What does it take to incorporate a business? And what other considerations do you need to make before going ahead with the process? Here, we discuss what it means to incorporate a business and aim to give businesses interested in incorporating, in England or Wales under the Companies Act 2006, an insight into the various procedures and corporate governance considerations to think about when setting up a company.
- What does “to be incorporated” mean?
- What’s the difference between limited and incorporated?
- Do I have to incorporate my business?
- What is the process of incorporation?
- Process of incorporation
- How to get a certificate of incorporation
- How long does it take to get incorporated?
- Do I need a lawyer to incorporate?
- When is it best to incorporate?
- How to get articles of association
- Should a sole proprietor incorporate?
- Do I need to incorporate an online business?
- How many shares should a startup company authorise at incorporation?
What does “to be incorporated” mean?
One dictionary definition of the word ‘incorporate’ means ‘to constitute’ or ‘to form’. There are various ways that a business can be formed and often this will be dictated by the type of legal structure that the business has chosen to take, common structures include a limited liability partnership or a limited company.
Most commonly, when a business states that it has been incorporated, it is understood that it has set up or acquired and registered a new company to act as a legal entity with a separate existence from the owners of the business. To legally incorporate a company in the UK, a business will need to comply with the registration processes set out in the Companies Act 2006 (the ‘Act’) and it is important that businesses are aware of how and when to comply with these legal requirements.
What’s the difference between limited and incorporated?
The words ‘limited’ and ‘incorporated’ commonly refer to the types of company that can be formed under the Act. All companies can be incorporated (in that they must be legally formed and registered in accordance with the requirements of the Act) but not all companies are limited.
Under the Act, a company is a ‘limited company’ if the liability of its members (the people that own the company) is limited.
Liability can be limited:
- By way of shares, meaning a member’s liability is limited to the amount as yet unpaid on the shares held by that person.
- Or by way of guarantee, meaning a member’s liability is limited to the amount that they have agreed that they will contribute if the company goes into liquidation.
It’s important to note a company limited by guarantee is not usually permitted to have a share capital and usually has to be a private company although the Act sets out exceptions to these rules. A business could also incorporate an unlimited private company but there will be no limit on the liability of its members – these people could then be responsible for all of the obligations and liabilities of the company.
A business can choose whether its limited company will be a public or private company. A company is a ‘public company’ if it has chosen to raise capital by offering shares to the general public. It has limited liability and its shares are available to be bought or sold by a range of people in a range of ways. The company’s certificate of incorporation also has to state that it is a public company. The Act states that a company is a ‘private company’ if it is not a public company. A limited company can also become a community interest company which are companies that often carry out work of a social or benevolent nature.
Do I have to incorporate my business?
A business can decide not to incorporate a company and can instead decide to operate by different means, for example either as a partnership or as a sole trader. It is important for business owners however to keep their business affairs separate and accountable from their personal affairs. The legal structure that is best for your business will depend on a range of factors specific to your business model. Before deciding on a legal structure for your business it is useful to get professional advice from a specialist corporate solicitor not least, to help you to consider the tax implications of adopting a particular structure.
What is the process of incorporation?
There are a couple of ways that the owners of a business can incorporate a company under the Act. It is possible for the owners of a business to set up a company from scratch and to tailor every element to that business’ specific requirements. This is common for established businesses to do if they are planning to use the company as their main business vehicle.
Alternatively, it is possible to purchase a ‘shelf’ company, which is a company that is already incorporated and registered with Companies House but has not yet begun trading, ready for a business to use. The purchase of a shelf company can be fast and these types of companies can be useful vehicles when it’s required to start quickly, and when it is intended to house investments or be part of an acquisition structure rather than making key strategic decisions regarding the direction of the business.
A ‘shelf’ company will already have been given a random name and will have standard incorporation documents such as the model articles of association provided by the Act (see the table below for details on the incorporation documents). But once the company has been purchased, a business can change the name and some of the elements of the incorporation documents to better suit its strategy. To purchase a shelf company, the owners of the business will usually enter into a share purchase agreement with the current owners of the company to buy all of the shares in the company so that they own the company in its entirety.
