The most commonly used form of company in the UK is the private limited company; often abbreviated “Limited” or “Ltd”.
This guide is intended to provide an overview of the private limited company and the main legal requirements that will need to be complied with when setting up in England and Wales.
2. Minimum Requirements
To form a limited company you need:
- One director as a minimum. Subject to the Articles of Association there is no limitation on how many directors a company can have;
- a registered office in England or Wales; this is the official address for service of legal proceedings and other documents and where the company’s statutory records should be kept); and
- one shareholder subscribing to at least one share.
The constitution of the company is set out in the Memorandum and Articles of Association (“Articles”).
The Memorandum sets out the initial incorporation details relating to the company.
The Articles govern how the company will be operated. The Companies Act 2006 provides a specimen form of articles called “Model Articles” and these are generally accepted as fair and effective. Accordingly, most companies simply adopt the Model Articles with a few amendments as their own Articles of Association.
The company will usually be a private company limited by shares. There are other form, the main one being a company limited by guarantee that is often used for non for profit activities.
A shareholder normally has no liability for the company’s obligations, but it may have to pay up any part of the nominal capital of his shares which is unpaid.
Technical terms often used in company documents are “nominal capital”, “issued capital”, “paid-up capital” and “market value”. The Articles of Association will set out the types of shares that the company is able to issue and the rights attached to those shares (dividend, interest, votes etc.). These can be as complicated or as simple as the company and/or its shareholders may wish. Each class of share will be given a face or nominal value. This is usually £1, but can be anything (1p, 10p or even Euros).
Most companies have just one class of shares (usually referred to as “ordinary shares”), which gives each shareholder one vote per share at shareholders’ meetings, and provides an income (“dividend”) to the shareholder according to the amount declared per share each year, if any, by the directors. The directors will usually seek approval from the shareholders in a shareholders general meeting before a declaration is made in respect of dividends.
The “issued capital” is the total of the face value of all the shares of all classes issued to shareholders.
When a company issues shares to a shareholder, it is not required to collect full cash payment of the nominal value. So, an ordinary share of £1 may be issued to the shareholder for payment of 25p. This is then called a “partly paid share”, and the shareholder owes a debt to the company of 75p being the difference between the nominal value (£1) and the payment (25p). The difference does not usually carry interest. The company may at any time make a “call” on the shareholder for all or part of the unpaid nominal value. The “paid-up capital” is accordingly the total amount received by the company on the issue of all classes of shares plus any calls made since their issue.
The “market value” of a share is the price which an independent buyer would be likely to be prepared to pay for the share, and is therefore related to the value of the company and its prospects.
The Articles of Association should set out any restrictions on the transfer of shares if this is required. The Model Articles gives power to the Board of directors to refuse to register a transfer of a share.
5. The officers
The directors are appointed by the shareholders, save for the Board of Directors (“Board”) having a limited authority to appoint a director to hold office only until the next Annual General Meeting of the shareholders.
The Model Articles give the directors the power to manage the business of the company.
There are very few matters on which the directors require the approval of the shareholders before they can act.
For reasons of liability screening, it is often unwise for shareholders to seek to interfere in the activities of the Board and legal advice should always be taken when shareholders are considering giving explicit instructions to the Board to act or refrain from acting in a particular way.
There is no set period of notice required to convene a Board meeting, it just has to be ‘reasonable’ notice (but one may be provided for in the Articles of Association) and a quorum for such meetings is usually 2 directors (and the meeting may be held by telephone), unless the company has just one director. Each director has 1 vote, the directors are free to choose the chair ( and the chair may have a casting vote if the Articles provide for this. 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) (called minutes). Where there is only 1 director, she/he is a quorum on her/his own.
The Board can act by a written resolution (that is, without a meeting), but it must be signed by all the directors to be valid. A single director often has power to commit the company to third parties by his acts alone; in particular a Managing Director or CEO is assumed to have authority to do so, unless the Articles say otherwise.
Company law requires the directors each financial year:
- To prepare accounts for the company which give a true and fair view of the financial affairs of the company; and
- to prepare a report to the shareholders reviewing the development of the business during the relevant accounting period.
