PRIVATE LIMITED COMPANIES Flashcards
What is a company?
An incorporated business with separate legal personality, where members can have limited liability.
What laws govern a company?
Companies Act 2006 (superseded by Companies Act 1985).
Primary aim of CA 2006 was to simplify the law e.g. removal of AGMs and Annual Returns
What are the advantages of a company?
- Separate legal entity (low risk)
- Limited liability - shareholders only pay any amount unpaid on their shares (low risk)
- Only 1 person required to incorporate a company
- Easier to raise finance (more attractive for investors)
- No minimum share capital (can be as little as £1)
- Most popular business model - perceived as more prestigious
- Recognised internationally
- Grant floating charges?
What are the disadvantages of a company?
- Set up costs and formalities - must be registered at Companies House (high formalities)
- Extensive disclosure obligations (privacy)
- Companies Act 2006 have strict governance requirements (organisation & structure)
- Pay corporation tax on income tax and capital gains tax
What does separate legal entity mean (private limited company)?
- Companies are distinct from their owners (shareholders/members).
- Perpetual succession (continue indefinitely)
- Companies can own property, enter into contracts and legal proceedings.
- Profits/losses belong to the company, therefore the company is liable for its own debts not the shareholders.
- Case: Salomon v A Salomon and Co Ltd [1897]: held that it was not fraud to create a company as a separate legal person, to avoid personal liability for debts.
What does limited liability mean (private limited company)?
Shareholders have limited liability to the amount unpaid on their shares (if any).
Protects shareholders & facilitates investment.
What is a shareholder/member and what do they do?
- Owners of the Company
- Can invest money in return for shares & dividends (distributed profits) (limited by share)
- Not involved in day-to-day management.
- Have voting rights
- Control key decisions
- Sometimes referred to as members
Power to amend Articles or remove a Director
What is a director and what do they do?
- General management powers - they run the company
- Officers/managers of the company
- Involved in day-to-day running of the company
- Collectively known as the board
Can a Director also be a Shareholder?
Yes - this is often the case in small private companies
Consider in which capacity they are acting.
Person of Significant Control
- PSCs are shareholders with OVER 25% (i.e. 25.1%)
- Details of PSCs must be provided to Companies House
- They are significant as they can block a special vote that requires over 75% of the vote to pass
What are the requirements for a Public Company limited by shares (plc)?
- Minimum share capital requirement of £50,000
- Requires a trading certificate before it can trade
- Needs a minimum of 2 directors
What is a Private company limited by GUARANTEE?
- Model for charities and non-profits
- No shareholders, shares or share capital
- Members (not shareholders) do not need to make a financial contribution (perhaps nominal £1)
- Profits not paid to members
- Liability of shareholders is limited to the amount they agreed to contribute in the event of a winding up
What is a Private company Limited by SHARES?
- Liability of shareholders is limited to the amount unpaid on their shares (if any)
- Share capital (value of company)
- Shares held by shareholders (not members)
- Shareholders have to pay full market value of shares if they want to buy
- Shareholders have a right to dividends (right to earn profit)
How do you incorporate a company?
- Incorporate from scratch: apply through Companies House
- Shelf Conversion Company: purchase a shelf company & make formal changes
Articles of Association
- All companies must have Articles of Association, that make up the company constitution.
- Purpose is to regulate relationship between shareholders, the directors and the company (governance).
- The Articles are legally binding (evidence a contract between the company and its members)
- The Articles must comply with CA 2006 (Legality Test)
- CA 2006 will override the Articles
- CA 2006 model articles available (known as TABLE A in CA 1985) - can be amended or tailor made to suit company needs
Memorandum
CA 1985: required Memorandum as part of company constitution. Objects clause setting out the purpose of the company - acting out of this objective described as ultra vires
CA 2006: declaration on part of the company’s subscribers (first members) that they wish to form a company and agree to become members of the company
Unrestricted objects - ultra vires does not apply to a 2006 Act company (unless in its AoA).
What does ultra vires mean?
Company formed under CA 1985 would have an objects clause in its memorandum. If a company acted outside of its purpose, it is described as ultra vires i.e. outside the company’s capacity.
The objects clauses of older companies continue to be in force, operating as a limitation on the company’s capacity, unless the AoAs are amended to remove its objects clause.
Amending Articles of Association?
- Special Resolution
- Alterations must be made bona fide in the interests of the company as a whole (Allen v Gold Reefs [1990])
- Shuttleworth v Cox [1927] amendment to Articles not valid if no reasonable man could consider it to be for the benefit of the company
Special Resolution?
- Decision of the shareholders
For example:
- Amend Articles of Association
- Change the name of the company
Entrenched Articles?
- An entrenched provision of a company’s Articles is one which can only be amended or repealed if specific conditions are met, or if procedures more restrictive than a special resolution are complied with.
- Can be amended by the agreement of all the members, or by court order
Articles as a contract
- Courts lean to members enforcing provisions contained in Articles through the company itslef, not against another member directly, unless a member accepts a personal obligation to another member (e.g. transfer of shares). Members may wish to enter a shareholder agreement (enforceable contract between members).
- Courts lean to preventing company infringing on members’ rights in breach of the Articles by granting an injunction.
Incorporate from Scratch?
- Memorandum
- Articles of Association
- Fee Companies House (normal and premium)
- Application for registration (Form IN01): registered address (for contact and where it can be legally served).
IN01 applciation?
- Statement of capital and initial share capital
- Statement of proposed officers (directors, company secretary)
- Details of the guarantee if limited by guarantee
- Statement of compliance with CA 2006 (legality test)
- Statement company is formed for a lawful purpose
- registered email address
When does a company become a legal entity?
From the date of incorporation set out in the certificate of incorporation.
