Companies: key characteristics, public vs private, constitution, and incorporation

Question 1

what is separate legal entity? what does this entail? (5)

Answer 1

• Companies are entities distinct from their owners.
• a company continues to exist even if owners or directors change
• the company owns property enters into contracts, and can sue and be sued in its own name.
• Profits and losses belong to the company and not to the shareholders
• the company is liable for its own debts, not the shareholders - so creditors sue the company

Question 2

what is limited liability?

Answer 2

• the liability of shareholders is limited to the amount unpaid on their shares (if any)
• creditors cannot sue shareholders personally for company liabilities
• This protects the shareholders and facilitates investment

Question 3

what are advantages (4) and disadvantages (5) of incorporation?

Answer 3

advantages:

• allows investment with limited liability (less risk for shareholders)
• gives a formal structure for the business to run
• easier to raise finance through issuing shares and lenders are more comfortable lending to companies on better terms than sole traders or partnerships due to the restrictions and disclosure requirements on companies
• shareholders receive a return on investment through dividends if declared

disadvantages:

• more onerous statutory requirements like filings, disclosure requirements, and procedural limitations on running the business
• public disclosure means less confidentiality (annual accounts, personal details of directors, PSC)
• set up costs and formalities = incorporation at CH
• double taxation if dividends are issued
• for small private companies where the management and ownership are the same, the benefits of separation of ownership is not realised as much – and the statutory procedural and disclosure requirements are onerous

Question 4

how are companies taxed?

Answer 4

• company pays corporation tax on its total taxable profits (income profits and chargeable gains)

Question 5

what does double taxation mean?

Answer 5

1. company pays corporation tax on its profits = if a company pays dividends it cannot deduct this to reduce corporation tax
2. shareholders pay income tax on dividends received

=> disadvantage of incorporation, especially for small companies where shareholders are directors

Question 6

what is the minimum number of shareholders for a private vs public company?

Answer 6

minimum 1 shareholder for both

Question 7

what is the minimum number of directors for a private vs public company?

Answer 7

private company: 1

public company: 2

AND at least 1 director must be a natural person

Question 8

is a company secretary required for a private vs public company?

Answer 8

private: no

public: yes - with requisite knowledge and experience

Question 9

what is the minimum share capital requirement for a private vs public company?

Answer 9

private = at least 1 share

public = minimum nominal share capital requirement of at least 50,000 GBP + 1/4 of nominal value and all premium must be paid up

Question 10

on allotment of shares in a public company, how much must a shareholder pay?

Answer 10

1/4 of the nominal value + the whole premium

example: nominal value 1 but issued at 5 –> shareholder must pay 4.25 (1/4 of 1 + 4)

Question 11

when can a private vs public company start trading?

Answer 11

private company: as soon as CERTIFICATE OF INCORPORATION is issued by Registrar of Companies

public company: A private company must apply for a TRADING CERTIFICATE which must be issued by the Registrar of Companies showing that the company’s allotted share capital meets the minimum requirement. After this, the company can offer shares to the public and trade as a public company.

Question 12

what is the requirement to hold an annual general meeting for a private vs public company?

Answer 12

private: none

public: 1 AGM per year (advantage for shareholders as it holds the directors accountable and can question them on company finances)

Question 13

what are the advantages/disadvantages of listing a public company?

Answer 13

A public company can be listed on a regulated market like the London Stock Exchange

A public company can apply for listing

Advantages:

• access to a much wider investment base
• access to international debt capital markets to issue debt securities

disadvantages = much higher regulation and less confidentiality

Question 14

when can companies use written shareholder resolutions for a private vs public company?

Answer 14

private: written resolutions permitted except for removal of a director or auditor from office

public: written resolutions are not permitted

Question 15

what is a person with significant control? what are the disclosure requirements under the PSC regime?

Answer 15

PSC is =

• a member owning more than 25% of company shares or voting rights or
• a member that has the power to appoint or remove a majority of the board of directors
• a member who exercises significant influence or control over the company

PSC regime =

• all companies must maintain a PSC register which must be available to the public for inspection AND
• filed at company’s house (with the annual confirmation statement)

Question 16

what constitutional documents exist for a company incorporated before 1 October 2009 (pre-2006 act)?

Answer 16

(1) articles of association

(2) memorandum: with a mandatory objects clause stating the purpose of the business - acting outside the objects clause was ultra vires

required by Companies Act 1985

Question 17

what constitutional documents exist for a company incorporated after 1 October 2009 (post-2006 act)?

Answer 17

• articles of association - regulates relationship between the company, shareholders, and directors
• a memorandum is not a constitutional document, but should be filed with Companies House for incorporation only as a declaration that subscribers wish to form a company and agree to be members of that company

Question 18

are companies restricted on the type of business they carry out?

Answer 18

• Post-2006 act companies have unrestricted objectives unless they specifically restricted it in the articles
• Pre-2006 companies: Provisions in a memorandum of older companies are treated as provisions of the company’s articles (including objects clauses). So, objects clauses are in force to restrict a company’s business unless articles are amended by special resolution to remove the objects clause.
• If a company’s acts are restricted by an objects clause, it will not have capacity to act outside of it and will be acting unlawfully

Question 19

how does the companies act 2006 restrict the terms of a company’s articles?

Answer 19

• there are minimum provisions under CA 2006 that must be complied with (to meet the ‘Legality Test’)
• Also, there are some overriding provisions that override anything provided to the contrary in the articles (e.g., the right of a shareholder to demand a poll vote cannot be removed by articles)
• otherwise, the company is free to provide more onerous provisions than those in the CA 2006 (e.g., change the minimum number of directors from 1 to 3)

Question 20

what is the legal nature and effect of the articles between the company and members?