For businesses that want to incorporate a tailor-made company from scratch, the table below sets out an overview of the key procedural points and documentation required.
To be incorporated, a business needs to register Form IN01 and a memorandum of association at Companies House with the Registrar of Companies (‘Registrar’). The documents can be submitted by post or alternatively an electronic registration process is available that allows for the submission of incorporation documents electronically. This electronic process can be quicker, but the business will need to register for an online account and keep a safe copy of its account details, including its authentication code. The proposed directors will each need to register and keep a personal authentication code for the purpose of consenting to actions done in their capacity as director and for validating documents and information electronically.
Process of incorporation
|Documents & Considerations||Commentary|
|Companies House Form IN01: Company Name||You will you need to have decided on the company’s full name. This can be harder than you think, as the name has to be available and should not already belong to another company that is not part of your group of companies. |
Before you submit a name, it is important to check (a) the online name availability checker service provided by Companies House that will search the list of registered company names to see if the name has already been taken and (b) the online UK Intellectual Property Office trade marks register to make sure that your name does not infringe an existing trade mark.
The requirements for naming the company are governed by the Act and so it is worth reading the Companies House guidance on its website that accompanies the name availability checking service carefully or alternatively you might think about appointing a third party incorporation service or corporate solicitor to do the task for you, to make sure that your preferred company name is permitted and to avoid prolonging the incorporation process.
For example, the Act, the Company, Limited Liability Partnership and Business (Names and Trading Disclosures) Regulations 2015 (SI 2015/17) and the Company, Limited Liability Partnership and Business (Sensitive Words and Expressions) Regulations 2014 (SI 2014/3140) states that some words need the express approval of the Secretary of State to be incorporated in a name because they are considered to be sensitive or restricted. This is for a number of reasons such as to protect the public interest or to not mislead people, for example, if the name incorrectly suggests a link to or endorsement from the government, a regulatory or pubic authority, or to the Crown or other British institution. The Companies House website has a list of sensitive words and expressions with information about who to contact for approval and what information to provide to them.
Another point to consider is that unless a company qualifies for and has been given an exemption not to use it, all private limited companies have to use the word “limited” or “ltd” in its name.
|Companies House Form IN01: Decision to be a public or private company||The business should decide whether the company is going to be: a private or public company; andlimited by shares or by guarantee or unlimited.|
|Companies House Form IN01: What the intended principal business activities are||The business needs to provide details of the company’s intended business activities by selecting an activity or activities from the United Kingdom Standard Industrial Classification of Economic Activities list which classifies businesses according to the type of their economic activity.|
|Companies House Form IN01: Details of the registered office||The business needs to decide whether the company’s registered office will be in England and Wales, Scotland or Northern Ireland and must provide details of the intended address of the company’s registered office. One point to bear in mind is that the registered office address has to be in the same country as where the company is registered. The registered office is where most communications and notices to the company will be sent as sending notices to a company’s registered office is deemed to be effective service of a document under the Act.|
|Companies House Form IN01: Details of directors and secretary||A private limited company is required to have at least one member and one director. A public limited company is required to have at least two directors. The Act requires businesses to state on the registration application form who the directors are and to provide certain personal data about themselves, including their service and residential addresses. A service address will be publicly available on the Companies House register and that might be something for the directors of a business to consider before submitting the form. A director’s residential address does not necessarily have to be publicly disclosed if it is different from the service address. A director can also apply to be exempt from disclosing their residential address to credit reference agencies and if an exemption has been granted this must be stated on the form. |
There is no requirement under the Act for a private company to have a company secretary however public companies are required to have at least one and there are specific requirements under the Act as to who can act as a company secretary for a public company. The details on the secretary must be included on the registration form. There are processes in place under the Act that allow a business to change the directors and secretary from time to time.
|Companies House Form IN01: Initial shares held by members and a statement of capital or guarantee||The business must state who the first shareholders (called ‘subscribers’) are going to be if the company is limited by shares and must provide a statement of the share capital setting out the total nominal value of the shares and any unpaid amounts on the shares. |
A company can have different classes of shares that carry different rights (such as different dividend rights, rights on a winding up of the company, redemption rights or voting rights) and these should be set out as well for each class of shares.
