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Private limited company

Contents of this page:

Introduction


UK jurisdictions


Shareholders


One man/woman company


Directors


Company Secretary


Filing of returns and accounts


Taxation


Memorandum and Articles of Association


Shareholders Agreement


Company and business names


Registered Office and service addresses


Share capital


Invitations to acquire shares and offers of shares


Registration of mortgages and charges

Company and business record keeping


Further information

Enforcement


How to set up a private limited company


What's new items

Introduction

A relatively easy means of trading through a limited liability company has been available since the mid-19th century when it became quite common for unincorporated partnerships to convert into limited companies. There were some 3.1 million private limited companies and a total of 3.3 million companies of all types on the UK register as at March 2014 [source: Companies House Report 2013/14].

Legal personality and limited liability: a private limited company has separate legal personality and limited liability (Companies Act 2006). A private company may be limited by shares or by guarantee. Companies limited by guarantee are normally only appropriate for non-profit making activities such as a club, social enterprise or charity.

Company law is complicated. The main legislation is now contained in the Companies Act 2006 (CA) which has the dubious distinction of being the longest in British Parliamentary history. It has 1,300 sections, 16 Schedules and covering nearly 700 pages, and containing 16 schedules (although the Corporation Tax Act 2009 has in fact 1330 sections). In addition there is a large body of case law.

The following is a summary of the main aspects of company law for a non-specialist to be aware of.

UK jurisdictions

UK company law applies throughout the United Kingdom, although there are minor variances in Scotland e.g. with regard to mortgages and charges.

However, there is a separate Registrar of Companies for England and Wales, Northern Ireland and Scotland. The place of the company's registered office will determine with which Registrar the company should be registered.

Wales is not a separate jurisdiction for this purpose. However, a company with a registered office in Wales may elect to deal with the Registrar of Companies in Welsh.

Shareholders

A limited company may have one or any number of shareholders (called “members” in company law). This allows a company to have family members or outsiders to invest and have shares in the company even though they do not participate in the management of the company. This result is not readily achieved in the case of an LLP. [CA Part 8]

One man/woman company

So long as the company was properly incorporated for a lawful purpose, it does not matter that only one person is the sole director and shareholder. The company is legally a separate person from the shareholder. The courts may not go behind or “pierce the veil” of incorporation to hold the sole director/shareholder liable for company’s debts (Salomon v A Salomon & Co Ltd [1897] AC 22, 66 LJ Ch 35 HL). This is subject to the general exceptions to limited liability and directors’ civil and criminal liability.

Directors

Since 1 October 2010, a private limited company must have at least one director who is an individual. On 1 October 2010, the two year period of grace for companies already incorporated with a sole corporate director came to an end. Any company with a sole corporate director after the deadline is liable to penalties which could include fines of up to £5,000 plus daily default penalties.[CA Part 10]

An individual must be at least 16 years to be a director.

CA Part 10 sets out the detailed obligations and duties of a director as regards the company. General guidance is available at GOV.UK (see 'Running a limited company'). The Institute of Directors publish a guide to Directors' duties and responsibilities.


It should be noted that in certain circumstances, a director may incur in his personal capacity director's civil liability and criminal liability. Where possible, directors should minimise the risk by using due diligence and taking out appropriate directors' and officers' liability insurance.

Disqualification of directors: a director who has breached company law duties, and in some cases other laws e.g. certain aspects of comnpetition law, may be disqualified by the courts from holding office as a director for a period of time [Company Directors Disqualification Act 1986]. For further information, see GOV.UK 'Company Directors Disqualification'.

What's new [go to What's New page or archive for full item]:

23/03/2018 ‘First ever’ successful prosecution for false company information
A company director has been fined for deliberately falsifying information about his firms in what is thought to be the first-ever conviction of its kind.

Kevin Brewer, a businessman, incorporated John Vincent Cable Services Ltd in 2013, making the former Business Secretary Vince Cable MP a director and shareholder without his knowledge. The company was dissolved and taken off the company register after Companies House took action.

Brewer, 65, then formed another company in 2016, Cleverly Clogs Ltd, making Baroness Neville-Rolfe – the Minister with responsibility for Companies House – James Cleverly MP and an imaginary Israeli national, Ibrahim Aman, all directors and shareholders without their knowledge. Companies House dissolved the company and took it off the company register.

At Redditch Magistrates’ Court, Brewer pleaded guilty to providing false information on the company register, contrary to s.1112 of the Companies Act 2006. He was fined £1,602 and ordered to pay costs of £10,462.50 and a Victim Surcharge of £160.

