 1000 shares of £1.00 or 4000 shares of £0.25 . Authorised share capital can be increased by an ordinary resolution. A private company can exist with a single share issued to the only shareholder; provided a company secretary (who is not that person) also exists.
The Articles of Association
All companies must have Articles of Association that deal with the rules and regulations of the company, and particularly how shareholders and directors will interact. The shareholders agree the articles. It is usual to take as a basis what is known as Table A from The Companies Act 1985. This is a pro-forma set of rules and regulations that can be modified by the shareholders to suit their needs. The Articles may be changed by a special resolution of the shareholders.
Form 10 – the First Directors and Secretary and Intended situation of the Registered Office
This form gives the names, addresses and consent of the first Director(s) of the Company as well as the Company Secretary. Note that in the case of a single Director company, the secretary must be a different person. Subsequent changes or additions to Directors and Secretaries must be notified to Companies House on specific forms (288a for appointments, 288b for resignations and 288c for changes of personal details) within 14 days of appointment or change.
The registered office of a company is the address to which legal documents can be served. It can be the address of the business, it can be an accommodation address, and often it is the address of the Company's accountants or solicitors. The address must appear on all business letters and order forms.
Form 12 - The Declaration
A Director must give a declaration on this form that all aspects of the Companies Act 1985 with respect to registration have been complied with.
Certificate of Incorporation
The Company comes into existence when Companies House issues the Certificate of Incorporation. The certificate states:
- The Company Name
- Date of Incorporation
- A unique company number
Trading as a company can commence from the date of incorporation. Any transactions entered into before that date is the personal responsibility of the person making them, not the company.
Hold the First Board Meeting
A first board meeting after incorporation should be held to deal with some administrative issues, such as the Directors agreeing to open a bank account and who will be signatories, agreeing responsibilities, agreeing contracts of employment etc. Things that need to be in-place to before trading starts.
Companies House provide a very helpful web site giving more details on forming a company as well as responsibilities of Directors and Secretaries at www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml
Back to topKey Obligations for a Company
Registers
A private company must keep the following registers:
- Register of directors
- Register of secretaries
- Register of shareholders
- Register of directors’ interests in shares
- Register of charges (mortgages) of the company
Annual General Meeting
Unless there has been an elective resolution to dispense with an AGM, one must be held within 18 months of incorporation and then one every calendar year, with no more than a 15 month gap. Minutes must be kept.
Annual Return
Each year the annual return must be filed with Companies House. It sets out information on the share capital, shareholders, directors and secretary of the company.
Filing Statutory Accounts
A company is obliged to file a set of statutory accounts with
Companies House each year. These accounts are in the public domain and
can be inspected by any one with an interest. The format of the
accounts is determined by The Companies Acts and can vary depending on
the size and circumstances of the company. Smaller companies have less
onerous obligations than larger ones; additionally smaller companies
can have an exemption from having an independent audit
It is strongly advised that professional advice is sought in preparing
statutory accounts and in determining the appropriate accounting
periods and dates.
Informing Revenue and Customs
You are obliged to inform HM Revenue and Customs as soon as the company exists (incorporated) by contacting your local tax office. They may well send a form requesting additional information. The company is required to file a self-assessment corporation tax form at the end of its financial year.
Again it is strongly advised that professional advice is sought in preparing this return which is known as the CT600 return.
The Revenue and Customs web site provides additional information at www.hmrc.gov.uk/businesses/tmacorporate-tax.shtml
Back to topVAT
If or when the turnover of the Company (the value of your sales to your customers) exceeds a particular level, you may need to register for VAT purposes. The registration level varies from time to time (usually at the time of a budget) so see Tax Rates and Limits elsewhere in the ESA for current levels, or go to the Revenue and Customs site at www.hmrc.gov.uk/businesses/ and click on VAT. Operating VAT should not be treated trivially and a full discussion with your professional advisor is strongly recommended.
The operation of vat is in principle simple:
- On sales to your customers you charge and collect VAT – known as OUTPUT TAX
- You deduct the VAT you have been charged by your suppliers – known as INPUT TAX
- You pay to or receive from HM Revenue and Customs the difference
Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The most common approach is to use the standard VAT scheme; however HM Revenue and Customs allow some special schemes i.e.
