Setting up a Company

This essay will be based on advice on setting up a company under the Companies Act 2006 (a legislation which relates to company law), also benefits of a company, types, and differences.

A company is recognised by law as an artificial person. “The owners are protected by the VEIL OF INCORPORATION. It considers the company’s artificial legal personality as a veil, separating the company and its members .If any wrong is done by the company, the owners will not be held responsible.

This is illustrated in the case of Salomon v Salomon & co Ltd (1897) [1] . Held: the company had been formed properly and without fraud.

Edward needs to be aware that, once it is lawfully incorporated it will be treated separately from him with liabilities and privileges suitable to itself.

In addition, a veil of incorporation could be lifted, if a company is formed for fraudulent reason.

Furthermore, separate legal personality applies to the right to own property Macaura v Northern Assurance Ltd(1925) [2] held : Macaura could not claim on the insurance policies because he had no insurable interest in the timber. In relation to this case Edward should insure property in company’s name and not it.

Other benefits are:

Perpetual Succession: if the shareholder dies, the company will continue to exist.

Can raise finance easily from the public through London stock exchange, share prices will be advertised through share capital.

Can sue and be sued

There are different types of Registered Company of the companies; [3] 

Unlimited and Limited Company..

An Unlimited company is one which there is no limit to the liability of the members of the company.

The benefits of incorporation, are

No capital duty is to be paid, no par value share can be issued if the company has share capital needed for dividends and voting rights. Moreover, copies of the company’s account need not to be delivered to the registrar of companies.

They have a separate legal personality. Although, members have to agree to have unlimited liability for the debts. If the company, on liquidation, does not have assets, members have to contribute some money to bail it out of debt.

Limited Companies can be divided into two types,

Limited by Guarantee: is mostly formed for non profit making purpose. In the event of liquidation, the liability of the members is limited to the sum they have undertaken to pay in settling the company’s debt. [4] 

A company limited by guarantee, have liabilities on liquidation, company must honour their guarantor. However the issue share price of their shares must be paid up. (Insolvency Act 1986) [5] .

Limited by Shares: company has a share capital, the liability of which each member is limited to the amount, unpaid on their shares if any. If the company winds up, and members have unpaid shares, they will be required to pay the remaining left of each share’s nominal value.

Edward needs to know that, control is still possible, he is responsible for the management and can be a director and secretary at the same time.

Furthermore, Public Companies are registered as PLC and a Private Companies are registered as LTD. [6] 

The differences between them are:

Public company:

Only two directors are required

Must have 500000 allotted share capital.

Could offer shares to be sold to the public or quoted on the stock exchange.

It must have a secretary who must be qualified, or must be capable of carrying out functions from previous experience.

Private Company:

There is no limit on their share capital.

It is a criminal offence to advertise it shares for sale to the public.

It does not need a secretary, if it has one, need not to be qualified.

Private company limited by shares can have at least one director, must be an individual [7] .

Furthermore, a private company is less open to public scrutiny, they do not need to file their account to the registrar. On the other hand, public companies have to.

In relation, a private company limited by shares is recommended, because it doesn’t need to have up to £50000 as capital, compared to a public company. Also, it can expand and then re-register with a new certificate of incorporation issued.

The documents required for the formation of a company, together with £20 fee or same day incorporation fee of £100, should be sent to the registrar of Companies. [8] 

These are explained below:

Memorandum of Association:

States objective of the initial shareholders, the intention of becoming a member when formed. It gives proof that the members have approved to take one share at a time at least.

Article of Association

An internal book, required by law, as it states a contract between company and the members

Two types of article can be altered

a) special resolution which is passed at shareholders meeting .

b) written resolution which only applies to private companies.

Edward should states the type of article he is adopting, if not the registrar will automatically apply the model article appropriate depending on the type of company.

An application for registration of the company:

The document must contain the proposed company name. [9] It should state the location, if company is to be private or public, limited by share or Guarantee. There are restrictions on the choice of name adopted by a company, it might not be registered under the control of the Secretary of states. [10] 

The application must also contain documents showing, the statement of proposed officers, which gives addresses of first director and secretary, if the company is limited by Guarantee, statement of share capital is required.

Statement of Compliance.

This form will be signed by a solicitor who is engaged in the formation of the company or a named director. It states the criterion relating to registration has been met. The registrar then issues a Certificate of Incorporation if it is satisfied with the documents sent in compliance with the Act. This certificate is like a birth certificate of the company, from that date it is able to utilize all the powers of a registered company.

Moreover a public company cannot start borrowing until it is issued a Trading certificate. A form SH50 needs to be sent to the Registrar, who will issue this with verification of a minimum allotted share capital owned by the company.

However, Edward needs to know that it is a criminal offence, [11] to commence trade for more than a year as a public company, without a trading certificate, he will be liable as a director to indemnify the third party.

In general a Private Company Limited by Guarantee is the most suitable to set up as personal liability is to be avoided and separate personality is to be gained.

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