12/03/2014: Cardiff company and its director fined for failing to register with the ICO
www.ico.org.uk/news/latest_news/2014/becoming-green-uk-ltd

22/10/2013: HMRC win Upper Tribunal appeal on Director’s personal liability for NIC
Commissioners for Her Majesty’s Revenue and Customs v O’Rorke
[2013] UKUT 0499 (TCC) Hearing date: 12-13/04/2013
The Social Security administration Act 1992 (“SSAA”) s.121 imposes personal liability for payment of NIC for certain officers of a company where that company is primarily liable but has failed to pay the contributions in question in consequence of a relevant officer’s “fraud or neglect”. HM Revenue & Customs (“HMRC”) issued a personal liability notice (“PLN”) to Mr O’Rorke further to the failure of L Wear & Co Limited (“the Company”), of which Mr O’Rorke was the Finance Director, to pay National Insurance Contributions (“NIC”) in the sum of GBP218,593.77 having reduced the original amount claimed in order to take into account the fact that Mr O’Rorke had resigned as director prior to the end of the period of non-payment.

Company secretary

A company secretary may be appointed but since the Companies Act 2006 came into force this is no longer mandatory in the case of a private company. However, the taks normally performed by a company secretary, such as ensuring that the company complies with Companies Act requirements to file the Annual Return, Accounts and other returns must still be dealt with.

Filing of returns and accounts at Companies House

The benefit of limited liability comes with the obligation to file accounts and other information at Companies House. Regular filing obligations include the Annual Return and Accounts.

Annual return

A company must file its Annual Return in the prescribed form made up to the return date each year within 28 days of such date. The return date is by default the anniversary of the company's incorporation, though it may be changed. The annual return contains details about the company's registered office, secretary if any, directors, share capital and shareholders . [CA Part 24]

Accounts

Directors are required by the CA to keep accounting records so that they know, on a day to day basis, the income and expenditure, and assets and liabilities, of the company.

A limited company must file financial accounts for each accopunting period ending on its accounting reference date (ARD). The default ARD is the end of the month of incorporation, though the date may be changed in certain conditions.

The accounts must be filed within 9 months of the ARD, faiing which a penalty will be automatically incurred. See late filing penalties

The accounts must conform to legal and accounting standards. Companies House make available templates for the most simple accounts applying to:

* 'dormant' companies i.e. companies which have not traded or acquired any assets or liabilities;

* small companies;

* 'micro' companies

[CA Part 15]

Audit

For all but the smallest companies, the accounts must be audited by a qualified auditor.

Subject to certain exceptions, accounts of 'small companies' are exempt from the audit requirement. To qualify for audit exemption, a company must qualify as small in relation to that financial year by meeting any two of the following criteria:

* •annual turnover must not be more than £6.5 million;

* balance sheet total of not more than £3.26 million;

* average number of employee must be not more than 50

[CA Part 16]

Event-driven filings

Certain corporate events require the company to file an appropriate form at Companies House including e.g.:

* Appointment and resignation of a director or secretary;

* change of registered office;

* change of accounting reference date;

* allotment of shares;

*  resolution to alter the name of the of articles of association;

* creation of a registrable mortgage or charge

Prescribed forms and methods of filing


Companies House has a list of paper forms which may be downloaded.

As an alternative to filing paper forms by post or personal delivery, an increasing amount of actions may be filed online via the webfiling service if the company and individual doing the filing is duly registered for the service. The advantage of doing this online is that the entries on the form are generally validated automatically, and on correct completion and submission an email acknowlegment is received.

Detailed guidance on filing requirements is available form Companies House.

For corporation tax return filing, see Taxation below.

Taxation

Unlike an LLP, a limited company is taxed as an entity separate from its shareholders. This is an important point to bear in mind when deciding whether to trade through a limited company. See Corporation tax.

What’s new item on this topic [see What’s new page or archive for full item]:

29/10/2014: Filing micro-entities accounts online—update from HMRC

Following an EU Directive, HM Revenue & Customs (HMRC) and Companies House are making improvements to the online filing experience of micro-entity companies.

From October 2014 micro-entities will have the option to file simplified accounts with HMRC. From mid November 2014 companies will also be able to send basic micro-entity accounts to Companies House.

