This short guide provides an overview of some of the main legal requirements that will need to be complied with or considered on setting up a business in England and Wales.
It is crucial to structure your business in the right way from the start, in order to keep the costs down and to ensure the best possible platform for your business. Choosing the right legal structure for your business will affect how you operate, your capital commitments and your liabilities.
Some legal structures are better suited to certain types of businesses and each type has distinct advantages and disadvantages.
The principal forms of trading entities in the UK are partnerships, limited liability partnerships, private limited companies and public limited companies. There are other ways of doing business in the UK such as sole trader, franchising or licensing but these are not covered in this guide.
2. Trading entities
A partnership exists where two or more persons carry on business together with a view to making a profit. There is no formal procedure to form a partnership or legal requirement for anything to be in writing, although naturally, it is highly advisable to agree in writing how the partnership will operate. There are no presumptions as to how the partnership should operate and it is therefore a flexible vehicle for the partners to set up and run as it best suits their business model.
In the absence of anything in writing, the Partnership Act 1890 will apply to regulate the partnership under the Act. All profits and assets of the partnership are divided equally amongst the partners and the partners shall be jointly and severally liable for all the debts and obligations incurred by the Partnership. The important point to bear in mind here is that a partnership vehicle is not a separate legal entity in law. Consequently, any private agreement or apportionment between the partners will not affect their joint and several liability.
It is important to note that the liability of partners in a partnership is unlimited and that a partner is personally responsible for any debts that the business as a whole incurs.
Further, in relation to taxation of the partnership each partner is treated as self-employed and must file a personal tax return each financial year. In other words, the partnership is transparent for tax purposes.
There are a number of advantages of a partnership:
- It is simple to form.
- Simple, un-audited accounts.
- Low National Insurance
- Total tax payments can be lower compared to doing business in a private limited company unless the earnings are high.
- It is possible to transfer the business to a private limited company later (there may be some stamp duty payable on the transaction).
- Raising capital can be facilitated by introducing new partners.
Some of the disadvantages are:
- Each partner is personally liable for all the business debt of the partnership (apart from tax on profits).
- Fewer social security benefits.
Limited Liability Partnership (LLP)
The formation of an LLP is more complex and costly than that of a partnership and similar to that of a private limited company (see below) which is subject to a statutory requirement to file certain forms with Companies House. Furthermore, like a limited company, there are statutory obligations which those in the LLP (“members”) must adhere to.
The LLP retains the flexibility of a traditional partnership as opposed to the rigid structure of a private limited company. Personal liability of members is limited as the LLP is a separate legal entity in law. Consequently, there is no joint and several liability on the part of members for contracts entered into by the LLP. However, there are “claw-back” provisions if the LLP ceases to trade; for example, a liquidator may in certain circumstances recover amounts withdrawn from the LLP by its members. Therefore, the members of a LLP can be more exposed to liability than they would be with a private limited company. Members can also be personally liable in tort or for their own negligence.
There is no restriction on the number of members that can be admitted to an LLP but a minimum of two of them must be “designated members” – akin to the role of a director – and the law places extra responsibilities on them. Should a LLP reduce its members to a single member, that member is deemed the designated member.
Members enjoy tax transparency as if they were partners in a partnership. Likewise, new members can bring new capital to the LLP and investors can therefore be involved in the management without losing the benefit of limited liability. However, the admittance of a new member is treated as if the existing members are making a disposal of part of the assets of the LLP for purposes of capital gains tax and therefore a tax charge may arise.
Some advantages are:
- The members enjoy tax transparency as if they were partners in a partnership.
- The members have limited liability like shareholders and are not jointly liable for contracts entered into by the LLP.
- A LLP is not subject to restrictions on member numbers.
- Investors can be involved in the management without losing the benefit of limited liability.
Many of the disadvantages are the same as with limited liability companies. In addition to this:
- Members may still be personally liable for their own negligence and tort under certain circumstances.
- LLPs are subject to “claw-back” provisions in case of closure, which leaves the members more exposed than shareholders and directors.
- Bringing in new members to raise capital will lead to each member existing being treated as having disposed of a proportion of the assets of the LLP, which may result in capital gains taxation.
- Difficult to float a LLP.
- The LLP will have to appoint at least two designated members who have a number of responsibilities regarding compliance in relation to preparing accounts, confirmation statements etc.
There are four main types of companies in the UK. They are:
- private companies limited by shares (members’ liability is limited to the unpaid share capital except where any personal guarantees have been given);
- private companies limited by guarantee (members’ liability is limited to the amount undertaken to be contributed by members);
- private unlimited companies (unlimited liability of members); and
- public limited companies (“PLC”) (members’ liability is limited to the unpaid share capit At the time of incorporation, a PLC must have an allotted share capital of £50,000.00).