The accounting standards, and whether the accounts must be audited, vary according to whether the company is dormant or trading, and whether it qualifies as “small”, “medium” or “large” (see under Accounts below).
Although it is no longer required under the Companies Act 2006 for private limited companies to appoint a company secretary, it is generally recommended – in particular to companies with an overseas management without in depth knowledge of UK compliance – to appoint one to ensure that all filing requirements are complied with as failure to do so will expose the company to various fines. The Board appoints the company secretary who usually acts as the principal administrative and compliance officer of the company for legal matters. The company secretary should ensure that the company maintains the registers required by law (see section 9 below), files all the documents required by law at the Companies House, and is often the person responsible for giving notice of Board and shareholder meetings and preparing the record of such meetings.
The company’s auditors are appointed by the shareholders. A dormant company and certain “small” companies do not need to appoint auditors. The auditors are required each financial year to prepare a report to the shareholders on whether the accounts give a true and fair view of the state of the company and have been properly prepared in accordance with the law. In carrying out this function, the auditors will usually:
- Examine, on a test basis, the accounts prepared by the directors;
- assess whether proper accounting records have been kept by the directors; and
- assess the significant estimates and judgments made by the directors in preparing the accounts.
Auditors have rights to attend and speak at certain shareholder meetings and, when resigning, to place any matter they consider significant before a meeting of the shareholders and to attend and speak at the meeting, should they wish to.
Often also called the “members”, these are the persons who hold the shares. Their rights vary according to the class of shares held, and will be set out in the Articles.
Decisions and voting
Decisions of shareholders are taken at shareholders meetings.
Shareholder decisions are usually made by simple majority vote, so that a resolution will be passed if 51% of those voting vote in favour; this is an “ordinary resolution”.
Sometimes the law requires a 75% majority; a “special resolution”.
The Model Articles require votes to be taken on a show of hands (one shareholder = 1 vote) unless a poll is duly demanded in accordance with the Articles.
The Board calls meetings of the shareholders, and company law requires a written note to be made of their decisions.
Shareholder meetings are called by the company sending a written notice to each shareholder stating the time, date and place of the meeting, the business to be discussed and the text of any special resolutions to be proposed. There are strict rules concerning the minimum period of notice to be given for such meetings.
The chair of the Board normally acts as a chair of the shareholders’ meeting; in her/his absence the chair will be another director. If no directors are willing to act as chair, then the shareholders may elect a chair of the meeting.
A member may appoint a proxy to represent her/him at the meeting. Almost anyone can be appointed as a proxy, but the form of proxy must be deposited with the company at least 2 days before the meeting. A record -also called minutes – must be made of the proceedings of all shareholder meetings.
Company law requires shareholder approval for a number of specific matters, the most common of which are:
- To change the constitution;
- appointment or removal of directors;
- appointment or removal of auditors; and
- to approve major transactions between the company and its directors.
Except for matters required by company law to have shareholder approval, the Model Articles gives the power to the directors to manage the business of the company.
7. People with Significant Control
Recently, a requirement to identify and maintain a register of PSCs have been introduced to create transparency in terms of the ultimate control and ownership of a company.
Please contact us if further guidance is required.
8. Annual Compliance
Each year the company is required to:
- File at Companies House a confirmation statement within 14 days from the date of the company’s anniversary. This is a snapshot of general information about the company’s officers (directors and company secretary), the registered office, shareholders, share capital and PSC. The form will appear on the public register; and
- file the accounts including directors’ and auditors’ reports if applicable at Companies House within 9 months after the accounting reference date (“ADR”). The accounting requirements, including the documents which must accompany the accounts, vary according to the size of the company.
The confirmation statement and accounts are now routinely filed online.
9. Ongoing Compliance
Every company must hold and maintain “statutory books”, which are registers of the following information:
- Directors’ residential addresses;
- Company secretaries;
- People with Significant Control.
Often you would supply the statutory registers with registers of:
- Transfers of shares.
- Security granted over any company property.
- Minute book of Board meetings and shareholders’ meetings.
The registers are normally kept at the registered office but may also be held at another location as long as the company notifies the Companies House of the so-called Single Alternative Inspection Location (“SAIL”).
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, October 2021