If the company is limited by guarantee, the business needs to provide a statement of guarantee setting out which of the first members (again ‘subscribers’) will contribute specified amounts to the assets of the company if the company goes into liquidation.
|Companies House Form IN01: Persons with significant control||The Act states that a company has to keep a register of persons with significant control (‘PSC’). On the registration form, a business will also need to provide a statement of those persons that have or could have significant control over the company. Going forward, the company’s PSC register will need to be regularly updated and those updates filed at Companies House.|
|Companies House Form IN01: Statement of compliance||The business will also need to give a statement of compliance as part of the registration form. A company must also comply with UN financial sanctions.|
|Companies House Form IN01: Public information keeping||If it wishes to, a private company can elect to keep information about the company’s directors, members, persons with significant control and secretaries on a public central register at Companies House.|
|Memorandum of association||The memorandum of association is a statement that that the subscribers want to form a company and have agreed to become members of that company (and shareholders if the company has a share capital). The memorandum is required by law under the Act.|
|Articles of association||The Act states that every company has to have registered articles of association at Companies House. Articles of association are the provisions by which the constitution of a company is formed and according to which the business is governed. They are legally binding for a company and its members. |
The business has to decide whether it will (a) adopt without amendment the model articles of association as provided by the Act (‘model articles’) which contains a ready-made set of rules and provisions, or whether it will (b) either amend the model articles or create tailor made articles with provisions that are specific to the business, in which case it will need to provide a copy of those amended or new articles as part of the registration process. If a business does not register articles, the applicable model articles will be deemed to have been chosen to govern the company.
|Additional documents for public companies||A public company will still need to file a Form IN01 and memorandum and articles of association (if required) with the Registrar but before it can begin trading it will need to apply for a trading certificate, which require the company’s share capital to be at least £50,000 or the euro equivalent set out in statute, one quarter of which must be paid up along with the whole of any premium on the share capital, by subscribers in cash. Form SH50 (apply for trading certificate for a public company) should be submitted to the Registrar.|
|Delivery of the incorporation documents||A business can deliver the incorporation documents to the Registrar by post, by hand or by electronic means through the Companies House web-filing and incorporation service.|
How to get a certificate of incorporation
A company is incorporated when a certificate of incorporation is issued by Companies House. If the application documents contain all of the necessary information, have been submitted and the correct fee has been paid, the business will receive a certificate of incorporation setting out when the company was incorporated and what the company’s registered number is. Once a business has this certificate, it means that its company has been properly incorporated in accordance with the Act and will be searchable on the Register of Companies.
Following incorporation there are various obligations for a company to comply with, such as holding its first board meeting and setting up a register of directors (including their residential addresses and service contracts) and secretaries, a register of persons with significant control and a register of members, which will all usually be held at the company’s registered office. It is also important to register with HMRC in respect of your corporation tax obligations.
How long does it take to get incorporated?
You can incorporate your business at any time by applying to Companies House. The time for incorporating a company will vary depending on the means by which the incorporation documents were submitted to the Registrar and whether there are any issues with the content of the incorporation documents or questions from Companies House.
If the documents are submitted in hard copy (by post or by hand) or electronically, then incorporation could take around seven days. An expediated same-day process is available and this can take up to 24 hours from submission of the documents. Web incorporation is also available where an applicant can apply directly to Companies House online and incorporation usually can take from 24 -72 hours from completion of the online process.
Do I need a lawyer to incorporate?
You do not necessarily need a lawyer to incorporate a company as the incorporation process can be relatively simple if you know what you are doing and are clear on which type of legal structure is best for your business to use but it is prudent to seek legal advice on the more complex aspects of incorporation, for example the drafting of the company’s articles of association or the amount and type of shares that the company has and the rights that those shares carry. These more complicated matters can have a significant impact on how the business can be managed and the freedoms given to investors and financiers for example. As a general rule, unless you are confident working through the incorporation process, it is advisable to get professional support to avoid any delays or mistakes along the way.
When is it best to incorporate?