The private limited company by shares and the PLC will be dealt with in more detail below.
Any person wishing to establish a company or LLP in the UK needs to be able to evidence their identity for compliance purposes. However, there are no special requirements which may act as barriers to the formation of an LLP or company other than the requirement for the business to have a registered office in the UK.
3. Private Limited Company (LTD)
By far the most popular company is the private company limited by shares. Although relatively straightforward, its formation is more complicated than forming a partnership or an LLP (see above).
There is no minimum threshold of either the share capital requirement or the par value of those shares. Shares can be issued at a price above the par value (at a premium), may have different class rights and values, and generally, ordinary shares do not need to be paid up (the situation is different for PLCs). Only public companies may issue shares to the public and only if listed on a recognised exchange.
Forming a company introduces a range of legal duties which a partnership of LLP arrangement does not have. The minimum requirements for a private limited company are:
- At least one director must be appoi
- The company must have its registered office in England (which is the official address for service of legal proceedings and other documents and where the Company’s statutory books should be held).
- At least one shareholder must hold one share of any value.
Appointing a company secretary is no longer compulsory for private limited companies, however, it remains advisable to do so, in particular for overseas owners. See below for further information about the role of the company secretary.
The constitution of the company is set out in the Memorandum of Association and Articles of
The Memorandum serves a limited purpose and basically sets out the first shareholders of the company. A statement of capital and initial shareholdings must be delivered to the Registrar on an application for the registration of a company having a share capital. This statement must detail:
- The proposed company’s aggregate share capital;
- the nominal value of the shares;
- the amount to be paid up on each share;
- the number of shares to be taken by each of the subscribers to the memorandum;
- the number and aggregate value of any class of shares; and
- particulars of the rights attached to those classes.
It is no longer required to stipulate in the memorandum the purposes for which the company was formed or all the acts which it is lawful for the company to do. All companies have unlimited objects unless the objects are specifically restricted by the Articles of Association.
The Articles of Association govern the internal workings of the company and how it will be operated. The Companies Act provides a specimen form of articles, which is called “Model Articles”. This is generally accepted in England as fair and effective. Accordingly, the articles of most companies simply adopt Model Articles with a few amendments reflecting the specific requirements of the company, such as:
- Empowering directors to allot shares, and, to whomsoever they wish;
- enabling directors to vote on issues in which they have personal interests;
- restricting the right of shareholders to transfer their shares;
- preventing removal of directors; and
- introducing an elective regime which simplifies the daily administration of a company.
Companies must be registered at Companies House and the directors are responsible for notifying Companies House of changes in the company’s structure and management. Certain documents must be sent to Companies House, such as the accounts and confirmation statement. Statutory books must be kept up to date and include current records of the following:
- Minutes recording the proceedings of board meetings or shareholders’ meetings;
- the directors of the company;
- the company secretaries of the company;
- any security granted over the company’s property;
- any transfers of shares; and
- any directors’ interests in shares and/or security of the company.
Often the administrative side of running a business is carried out by a company secretary. The company secretary is the principal administrative officer of the company for compliance matters. Having a company secretary is, however, no longer compulsory for private limited liability companies. If a LTD does not have a secretary, the directors may do anything that the secretary was required or authorised to do.
Directors’ and Shareholders’ meetings
It is important to distinguish the roles of shareholders and directors; shareholders own the company while directors make the day to day business decisions. The directors are usually appointed by the shareholders and there are few matters on which directors require the approval of the shareholders before they can act.
When the directors act or meet collectively, this is generally referred to as the “board“, together they will regularly hold “board meetings“. The Model Articles require a record to be made of the proceedings of all board meetings with the names of the directors present (or involved by telephone) (“minutes“). The board can act by a written resolution, which must be signed by all the directors to be valid.
When shareholders meet this is called a general meeting of members. It is either an annual general meeting (“AGM”) or otherwise an extra-ordinary general meeting (“EGM”). Likewise, the members can act by a written resolution, but again, it must be signed by all the members to be valid.
The advantages of trading in a LTD usually increase as the business grows. Some are:
- A LTD signals credibility.
- The liability is generally limited to the shareholders’ subscription for shares. (This is off course not the case if you give a personal guarantee for the LTD. If the LTD trades insolvent, you may also be personally liable as a director.)
- It is less complicated to introduce new capital in the LTD.
- It is easier to transfer or issue new shares.
- If the business is profitable, there can be tax advantages in keeping profits in the company.
Most of the disadvantages are associated with greater obligations and costs:
- The cost of setting up a LTD is higher than most other legal structures.
- The annual accounts are more complicated and you may require an independent audit to be carried out by a qualified accountant, unless you have at least 2 of the following:
– an annual turnover of no more than £10.2 million
– assets worth no more than £5.1 million
– 50 or fewer employees on average
- The employer’s National Insurance payments are higher.