Answer 20

s33 CA 2006: the articles are binding on the company and members in their capacity as members as it it were a contract

• company can enforce members’ breaches of the articles against members
• members can enforce company’s breaches of the articles against company (e.g., by injunction)
• between members themselves, a member can only enforce articles against other members through the company itself (advise member to enter SH agreement to enforce directly against other members)

note: the articles apply to members in their capacity as members and not in their personal capacity

Question 21

what options does a client have with regards to their articles?

Answer 21

1. adopt the model articles
2. adopt the model articles but amend where needed
3. ask solicitors to create bespoke tailored articles for company needs - expensive but may benefit company in the long run

Question 22

what are the 2 ways to form a company?

Answer 22

1- incorporation from scratch

2- purchasing a shelf company

Question 23

what must be delivered to the Registrar of Companies at Companies House in order to incorporate a company from scratch? (4)

Answer 23

1) memorandum setting out the subscribers

2) articles (otherwise default MA will apply)

3) fee

4) form INO1

Question 24

what must be included in form INO1? (8)

Answer 24

• company name
• registered office
• if limited by shares or guarantee
• statement of capital and initial shareholding
• rights attaching to each share
• statement of proposed directors
• any PSC
• statement of compliance with CA 2006

Question 25

what will the registrar issue after an application for incorporation?

Answer 25

Certificate of Incorporation

sets out:

• company name
• company registered number
• date of incorporation

effect: The company becomes a legal entity from the date of incorporation set out in the certificate of incorporation

Question 26

what is the process of incorporating a company by purchasing a shelf company? what formalities must be followed (9)?

Answer 26

1) purchase of the company by buying the shares

2) control is obtained when the purchaser is entered on the register of members

3) execute formalities by passing directors and shareholders resolution to:

• Change company name – special resolution of shareholders
• Change articles if needed – special resolution of shareholders
• Change registered office – board resolution
• Appoint new directors – board resolution
• Current directors resign – board accepts letter of resignation
• Appoint company secretary – board resolution
• Current company secretary resigns – board accepts letter of resignation
• Transfer shares to new members – board resolution
• Appoint chair – board resolution

Question 27

what steps must be taken after incorporation? (5)

Answer 27

1. decide whether a chairperson is desired who will have a casting vote in a board tie - model articles provide for a chairperson and special resolution is needed to amend the MA
2. set an accounting reference date (default is the last day of the month in which the company is incorporated)
3. appoint an auditor to prepare annual accounts
4. register for corporation tax, VAT, and PAYE if it has employees
5. shareholders may want to enter a shareholder agreement

Question 28

if someone purports to contract on behalf of a company before it is registered, who will be liable for the contract?

Answer 28

• the individual (‘promoter’) will personally be liable for the contract not the company (even if they state they ‘sign on behalf of the company’)
• this is because a company becomes a legal entity on the date of incorporation as stated in the certificate of incorporation - and so it does not have the capacity to enter into contracts before it is a legal person
• this protects the third party

Question 29

if someone purports to contract on behalf of a company before it is registered, and the company later wants to have the benefit of this contract, what can be done?

Answer 29

• the individual and the third party can novate the contract so that the rights and obligations are transferred to the company
• this requires the consent of the individual, third party, and company
• (ratification is not possible)

Question 30

what resolution is required for changing company name?

Answer 30

special resolution of shareholders at a general meeting

Question 31

what resolution is required for appointing new directors?

Answer 31

board resolution at a board meeting

Question 32

what resolution is required for appointing a company secretary?

Answer 32

board resolution at a board meeting

Question 33

what resolution is required for changing the registered office?

Answer 33

board resolution at a board meeting

Question 34

what resolution is required for appointing a chair?

Answer 34

board resolution at a board meeting

Question 35

what internal records must be kept and updated by the company? (6)

Answer 35

the following must be kept at registered office, updated, and available for inspection:

1. register of members
2. PSC register
3. register of directors = with their service address
4. directors service contracts = must be kept for 1 year after the end of the contract
5. minutes of all meetings = must be kept for 10 years
6. copy of every charge and instrument which amends a charge

Question 36

what are the disclosure requirements on companies? (8)

Answer 36

1. PSC regime: all companies must maintain a PSC register which must be available to the public for inspection AND filed at company’s house
2. all companies must file annual accounts
3. all companies must file a confirmation statement annually confirming the company’s constitution and details
4. display company name on the outside of every place it carries business, business letters, websites, and official company publications
5. any resolutions that affect the company’s articles must be filed within 15 days at the Registrar
6. all special resolutions must be filed
7. articles are filed and if articles are updated this must be filed
8. file ordinary resolutions that give directors the authority to allot new shares

Question 37

what are the disclosure requirements in relation to members of a company?

Answer 37

1. shareholders: names of shareholders must be entered in the company’s internal register of members, which must be available for inspection for all members at the company’s registered office
2. persons with significant control: all companies must maintain a PSC register which must be available to the public for inspection AND filed at company’s house (with the annual confirmation statement)

Question 38

what information must be disclosed about directors in annual accounts? (5)

Answer 38

1. directors salaries, bonuses, and pension entitlement
2. compensation paid for loss of office
3. payments by company to a person / entity connected to director or payments to director
4. info on advances and credits given to directors
5. guarantees entered into by company on behalf of its directors