A business can incorporate a company at any time but usually businesses decide on their legal structures at the beginning or in the early stages of the life of the business. Having said that, a business may choose to change its structure during the early growth phase of the business to better facilitate its evolving nature or at a point during the life of the business where a restructuring is beneficial or to accommodate a change in circumstances for the business itself or its owners.
How to get articles of association
All companies incorporated under the Act are required to have articles of association, either the model articles (amended or unamended) or bespoke articles. The model articles are set out in schedules 1-3 of The Companies (Model Articles) Regulations 2008 (SI No. 3229) and bespoke articles can be drafted either by the business or by a legal professional (the latter is recommended).
Articles of association are key provisions for a company – the articles are a fundamental cornerstone of how a company is run and managed. They set out the rules that are chosen by the company’s members on how to govern the company’s affairs. The articles also instruct the company’s officers how to manage and operate the company on a day to day basis. A company’s articles act as a statutory contract between the company and its members, and also between each of the members themselves.
A business can also indicate in the incorporation documents to be submitted to the Registrar whether it wants any of its articles to be entrenched, meaning that specific articles can only be repealed or amended if certain conditions are met and these conditions are more onerous than the requirements under the Act for amending or repealing articles, but only if all of the members of the company agree to the entrenchment.
Should a sole proprietor incorporate?
The decision as to whether a sole proprietor should incorporate a company as a vehicle to operate its business will turn on the facts and circumstances surrounding the specific business. Before a sole proprietor decides to incorporate a company or change its structure, it is recommended that professional advice is sought on the merits and potential implications of doing so.
One of the key benefits of incorporating a company is the fact that a company is a separate legal entity to the sole proprietor and that will usually mean that the owner of the company has the protection of limited liability. Keeping an owner’s personal assets separated from the business’ assets can give business owners some comfort that the risks involved with running their business are mitigated on a personal level.
Another perceived benefit is the fact that companies are seen to be professional and accountable and therefore credible to third parties working with the business or looking to invest in the business. In the latter instance, investors may favour a company limited by shares as they can invest in the business in exchange for share capital and rights attaching to those shares that have legal enforceability. There can also be tax advantages to incorporating a company, but this will depend on the financial status and circumstances of the sole proprietor’s business as well as any existing tax benefits that the sole proprietor currently enjoys.
Considerations when deciding whether to incorporate a company will no doubt also involve the level of regulation involved with running a company – both as an owner of a company and as a director of a company (where incurring personal liability is a possibility), including the enhanced governance required to comply with the Act. Many aspects of a company are also required to be publicly available and this may not be desirable to some sole proprietors that currently enjoy a relatively high level of privacy in their dealings.
Do I need to incorporate an online business?
It is very unusual for a company not to have some presence online, particularly if the company is a public company and depending on the industry sector of your business, you may be at a commercial disadvantage if your company does not have a website. An online business (meaning a business that operates online) will be bound by a lot of the same legal obligations as businesses operating physically offline and in fact, may be subject to some additional compliance. There are various legal disclosure obligations relating to the information that must be included on or published on a company website, particularly for public companies.
How many shares should a startup company authorise at incorporation?
The number of shares that a company will authorise at incorporation will depend on how many shareholders a company is going to have, the intended distribution of control over the company and the level of individual investment in the company. There is no longer a requirement for a private limited company to have an authorised share capital limit and so unless the company has more than one class of share, the directors are free to allot shares without requiring additional authority from the company (unless the company’s articles of association state otherwise). If the company has more than one class of shares, or is a public company then a separate authorisation will be needed from the company. It is worth seeking legal advice on the allotment of shares in your company, as this can be a complex process to get right – for example in some circumstances, rights called ‘pre-emption rights’ (which give some shareholders a preferential right to buy any shares in the company that are proposed to be sold) may need to be addressed and if necessary, disapplied, before the authorised shares can be issued and allotted to a shareholder.
In private companies, it is likely that business owners with more investments or who have the most of the control of the business will expect to hold a larger proportion of the shares of the company to other shareholders and to be able to exert a bigger influence over the company by exercising the rights attaching to those shares to influence key the decisions that the company makes.
A business should also think about how it is going to raise funds – if it is intended to give investors an equity stake in the business it might be worth authorising a larger number of shares at incorporation.