It can be limited either by shares, which means that the members’ liability is limited to the money they have invested buying those shares in the business, or by guarantee, which means that the members’ liability is limited to the amount they have agreed to contribute to the company’s assets if the company is wound up.
Members of a company limited by shares are known as shareholders. Shareholders buy shares issued by the company when it is incorporated and may buy further shares at a later date. The money for the purchase of the shares is invested in the company. Shares in private limited companies cannot be publicly traded.
Below explains the ownership and management structure of limited companies, issues to be aware of when choosing a business name and company naming restrictions. It also explains the steps to incorporate and register a company, the process for buying an off-the-shelf company and registering for corporation tax.
The ownership and management structure of limited companies
The owners of a company are called ‘members’ or ‘shareholders’ and benefit from limited liability, so that if the company is wound up, the shareholders will lose the value of their investment in the shares but their personal assets will be protected.
Directors, who may or may not be shareholders, are appointed to manage the company. In practice, for most small companies, the shareholders and directors are the same people. Directors must be aged 16 or over and must not have been disqualified from being a director. They are legally responsible for running the company and complying with requirements for filing company accounts and reports correctly, and their names and addresses are usually publicly available on the companies register. While limited companies can be directors, at least one director must be an actual individual.
A company can be set up with just one member or shareholder as a ‘single member company’. If there is only one shareholder, he or she can also be the sole director.
A company secretary can be appointed although this is no longer a statutory requirement. If no such appointment is made, the administrative duties typically performed by a company secretary must be carried out by one or more of the directors.
Shares in private limited companies cannot be publicly traded. They are usually held by directors, employees, other companies, family members or other investors. Any profit made is owned by the company and, after payment of corporation tax (and depending on its precise legal structure) the company can either share out the profits or retain them for re-investment in the business.
Choosing a business name and restrictions on company names
Before setting up a limited company it is necessary to choose a company name. There are certain restrictions on the company name that can be used. For example, it is not possible to register the same name as another company (or one that is too similar), certain words are restricted and names that may cause offence are not permitted. The index of company names kept by the Registrar of Companies at Companies House should be checked to ensure that another company is not already using the preferred name. The availability/acceptability of a preferred name can be checked using the Registrar’s WebCHeck service (https://beta.companieshouse.gov.uk/).
The company’s name must be displayed continuously at any place where it does business (such as its retail outlets), at its registered office and at the place where its records can be inspected (for example its accountant’s premises). It must also appear on all company publications and correspondence, including business letters, websites, cheques, invoices and notices. The company’s directors and secretary (if there is one) may be fined if the company name is displayed incorrectly.
The letters ‘Ltd’ or the word ‘Limited’ must be displayed after the company name.
The company’s place of registration (England and Wales, Wales only, Scotland or Northern Ireland), and its registered address and registration number must also be displayed on business letters, order forms, email communications and websites.
The steps to take when incorporating a limited company
A private company limited by shares must be incorporated and registered with Companies House before it can start to trade. The information and documents that must be supplied when incorporating a company are as follows:
- The company’s name.
- Details of the company’s directors.
- A registered office address where official communications can be sent, that will be publicly available on the companies register. This must be a physical address in the same country in which the company is being registered (for example a company registered in Scotland must have its registered address in Scotland too). Acceptable types of address include a home address, a PO Box or the address of the person who will be responsible for the company’s corporation tax.
- A memorandum of association, which demonstrates the agreement of all the shareholders (known as the initial ‘subscribers’) to the formation of the company. A pro forma memorandum is available at www.gov.uk/government/publications/give-notice-of-subscribers-company-with-share-capital.
- Articles of association, which set out the rules about how the company will operate and the powers of the directors. Most companies use standard articles known as ‘model’ articles, which are available to download at www.gov.uk/model-articles-of-association-for-limited-companies.
- A statement of capital that includes the names and addresses of all the shareholders and the number and type of shares the company has issued (known as its share capital).
A company limited by shares can be registered with Companies House online if model articles of association are used. The fee for online registration is £15 and online applications are usually registered within 24 hours.
A company can also be registered by post using form IN01. However, the fee in this case is £40 and postal applications are usually registered within eight to ten days. A same-day service is available for applications that are received at Companies House before 3pm and the fee for this is £100.
The corporation tax set-up process
Following incorporation, Companies House will contact HMRC to inform them that the company has been set up. HMRC will send a unique taxpayer reference to the company’s registered office within a few days, together with a letter explaining how to set up an online account for company tax returns and corporation tax purposes and giving the dates for the company’s 12-month accounting period.
If a new company has not yet started trading, it can be registered with HMRC as dormant. However, HMRC must be informed once the company becomes active, and it must be set up for corporation tax within three months of the start of the accounting period to avoid penalties.
Company directors’ responsibilities
In order for a limited company to operate, its shareholders delegate the day-to-day management responsibility to a board of directors who have the power to take business decisions and enter into contracts on the company’s behalf.
To protect shareholders, directors are subject to various restrictions and controls imposed by legislation and the company’s articles of association. These include general and administrative duties imposed by Part 10 of the Companies Act 2006.
Formal and specific powers for the directors and rules for operating the company are set out in the memorandum and articles of association (the constitutional documents of the company), which are issued when a company is formed.
Under the Companies Act, directors have a duty to:
- Promote the success of the company.
- Act within their powers.
- Exercise independent judgment.
- Exercise reasonable skill, care and diligence.
- Avoid conflicts of interest.
- Not accept benefits from third parties.
- Declare any interest in a proposed transaction or arrangement.
Directors are responsible for the submission of statutory documents to Companies House, and must provide notice of changes in the company’s structure and board of directors. In particular, they are held personally responsible for the submission of accounts, with late filing resulting in a fine.