- Cash Basis Scheme
- Flat Rate Scheme
- Annual Scheme
For the standard scheme VAT is accounted at the tax point date shown on invoices raised or received.
The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out.
The Flat Rate scheme relieves that business of having to record the VAT on every individual sale and purchase transaction, but allows the VAT payable to be calculated as an agreed percentage of the VAT inclusive turnover. The business is still required to provide VAT invoices to all its customers.
Certain conditions must be fulfilled before you can use the Cash Accounting or Flat Rate schemes, please check with your Professional Advisor before making a decision. VAT returns are required to be sent to HM Revenue and Customs periodically. The most common is quarterly, however in special circumstances monthly returns can be filed or a single annual return (Annual Scheme). Note that the Annual scheme does not mean you only make a VAT payment once a year, an agreed amount is paid quarterly and the final payment must reflect any correction to come to the amount shown on the annual return.
Again proper advice should be sought before moving to one of the schemes.
Back to topEmploying People
A company can employ people; you will need to inform Revenue and Customs that you are doing so. A helpful web site is www.hmrc.gov.uk/employers/first_steps.htm Legislation with respect to the obligations and relationship between Employer and Employee has been growing considerably over the last years. An employee must have a signed contract of employment; proper care must be taken to ensure there is a safe and healthy place of work and that the employee is properly trained in working safely. It is good practice and commonly expected to have in place an induction program for a new employee as well as an appraisal process linked into development and training programs. A good place to get some advice in this area as well as other business support is the local Business Link office or the Business Link web site www.businesslink.gov.uk/
Back to topBusiness Plans and Cash Flow
Just as with any business it is wise for a Company to ensure that there is a plan before starting trading, you will need to understand when your customers will be paying you and when you will need to be paying the suppliers. A business plan and a cash flow forecast are essential. A business plan is a blue print for your business, and should layout how the company will achieve its business goals. It is sometimes seen as something only to be written if seeking finance and whilst it is fundamental to that process it is also fundamental to keeping your business going in the direction you wish. It does not necessarily have to be a lengthy document, as long as it conveys what the company is doing and how it is going about it. There is much help available in preparing business plans and a good place to start may be talking to your bank. But to help you think through the issues go to the Business Planning section of the ESA and perhaps use the downloadable tool.
A cash flow forecast deals with knowing when you will receive cash and when you will need to pay out cash and when you might need to find additional cash to keep going. IT IS VITAL. Again your professional advisor or bank can help, but you can look at our Cash Flow Forecast section of the EAS and even use the tool provided.
Back to topTax and National Insurance
Aside from VAT there are two other main types of taxation a company must deal with, Corporation Tax and Income Tax.
Taxable profits from a Company are subject to Corporation Tax. Taxable profits basically are calculated by deducting business expenses from the sales income.
Where the Company employees people, then the Company must operate PAYE (pay as you earn system); deducting at source the Income tax and national insurance its employees owe and paying them over to HM Revenue and Customs. Employee costs are deducted as business expenses and this includes the employer’s contribution to national insurance for all employees.
Residual income after Corporation tax can be paid out in the form of Dividends to shareholders, subject to certain regulations specified in the Companies Acts. Dividend income in the hands of the shareholder can come with advantages, particularly as no national insurance is payable. Smaller companies, especially ones with a single shareholder have taken advantage of this; however there are some particular potential pitfalls that need to be watched. IR35 regulations can impact those that contract to use their personal skills (IT Developers, Web designers) and if HM Revenue and Customs feel the Company is not really taking trading risks, then an imputed income tax and national insurance is imposed on the shareholder.
It must be stressed that taxation can be a complex and time consuming area; it is strongly advised appropriate professional advice is taken.
Back to topShareholders Agreement
When more than two shareholders exist it is common and good practice to have a shareholders agreement. This is a legal agreement between the shareholders setting out how the company will be managed and run and the relationship and influences between the shareholders themselves.
Many things can be put into the agreement and they potentially can have impacts both in law and in taxation. It is wise therefore is use a properly qualified professional advisor to supervise and draw up the agreement.
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