Companies:the consequences of incorporation Flashcards
Legal personality
A company is a separate legal entity to its shareholders and its directors. This means:
- It is an artificial person
- Its members have limited liability
- It has the ability to hold property
- It continues in existence known as continual sucession
Amount owed by member at winding up - Company limited by shares
Fully paid shares: No further liability to contribute
Partly paid shares: Any outstanding amount
Share premium: Any unpaid premium
Amount owed by member at winding up - Company limited by guarantee
The amount they guaranteed to pay
Veil of incorporation
Drawn between the members and the company, separating them for the purpose of liability and identification.
what are the consequences of being a separate legal entity?
- separation of management and ownership
- companies are subject to Companies Act 2006
- Company owns it properties not shareholders
- Company has perpetual succession
- Company enters into a contract in own name
- Company liable for its own debts
In a company, the liability is limited for the
members only
When may the court lift the veil of incorporation?
- where a group of companies are trading as a single economic unit
- To produce tax liability
- To prevent tax evasion
- To give entitlement to compensation
- Prevent evasion of excise duty
what is the result of lifting the veil?
members or directors become personally liable for company’s debts
what is a sham company?
a company which has been registered for an improper purpose
eg. to evade a legal obligation or to hide the national identity of a business
what is a quasi-partnership?
a business which is registered as a company but is run as if it were a partnership
Differences between private and public companies - Share Capital
Private - No minimum
Public - Authorised minimum (£50,000)
Differences between private and public companies - Ability to commence trading
Private - Once incorporated
Public - Must have trading certificate
Differences between private and public companies - Public offers
Private - Prohibited from offering its shares to the public
Public - Can offer its shares to public (stock exchange)
Private - Prohibited from offering its shares to the public
Public - Can offer its shares to public (stock exchange)
Private - Rules do not apply
Public - Need members’ approval
Differences between private and public companies - Directors
Private - Must have at least 1
Public - Must have at least 2
Differences between private and public companies - Company secretary
Private - Do not need one
Public - Must have one
Differences between private and public companies - Written resolutions (votes)
Private - May pass written resolutions instead of calling meeting
Public - not applicable
Differences between private and public companies - AGMs
Private - Need not hold
Public - Must hold
Differences between private and public companies - Accounts and reports
Private - Must file within 9 months
Public - Must lay before general meeting and file within 6 months
Difference between private and public companies - Purchase of own shares out of capital
Private - Permitted
Public - not allowed, repurchase from distributable profits only
Difference between private and public companies - reduction of capital
Private - special resolition needed
Differences between private and public companies - Small and medium audit exemptions
Private - May qualify
Public - Not applicable
Differences between private and public companies - Payment of shares
Private - Not applicable
Public - Shares must be at least 1/4 paid up
Documents to be submitted for formation
- Memorandum of association
- Application
- Articles
- Statement of capital and initial shareholdings
- Statement of guarantee (if applicable)
- Statement of proposed officers
- Statement of compliance
- Registration fee
Documents to be submitted for formation - Memorandum of association
Signed by all subscribers (first shareholders) and stating that they wish to form a company and agree to become members of the company
Documents to be submitted for formation - Application
- The proposed name of the company
- Whether the members will have limited liability (by shares of guarantee)
- Whether the company is to be private or public
- Details of the registered office and intended address of the registered office
Documents to be submitted for formation - Statement of capital and shareholdings
- Number of shared
- aggregate nominal value
- details of each class of share
- how much has been paid up on each share
Documents to be submitted for formation - Statement of guarantee
this states maximum amount each member undertakes to contribute (if company goes into liquidation)
Documents to be submitted for formation - Statement of proposed officers
gives details of the first directors (company secretary) and their consent to act
Documents to be submitted for formation - Statement of compliance
this provides confirmation that CA 2006 has been complied with
For a public company to obtain a trading certificate, must apply to the registrar stating:
- nominal value of shares sold £50,000
- 25% paid up
- preliminary expenses paid
- benefits given
consequences if public company trades before trading certificate is given
- liable to fine
- grounds for winding up if not obtained within a year
- directors personally liable if company defaults within 21 days of due date as veil of corporation is lifted
- contracts are still binding on the company
what is an off-the shelf company?