HMRC’s online filing software allows certain companies to choose to prepare and publish simplified financial statements (profit & loss account and balance sheets) if they meet the following criteria:

* turnover £632,000 or less and either;

* balance sheet where assets total £316,000 or less; or

* average number of employees in the year is 10 or less

To file basic micro entity accounts with Companies House, companies must meet two out of the three criteria above.

Memorandum and Articles of Association

The Memorandum of Assocation of a company used to be an important document which set out the objects and powers of the company, the place of its registered office, the amount of its share capital and sometimes other constitutional matters.

However, following changes in company law prior to and in the Companies Act 2006, the Memorandum has ceased to be important and its purpose now is confined to a simple statement that the subscribers wish to form the company and (in the case of a company with a share capital) agree to take up one or more shares.

Articles of Association: the constitution of a limited company is contained in its articles of association. These deal with such matters as how new shares are issued, transfers of shares, shareholders’ meetings, appointment and removal of directors, meetings of directors and other matters. There are “model articles” which automatically apply to all new companies incorporating under the Companies Act 2006 on or after 1 October 2009 (Companies (Model Articles) Regulations 2008). The model articles for a company limited by shares or limited by guarantee may be downloaded from the gov.uk site.

A company may wish to make certain amendments to the model articles. It may also adopt completely bespoke articles instead of the model articles. It is possible to “entrench” certain provisions in the articles, i.e. the specified provisions may only be changed under certain conditions or procedures. This may be done upon incorporation or later by the consent of all the members.

The articles are a legally binding contract between the company and each of its members (CA 2006 s.33).

Shareholders agreement

In addition to the articles, the founding shareholders of a company limited by shares may wish to adopt a shareholders agreement. This is often done in the case of a smaller company, i.e. an owner-managed company in which all or most of the shareholders will be working in the company. The shareholders agreement will be private and will not appear on the company’s file at Companies House. However, technically if the company itself is a party to the agreement, it may mean that the shareholders agreement must be filed at Companies House (CA 2006 s.29).

The shareholders agreement is really analogous to the partnership agreement in the case of a partnership. It will typically deal in more detail with voting rights, what issues require a unanimous decision of all shareholders, restrictions on the right to transfer shares, finance and borrowing, distribution of profits and resolution of disputes.

If there is a complete breakdown of trust among shareholders in a small or 'quasi-partnership' company, the court may order that the company be wound up; see below.

What’s new item on this topic [see What’s new page or archive for full item]:

14/02/2014: Family owned farming company wound up due to breakdown in trust
http://www.bailii.org/ew/cases/EWHC/Ch/2014/247.html
Re Brand & Harding Ltd
[2014] EWHC 247 (Ch)  Hearing Date: 14 February 2014
The Companies Court granted a petition to wind up a family-run company where there had been a complete breakdown in the mutual trust and confidence between the family members, impeding the proper management of the company, and where it was just and equitable to wind up the company. The Court followed the leading case in this area: Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492

It will usually be better to get advice before making changes to the articles or adopting a shareholders agreement.

Company names and business names

The name of the company must end in “limited” or “ltd.” or lower case) or, for firms whose registered office is in Wales, the Welsh equivalent (Companies Act 2006 s.59).

A company must not have a name which is the same, or is treated the same, as an existing company or LLP. Clearance is needed for “sensitive” words and expressions such as “Royal” etc. A name which may be regarded as too similar to existing company or business name should also be avoided (Companies Act 2006 Part 5).

If a company trades under a name other than its full registered name, it must comply with the business name regulations.

A company is required to disclose certain particulars on its business stationery, websites etc.

For further information on the above matters, see Business and company names

Registered Office and service addresses

A company must have a registered office in that part of the United Kingdom where it is registered (see UK jurisdictions above).

The directors must provide both a “service address” and their usual residential address. Note that the residential address is not available to the public. It is usually convenient to make the service address the same as the registered office.

Share capital

The share capital represents the company's permanent funding paid in by the shareholders in exchange for their shares. Under UK law, shares must have a “nominal value” when first issued. The value may be denominated in pounds sterling or euros.

The company must receive from the shareholder cash or value equal at least the nominal value [CA 2006 Part 17 Chap.5]. The company may require more than the nominal value for the share; this extra amount is called the “premium”. Typically, the subscribers’ shares and shares issued early in the life of the company are charged at the nominal value. Later when the company has grown in value, it may charge a premium for new shares.

New shares issued by a company must be paid for in cash or in money’s worth. This may include intangible assets in the form of goodwill or know-how (CA 2006 s.582). However there are stricter rules for public limited companies.

