Most owners of start-up businesses will be asking this question when they begin to enjoy a certain level of financial success.
With the money starting to come in, deciding at what point it becomes more cost-effective and tax-efficient to think about incorporating a business is a common conundrum.
Aside from the financial considerations, there are many legal aspects of incorporation that need to be considered and which you should seek professional advice on.
Below set out some of the many factors that need to be considered when incorporating a private limited company and the steps that need to be taken.
What type of company can be incorporated?
A new business can be set up as a company or an existing business can be incorporated as a company. The latter is often the case when a business has reached the stage where the increased administrative burden of company law requirements is offset by the benefits that the company structure offers, such as limited liability.
A company can be incorporated as:
- A company limited by shares (the most common form)
- A company limited by guarantee
- An unlimited company
A company is incorporated by filing the necessary documents and paying the required fee at Companies House. There are two options:
- Creating a tailor-made company. This is a new company with documents that are specifically tailored to their requirements.
- Buying a shelf company. This is a company that has already been incorporated but has not yet traded. Law stationers and company formation agents register shelf companies with standard provisions in their constitutions and sell them to buyers who can change them to meet their requirements.
Creating a company constitution
A company’s constitution and the rules governing its administration are set out in two legal documents that all companies must have – its memorandum of association and its articles of association.
A memorandum of association must be submitted to Companies House with the other registration documents. It states that the subscribers to the company want to form a company and have agreed to become members and, in the case of a company that is to have a share capital, to take at least one share each. The memorandum cannot be updated; it is a ‘snapshot’ of part of the company’s constitution at the point of registration.
Articles of association set out the basic management and administrative structure of the company. They regulate the internal affairs of the company (for example, the issue and transfer of shares) and create a contract between the company and each of its members. Companies can either create bespoke articles of association or adopt (in whole or in part) model articles. If no bespoke articles are registered, the model articles will apply as the default set of articles for limited companies.
Incorporating a tailor-made company
To register a private limited company, Form IN01 and the memorandum of association must be lodged with the Registrar of Companies at Companies House. Form IN01 includes:
- The proposed company name.
- The type of company. A statement must indicate whether the company is:
- To be limited by shares or guarantee; or
- To have unlimited liability
- Details of the registered office. A company must have a registered office at all times, so that communications and notices can be addressed to it.
- Articles of association. The form allows a new company to indicate whether it is adopting:
- Model articles in their entirety or with amendment; or
- Bespoke articles
- Details of directors. Private companies must have at least one director who is at least 16 years of age. They do not need to have a company secretary. The form sets out the particulars that must be provided.
- Statement of initial shareholdings. This states the total shares taken by the subscribers when the company is formed. It includes the number, class and aggregate nominal value of those shares as well as the amount paid up or the amount to be unpaid on each of the subscriber’s shares.
- Statement of capital. This statement sets out each class of shares in the company, the number of shares in each class, the aggregate nominal value of the class, and the amount paid up or unpaid on each share. The statement must also include details of the rights attaching to each class of shares of the company: voting rights, rights to dividend, rights on a capital distribution (including on a winding up of the company) and any redemption rights.
- Statement of guarantee. If the company is limited by guarantee, it must deliver a statement of guarantee. This is a statement from each of the subscribers that if the company is wound up while he is a member or within one year of him ceasing to be a member, he will contribute (up to a specified amount) to the assets of the company.
- Statement of compliance with the registration requirements of the Companies Act 2006.
Filing the registration documents
The required documents must be delivered to the appropriate office of the Registrar. The company is brought into existence when the Registrar issues the certificate of incorporation. This normally takes seven days if the application for registration is made using the normal service and currently costs £40 (unless the company is an unlimited company where the fee is £20). An expedited service of incorporation within 24 hours is available and currently costs £100.
Companies House has an electronic filing service for new incorporations, which allows for electronic submission of the necessary documents. It currently costs £15 (£30 for same day service).
The incorporation formalities should be completed at a meeting of the board of directors as soon as possible after receipt of the certificate of incorporation and any documents that require filing at Companies House must be filed within the statutory time limits.
Guidance and legal advice on incorporating a businesses is available as part of our HD Start-up Assist service. For more information on this, or any other legal matter affecting start-ups, contact Brett Cooper on 01772 258321. Brett is an associate solicitor in Harrison Drury lawyers in Preston.