one that has been registered and is ready to trade straight away
Off-the shelf companies - Advantages
- cheap and simple to buy
- can trade immediately
- no problem of pre-incorporation contracts
Off-the shelf companies - disadvantages
- The articles of association may be unsuitable
- Altering the articles will incur costs and may be inconvenient
- Need to change officers
what is a promoter?
undertakes to form a company and takes the necessary steps to do so
Duties the promoter owes to the company
- Act in companies best interests
1. reasonable care and skill
2. disclose any interest
3. disclose any benefit
Pre-incorporation contracts
contract made by a person acting on behalf of an unformed company
Pre-incorporation contracts - Consequences
- promoter acts as agent so is personally liable
- company cannot ratify the contract
- company is not bound by the contract
- company cannot enforce the contract against a third party
choosing a companies name
- must have ltd or pls at end
- cant be same or virtually same as another in index of names
- cant use certain works which are illegal or offensive
- must have secretary or states consent to use certain words
- cant use words indicating the company is of another type or legal form
how can a company change its name?
- the shareholders passing a special resolution
- notifying the registrar
changing company name - the name is the same as or too like an existing registered name
12 months
changing the company name - gives misleading an indication of the nature of the company’s activities as to be likely to cause harm to public
no time limit
changing the company name - misleading information or undertakings were given when applying for a name that required approval
5 years
what is articles of association?
form part of the companies internal constitution along with any other agreements
- set out the manner in which the company is to be governed
- regulate the relationship between the company and its shareholders
- Model articles or own articles
can you make alterations to articles?
- If entrenched - set procedure
- If not special - resolution of the shareholders (75% Majority)
- Sent to registrar within 15 days
Company records
- members
- directors and company secretary
- people with significant control
- charges
- other documents (resolution and minutes of general meetings must be kept for 10 years)
the registrar of companies maintains which details?
- the certificate of incorporation
- the trading certificate
- certificates of registration if charges
- the annual accounts
- the confirmation statement
- special resolutions (some ordinary resolutions)
- changes of directors
confirmation statement
Can be sent at any time but no more than 12 months between each Statement
- Confirms that no changes to key information have happened during the year and any changes should be stated
- EG. type of company, address of registered office
Accounting record
Contains sufficient information to show and explain the company’s transactions
- details of all money received and spent
- a record of assets and liabilities
- statement of inventory (stocks) at end of year
Annual accounts
Required to produce annual accounts containing:
- balance sheet
- profit and loss
Must be approved and signed on behalf of the board of directors and a copy filed with the Registrar
Directors report
Names of directors, principle activities of the company and statement that auditor is aware of any relevant information
- usually includes a recommended dividend
- certain businesses must publish information in their director’s report information regarding the emissions, energy consumption/ efficiency of the business
Directors remuneration report
Quoted companies only, subject to members’ approval
Auditors report (if applicable)
- identifies account audited
- described the scope of the audit
- the accounts give a true and fair view of company’s financial affairs
- directors’ report is consistent with the accounts
Strategic report
Large and medium sized companies must prepare this as a part of their financial statements:
- a fair review of the companies business
- a description of the principal risks and uncertainties facing the business
Quoted companies also required to report on environmental matters
Additional information (miscellaneous reporting regulations)
- report on engagement with stakeholders
- how directors have complied with their duty to promote the success of the company
- which corporate governance code has been applied
- within directors remuneration report (quoted companies only) a ratio of CEO’s pay to UK employees pay
when might the veil be lifted via legislation:
- disqualification of director
- wrongful and fraudulent trading
- trading without a certificate
are contracts valid or not if public company trades without trading certificate?
still valid but any within 21 days personally liable on members
For a public company to obtain a trading certificate is must submit:
- An application stating that the nominal value of the companies alotted share capital is not less than the minimum
- Statement of compliance
what is the minimum percentage holding of a company’s shares or voting rights that is required for an individual to be included on the register of people with significant control?
25%
how long should a companies accounting records be kept for?
3 years if private and 6 years if public
when should company accounts be filed to registrars?
- 9 Month private
- 6 Months public
at end of relevant accounting period
what was the name of the case that is generally cited as establishing the principle or corporate responsibility?
Salomon vs Salomon Co ltd
how can a company change its articles of association?
Special resolution unless there is a provision for entrenchment in which case unanimous case or court order is required
in the event of conflict which prevails: the articles or act?
The Act
which companies are required to make a directors remuneration report
quoted companies (listed on stock exchange)
TRUE OR FALSE
group accounts must produce a consolidated directors’ report
true
