The rules for incorporating a company in England and Wales are set out in the Companies Act 2006 (CA 2006). A new business may be set up as a company, or an existing business (already trading as a sole trader) may be incorporated as a company. One of the main benefits that the company structure offers versus the sole-trading model, is the limited liability. The CA 2006 provides for the incorporation of three types of company:
- Company limited by shares (public or private company).
- Company limited by guarantee (private only).
- Unlimited company (private only) The most common form is the company limited by shares.
So, where do you begin? Every story starts at the beginning, right?
Not if you’re founding a business. That starts with a vision of where you want to take your idea, in other words, your story starts at the end. What’s your main goal? What do you need to achieve it?
Your business plan
If you’re reading this you already have a business idea you think can make it in the market. The first thing you need to do therefore is put together your business plan. It’s a good idea to try to define your objectives along the way to achieving your goal. Whether you want to make the world a better place or to become a millionaire in five years’ time (or both) you should work backwards from your goal, thinking about everything you need to do to get there. This will shape all the decisions you make early on. The Prince’s Trust does a good pro-forma business plan you can start with, which is available here.
Your business name
It’s the first thing people will ask you when you’re starting out; it’s the word(s) people will put intosearch engines; and it’s the word(s) you’ll have to sell to investors. So, no pressure then. It’s entirely up to you, but the name:
- cannot have the same name as another company, so a clearance search in the Companies House Register is a good place to start. Also consider that some words and symbols are considered to be the same. For example: "Make £££ Limited" may be considered the same as "Make Pounds Limited";
- cannot contain certain restricted or sensitive words; some words will require approval from the Government or a regulatory body -for example using the word ‘English’ or ‘Banking’ would require approval;
- cannot imply a connection with a public authority; or cannot be offensive or potentially constitute a criminal offence.
You can check out the Government’s guidance on company names here. You should also ensure that your company’s name does not infringe or dilutes someone else’s intellectual property. It is therefore advisable to conduct a trademark clearance search of your proposed name, including the Trade Marks Registry as well as web search engines and social media pages. You may decide that you want to trade under a different name to the name your company is registered with, this is called a "trade name". In this case, your business name should follow the company’s name guidance and your trade name the trademark rules and regulations. Please also remember to make sure that on official correspondence, invoices and somewhere on your website it's clear that "X" is the trading name of "Y Limited".
What type of company?
Whether you’re looking to attract investment, hoping to grow and sell your business, or float on the stock market, you’ll probably be using a private company limited by shares to carry on your business. The work-horse of the economy, private limited companies offer the key advantage of being able to scale up easily and in a way that your creditors, clients and investors can trust. You can’t float a sole-trader or a partnership on the stock market, after all. A few important things to keep in mind about companies:
- You can easily sell shares to investors, who are used to buying shares in start ups and gaining tax relief on those investments.
- Your company pays corporation tax and you pay income tax, but a company may well offer tax advantages overall.
- On the other hand, the extra admin means you may need to instruct accountants to deal with expenses, corporation tax, PAYE and VAT unless you feel confident in dealing with these yourself.
- It’s also important to note that if your company makes a loss, this cannot be offset against your other personal income.
The company is a separate legal entity from you as shareholder or director, so your liability is limited to whatever assets you have put into the company (i.e. the money you pay for shares). The quid pro quo for limited liability is that your accounts are public, as your creditors need to know you’re going to be able to pay back their money. There are other types of structure you can use for your business. Professional firms, for examples, are often Limited Liability Partnerships, while micro businesses are often sole-traders or partnerships. This guide focuses on private limited companies as the most common and appropriate entity for start-ups, but if you would like to discuss the other options available, please contact us.
Memorandum of Association.
The incorporation process refers to the Memorandum of Association. Historically, a company has needed shareholders to sign a ‘memorandum of association’ to show that they agree to form a company. When going through the process of incorporating a company online, shareholders can now do this electronically.
Articles of Association.
Articles of Association or "articles" are the constitution of your company, essentially the contract between shareholders and the company, setting out the obligations between them. You can either incorporate a company with model articles (i.e. the pro-forma articles that the Government provides), available here, or bespoke articles drafted for your business by a solicitor. Our team of experts can help draft bespoke articles (for example if you or a potential investor would like more than one class of share). If you are interested in this service, please contact us. For most start-ups, where future revenue is uncertain, and you don’t want to incur lots of costs up-front, online incorporation with the model articles makes the most sense. The model articles are commonly used and will be suitable in many circumstances. And if you want to change the articles later, you can do so.
Registering for Corporation Tax.
When you incorporate your company online you will be required to register for a unique taxpayer reference number for corporation tax purposes. As companies are separate legal entities, they pay corporation tax which is separate to any taxes that shareholders or directors pay as individuals. Companies therefore need a unique taxpayer reference number in the same way that an individual registered for self-assessment does. Our premium package offers this service.
Setting up a business bank account.
After you’ve incorporated your company you’ll need a business bank account to ensure you can get paid and also pay your costs and taxes. In the UK this is relatively simple to do. It’s common for banks to charge fees for business accounts so look for the best deals online, you should be able to get the first six months to a year free, depending on the size of the company and the number of initial directors.
Companies House.
If the filed documents are in order, the Registrar will issue a certificate of incorporation with the official unique company number (note that this is not the same as your corporation tax number) and the date of incorporation. This certificate is evidence that the company is properly constituted and that the requirements under the CA 2006 in respect of registration have been complied with.
On incorporation, the subscriber(s) to the memorandum are deemed member(s) of the company.
The director(s) and secretary (if any) named in Form IN01 are deemed appointed respectively as director(s) and secretary of the company. The subscribers are a body corporate that can exercise all the functions of an incorporated company from the date of incorporation (section 16, CA 2006). It is important that the prospective owners or directors of the company do not trade on behalf of the company before the certificate of incorporation is issued because any person who purports to act for or as agent of a company before the company has been formed will be personally liable for any contract they make on behalf of the company. Once you’ve incorporated your company, you’ll be able to see your company online by searching the Companies House Register. This is public and helps potential creditors, suppliers, clients and investors to check that you are who you say you are.
Company Registers
It’s important to note that while Companies House maintains the Companies House Register, this register is different to your ‘company registers’. Put simply:
- The Company’s House Register is the public record which you as director or secretary are responsible for maintaining. In most cases, not filing a document at Companies House will not affect the validity of such document. For example, failure to file the appointment of a director will not mean that the director has not been appointed. There are likely, however, to be fines and offences if you do not make your filings on time.
- The company registers are (unless you elect otherwise) company documents which must be stored at your Company’s registered office and include the register of members, register of transfers, register of debentures, register of directors, register of company secretaries. It is important to keep these registers up to date, particularly the register of members, which records who your shareholders are. The register of members is not published online, but legally speaking this is one of the most important documents in relation to your company: a shareholder is not legally a shareholder until their name is entered into the register of members. If this is not maintained it can have serious consequences for the Company and the shareholders.
Shareholders’ Agreement.
Assuming you’re happy using the model articles for your company, one of the first documents that small companies want help with is the Shareholders’ Agreement. As the name suggests, this is an agreement between shareholders about how they will behave in relation to the company. These mirror the articles but are private documents, so you can keep certain arrangements confidential. For example, you can include provisions:
- determining how the chairman of the board will be appointed;
- restricting what shareholders can do after they leave the company;
- how and when shareholders can transfer or sell shares and how shares will be valued;
- what issues require the shareholders to agree unanimously; and
- determining what happens on death of a shareholder. If you would like help drafting a shareholders’ agreement, please contact us.