- The LTD will be subject to annual compliance in accordance with the Companies Acts.
- It can be more complicated and expensive to close the LTD.
4. Public Limited Company (PLC)
PLCs are heavily regulated by statute, far more so than for a private company limited by shares, and some of the concessions available to private companies are not available to PLCs. PLCs are not able to avail themselves of the elective regime or to pass a resolution by way of a written resolution. The rules for issuing dividends are stricter for PLCs and there are codes of conduct for directors. Finally, there is a shorter period for the laying of accounts with Companies House; only six months after the end of the company’s accounting reference period.
By law, a PLC must have:
- a minimum authorised share capital of £50,000; and
- allotted shares to the value of £50,000, of which 25% of each allotted share must be fully paid up.
- a minimum of 2 directors and one company secretary (the latter must have suitable experience, a suitable qualification or both);
- a registered office in England (which is the official address for service of legal proceedings and other documents and where the company’s statutory books should be held); and
- a minimum of one shareholder, holding one share of any value.
- Articles of Association as above for a private limited company; and
- a memorandum stating that the company is a public limited company and in a specified form.
Furthermore, there are additional rules and regulations that a PLC has to abide by including but not limited to The Listing Rules, applicable to PLCs wishing to become a listed company and The City Code on Takeovers and Mergers applicable to any sale, purchase or merger activity of the PLC.
PLCs are able, provided the necessary resolutions have been passed, to create and issue share capital in another currency. This ability, however, does not affect the requirement to always have at least the authorised minimum of £50,000 as issued capital. A PLC may use as many currencies as it wishes for its share capital, provided that they are true currencies.
5. Snapshot of key characteristics
Key characteristics for each type of structure can be summarised as follows:
|Not a separate legal entity.||Separate legal entity.||Separate legal entity.|
|Unlimited liability for partners.||Limited liability for shareholders.||Limited liability for members.|
|Governed by Partnership Act 1890.||Governed by Companies Act 2006.||Governed by Limited Liability Partnerships Act 2000.|
|Few formalities. Can be created orally.||Incorporated by registration at Companies House.||Incorporated by registration at Companies House.|
|Can be formed by two or more people up to a maximum of twenty. There are a few exemptions.||Can be formed by one or more persons. No maximum.||Can be formed by two or more persons. No maximum.|
|Tax transparent.||Not tax transparent. It is a taxable entity.||Tax transparent unless in dissolution.|
6. Taxation of businesses¹
The UK corporate tax system is now based on a single rate applied to all chargeable profits. The current rate is 19%.
Partnerships and LLPs
Everyone receiving an income as a partner in a partnership or a member in an LLP is responsible for, and required to, file a personal tax return for the year after the relevant income tax year. The tax return must be filed with the local tax office by end October each year.
The income of each partner or member is taxed on the following scale:
Rate of tax (%) Income (£)
0% income tax on first 12,500
20% on income between 12,501 and 37,500
40% on income between 37,501 and 150,000
45% on income over 150,000
Small companies can take the advantage of filing abbreviated accounts to Companies House under company law and they need not be audited accounts. However, larger companies must have their accounts audited and have to ensure that they are submitted to Companies House on time.
Customs and Excise
You must, by law, register for the purposes of Value Added Tax (VAT) if:
- the value of your taxable supplies or acquisitions in the past 12 months or less have exceeded the current VAT registration threshold of £85,000, or the value of such is, in the next 30 days alone, expected to exceed this threshold; and/or
- you are a supplier in another EU country and the value of your distance sales to the UK has exceeded £70,000 in the calendar year, or part year, or you expect to acquire more than that value in the next 30 days alone.
There are fines and potential criminal liability for not doing so. If you are obliged to be registered for VAT, when you issue an invoice, you must include the business’ VAT number on the invoice.
VAT is currently charged at 20% on the supply of goods and services delivered in the course of a business.
Profits are usually distributed to shareholders in the form of dividends. Individuals in receipt of dividends from UK-resident companies are currently legally entitled to a non-payable dividend tax credit.
Inland Revenue – PAYE
Company directors are not necessarily employees of the company but, if they are, they must pay Class 1 National Insurance contribution (NIC) as well as income tax on their salaries. If your company or organisation has any taxable income or profits, you must tell the Inland Revenue that your company exists and that it is liable to tax.
For LLPs and partnerships, the NICs are paid in addition to income tax, and separate provisions must be made as against the partners’ or members’ drawings.
The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.
© Miller Rosenfalck LLP March 2019
¹If you have any questions or queries please do not hesitate to let us know and we can arrange for you to speak to a suitably qualified professional