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Limited Company Formation - How it all works  

Many IT Contractors work via their own limited companies. Your accountant will usually be able to set up a company for your, or you can set one up right away using a company formation service such as Duport (Hundreds of our visitors have used this service over the past 2 years). This guide will help you understand the company formation process in detail.

Background


Limited liability companies are the most popular vehicles for businesses to carry out their operations. This is because of (with limited exceptions) the obvious advantage of limitation of liability so that the assets of the owners of the businesses can be shielded from the risks of the businesses activities. Statistics from Companies House show that there are now more than 2 million companies on its register.


Incorporation of a limited company can be straightforward. Here, senior partner, Christopher Sykes, and commercial solicitor, Peijun Xia of Sykes Anderson LLP Solicitors take you through the process of forming a limited company with emphasis on a private limited company by shares.


Briefly, with the exception of a community interest company, formation of a company requires four documents to be lodged with the Registrar of Companies at Companies House in Cardiff, together with a fee which is £20 or £50 for the same day incorporation. Those four documents are:



  • The Memorandum of Association;

  • The Articles of Association;

  • Form 10; and

  • Form 12.

The main points of each of the four documents are as follows:-

The Memorandum of Association


The Memorandum of Association must include five clauses, namely: the company's name, its object, i.e. what it will do, its registered office, liability and capital.



  • Name. It is important to appreciate that you do not have absolute freedom in terms of your choice of name, for example, a company cannot be registered in a name which is already used by another existing company or names likely to cause offence, and use of certain specific words will require the prior written approval of the Secretary of State. It is recommended that you carry out a search of the index of names at Companies House and also a search of the Trademark Index to ensure that the proposed name is not already in use.


  • Objects. These describe the purposes for which the company is in business and what it is permitted to do. It is useful for there to be a specific objects clause which states the main purpose of the company and followed by general objects clause which pretty much permit it to undertake any business activity. Under the Companies Act 2006, a company will no longer be required to have an objects clause and its objects will be unrestricted unless expressly limited by its articles.


  • Registered Office. Every company must have a registered office. This is an official address to which formal notices are to be sent. This is not necessarily the same as the trading address of the company. Sometimes the offices of solicitors or accountants are used for this purpose and it is important that an address is chosen where official notices will come to the attention of those running the company. The registered office can be changed later through filing form 287 with Companies House.


  • Capital. The nominal capital of the company is set out here. The nominal capital figure is the maximum nominal value of shares that a company can issue. It can be increased later if necessary. Currently a public company must have a minimum capital of £50,000 of which 25% must be paid. There is no minimum capital requirement for private limited company.


  • Liability. The Memorandum must also state whether or not liability of the company is limited. Whereas private limited companies are most common, you may form a private unlimited company if you wish.

You may submit the Memorandum electronically, however, if the company is formed by conventional means, i.e. by post, then the Memorandum must be printed and signed by at least one subscriber. It is usual to have two subscribers. The subscriber must state his/her name, address and occupation and the number of shares that he or she intends to take in the company when it is formed. A subscriber automatically becomes a member of the company when the company is registered. Please do pay attention to some practical points, for example, do remember that the subscribers' signature to the Memorandum must be witnessed and the document must be dated.

The Articles of Association


This document sets out the internal management structure of the company. The Articles forms a contract between the company and all its members insofar as membership rights are concerned. They deal with matters such as the quorum required and the procedure for general and board meetings and the rights attaching to shares. The Companies Act 1985 ("the 1985 Act") provides a precedent articles for a private company limited by shares commonly known as Table A. Most companies adopt Table A with amendments.


Company formation agents have forms of Articles with 'standard' amendments for different types of company. However it is important that the Articles are checked carefully to make sure that they suit your particular requirements.


Note that under Companies Act 2006 ("the 2006 Act"), there will be a prescribed Articles of Association for a private limited company. The Memorandum and Articles of Association together are the constitution of the company. As with the Memorandum, the Articles must be printed and signed by the subscriber to the Memorandum.


Form 10


This form provides details of the first director, secretary and the registered office of the company. Under the 1985 Act a private limited company must have one director and a public limited company must have a minimum of two directors. A director can be secretary of the company provided that there is another director. Please note that under the 2006 Act, there is no longer a requirement for a private limited company to have a secretary and a public company can be formed by a single member (the relevant provisions will come into force in October 2008).


Subject to certain rules, most people can be directors of a company. The directors' name, address, business occupation, nationality, date of birth, etc. must be included in the form. Note, however, when the relevant provisions of the 2006 Act come into force, a director will be able to register a service address rather than his/her residential address on the register of directors. In other words, a director's residential address will be omitted from the public record. In the meantime this information can only be excluded if an application is made and a Confidentiality Order is granted for the director's address to be kept confidential. The Order will only be granted on the basis that the director or his immediate family's personal safety is at serious risk if his or her usual residential address was made publicly available.


Form 10 must then be signed by the subscriber to the Memorandum or alternatively it can be signed on their behalf by the solicitor instructed in the formation of the company.


Form 12


This is a statutory declaration that all the requirements of the Companies Act regarding formulation of a company have been complied with. This can be made by the person named as director or secretary on Form 10 or by their solicitors.


When completed, these four incorporation documents together with the prescribed fees are submitted to Companies House. The Registrar of Companies will examine the documents and when he or she is satisfied that conditions are fulfilled, he or she will issue a certificate of incorporation with which the company comes into being.


Alternatively you may wish to purchase a shelf company which is a company already formed by formation agents. This method offers a quicker way of getting you in business through the medium of a company. It is used quite often. However, the company needs to be adapted to suit your purposes and in particular as stated above, the Articles of Association will often need to be changed.


As soon as the company comes into being, you will need to attend to the practical issues such as registration for VAT, taking out insurance, ordering stationery etc. For help with various company matters especially regulatory issues, both the websites of Companies House and the Department of Trade and Industry now called Department for Business, Enterprise and Regulatory Reform (www.dti.gov.uk) contain a wealth of information and could be used as your first port of calls to guide you through especially regulatory minefield. of course, you should be able to find the answers to most of your questions by browsing Bytestart, our small business site.


Should you need any help with the formation of a company or any matter concerning your company, please contact either Chris Sykes or Peijun Xia of Sykes Anderson LLP Solicitors.


Please note the content of this article is of a general nature and you should not take or refrain from taking any step without full legal advice on your particular circumstances


Published on Mar 27, 2008


Further Reading