The transaction whereby the company issues a share and receives value is a type of contract. The terms of the contract may provide for the price of the share to be paid on deferred terms. The Directors should ensure that the terms of the contract are clear, in particular setting out whether the applicants for the shares may rely on any information about the company's finance or business.

It may be appropriate for new shareholders to enter into a Shareholders Agreement (see above), and some investors, typically private equity or 'Business Angel' investors, may require the company and its principal shareholders to enter into anb Investment Agreement.

Is is the duty of the directors of the company to ensure that it does actually receive the value for the shares.

The share capital may only be withdrawn when the company is liquidated or under certain conditions. A company may of course be financed by loans. However, a substantial share capital may indicate to persons dealing with the company that it is soundly financed.

Invitations to acquire shares and offers of shares (or debentures)

A communication (whether oral, in writing or in electronic form) containing an invitation to subscribe for new shares or debentures (and to acquire or dispose of existing shares or debentures) is regulated under the Financial Services and Markets Act 2000 s.21 and must be approved by an FSA authorised person unless it is exempt. For further information on this topic, see Equity funding

Note that a private limited company may not raise funds by making an “offer to the public” of its shares or debentures. This is a right exclusive to a public company, although a co-operative society (see Co-operatives) may also issue shares to the public.

There are also regulations which prohibit any person from issuing a “financial promotion” i.e. communicating (even if not to the public) an invitation to buy new sharers or debentures (Financial Markets and Service Act 2000 s.21) unless the communication is exempt or is approved by a person authorised by the Financial Services Authority. This means that advice should be obtained before seeking to raise money in this way.

Registration of charges

Lenders and company borrowers should be aware that security in the form of a fixed or floating charge must be registered on the borrower's file if it is a company registered at the UK Companies House or is a foreign company with secured assets in the UK.
See the Companies House guidance on registration of charges.

Following consultation, the law and procedure of registration of company charges was changed and new rules came into force on 6 April 2013. See the Companies House note on the changes to Part 25 of the Companies Act 2006.

Company and other business record keeping

Corporate records

Companies must maintain certain statutory records including the following:

* Registers and minute book:
* Register of members (with an index if over 50 members unless the register operates as an index itself));
* Register of directors and secretaries (for companies);
* Register of debenture holders;
* Register of mortgages and charges on property;
* Copies of directors’ service contracts (or memorandum of terms if unwritten);
* Minutes of meetings of directors (keep for 10 years);
* Minutes of proceedings at general meetings (i.e. shareholders’ meetings) and resolutions passed (keep for 10 years).


[CA ss.113, 162, 275, 355, 743, 859]

From 6 April 2016, companies (and limited liability partnerships) are required to establish and maintain a register of People with significant control.

Accounting records


Companies must also maintain accounting records showing and explaining the company's transactions which disclose with reasonable accuracy, at any time, the financial position of the company and enable the directors to ensure that any accounts required to be prepared comply with the requirements of the Companies Act. Accounting records must in particular contain:

* entries from day to day of all sums of money received and expended by the company with descriptions
* a record of the assets and liabilities of the company;
* if the company's business involves dealing in goods: (a) statements of stock held by the company at the end of each financial year of the company; (b) all statements of stocktakings from which any statement of stock as is mentioned in paragraph; (c) except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.


Accounting records must be kept for 3 years (6 years in the case of a public company).

[CA s.386]

For further information on the company and business records which must be kept, see Business records.

Further information

For more information, read the Companies House guide on limited companies.

Enforcement

Civil enforcement

Civil enforcement of company law is generally the responsibility of the company itself to enforce against individual directors or shareholders. The company would generally act through the board of directors, though in some cases, e.g. where the directors cannot or refuse to act, action may have to be taken by one or more shareholders.

Civil penalties:late filing penalties are automatically incurred if accounts are delivered late.

Disqualification of directors: a director who has breached company law duties, and in some cases other laws e.g. certain aspects of comnpetition law, may be disqualified by the courts from holding office as a director for a period of time. For further information, see GOV.UK 'Company Directors Disqualification'. [Company Directors Disqualification Act 1986]

Criminal enforcement

The CA creates many criminal offences which are committed or may be committed if the directors fail to comply with a particular requirement, such as filing accounts or an annual return. Penalties vary according to the particular offence. Some offences attract a daily fine.

For example, failure to keep accounting records ispunishable on conviction on indictment to imprisonment for a term not exceeding two years or a fine (or both). A person guilty of the offence to file an annual return is liable on summary conviction to a fine not exceeding level 5 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 5 on the standard scale.

A due diligence defence is available in respect of the above offences, and some other offences.

How to set up a private limited company (i)

* choose a name for the company having regard to the company and business name regulations and existing similarly named businesses
* decide if you wish to adopt model articles, changes to the model articles or adopt bespoke articles
* consider whether a shareholders agreement should be drawn up and signed by the shareholders
* decide where the registered office will be
* decide who will be the directors and (optional) company secretary
* decide upon the initial share capital (this can be as little as 1p)(iii)
* complete form IN01 which may be downloaded from the Companies House website forms page (each director must sign the consent to appointment)
* consult the notes to the form or Companies House FAQs for assistance (e,g, the section requiring” prescribed particulars of rights attached to shares”
* the form must be signed either by all the subscribers (i.e. founding shareholders) or an agent. NB: only one subscriber is needed; more shareholders can be added after the company has been incorporated
* the subscribers must sign the memorandum of association (the form for this may be downloaded from the Companies House forms page)
* deliver the completed forms to Companies House with the fee (depending on the location of the principal place of business, deliver to Cardiff (England and Wales or Wales only), , Edinburgh (Scotland) or Belfast (Northern Ireland)
* receive the certificate of incorporation
* open a bank account
* complete and return corporation tax form CT41G when received from HM Revenue & Customs (ii)
* register a PAYE account with HMRC regarding the paid directors
* consider whether and when you should apply for VAT registration.

Notes:
(i) Iit is possible to incorporate a private limited company online via https://www.gov.uk/register-a-company-online
or via some company registration agents websites. Alternatively, you can instruct Legaleze to incorporate a company - contact us.
(ii) Corporation tax: customers are able to incorporate a company and register for Corporation Tax (CT) in one opration. This option is be available to all non-charitable companies and those not part of a group. The start date for the company business activities is required and the CT information can be completed at the end of the Web Incorporation process by answering six questions on one screen.
(iii) The above applies to a private company limited by shares.

What's new [go to What's New page or archive for full item]:

05/04/2016: PSC Register in effect on 6 April

The main part of the regulations requiring UK companies and limited liability partnerships to set up a register of People with Significant Control (PSC) come into effect on 6 April 2016.

Companies are required to set up their own PSC register as from 6 April 2016 and to send the information to the registrar of companies on incorporation and with their confirmation statement (which replaces the annual return) from 30 June 2016 onwards. Companies House will make PSC information available free of charge on a central, searchable public register.

Contact Legaleze for further information on the PSC Register.

29/01/2015: Companies House liable for company’s failure due to administrative error

Sebry v Companies House and another
[2015] EWHC 115 (QB)

Companies House erroneously described a company as being in liquidation. The High Court ruled on a preliminary legal issue that Companies House, i.e. the Registrar of Companies, owed a duty of care when entering a winding up order on the Register to take reasonable care to ensure that the Order was not registered against the wrong company. The duty was owed to any company which was not in liquidation but which was wrongly recorded on the register as having been wound up by order of the court.

15/01/2015: BIS publishes timetable for implementation of company law reforms

The Government has published its provisional implementation plan for Parts 7 and 8 of the Small Business, Enterprise and Employment Bill which contain a number of company law reforms.

Phase 1: Two months after Royal Assent of the Bill

Companies will no longer be able to issue bearer shares. The nine month conversion period for existing companies will start from this point.

Phase 2: October 2015

The prohibition of corporate directors, with exceptions, will come into force. The Government is currently consulting on what those exceptions should be.

Measures to aid resolution of company registered office and director disputes will come into force, as will measures to suppress the ‘day’ element of the date of birth of directors on the public register at Companies House and to speed up the strike-off process.

Phase 3a: January 2016

Companies will be required to keep a register of people with significant control from this point. However the obligation to file this information at Companies House will not come into force until April 2016 in order to allow companies three months in which to obtain and hold the required information.

Phase 3b: April 2016

Changes to Statement of Capital will come into effect.

The new confirmation statement will come into force, replacing the annual return. The requirement to file information on people with significant control at Companies House will come into effect as part of this, including the application of measures to suppress the ‘day’ of the date of birth.

Private companies will be able to opt to keep information in their registers on the public register at Companies House, and all companies will be able to put certain optional on the public register.

 

[Page updated: 05/04/2016]

 

 

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