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This guide provides an overview of the different legal structures a business can operate. Tax and finance considerations are paramount, and this guide aims to help you in your decision as to which structure will best suit your business.


Consideration 1 - Choosing the right Legal Form

The different legal forms that are available are:

  1. Limited Liability Company
  2. Sole Trader
  3. Partnership
  4. Limited Liability Partnership
  5. Companies limited by guarantee

Limited Liability Company

A limited liability company has a separate legal identity from its shareholders.

The business can only cease to continue following the winding up of the company.

If you plan to grow a business, then a limited company is a good legal entity to use since it offers the flexibility to sell shares to outside investors. However, you should be careful about who you allow to become shareholders of your company. Shareholders will share in the ownership and possibly the decision making of your business.

As a shareholder your liability is limited to the amount invested in the company. You risk greater losses if you stand as a personal guarantor for any of the company’s debts. If the company goes into liquidation with debts, the creditors are paid out of the sale of the assets of the company.

Under normal circumstances, creditors have no legal right to obtain repayment from the directors or other shareholders of the business. The debts of the company should not affect the directors’ personal credit ratings.

A limited liability company can raise capital by acquiring a loan or issuing new shares in the company. When selling a stake in the business to a key manager, you may decide to tie him in, or introduce bad leaver provisions.

Unlike private companies, public limited can sell their shares openly on a market such as the London Stock Exchange. A private company cannot offer its shares for sale to the general public.

To set up a private limited company you will need to register with Companies House.

This is known as ‘incorporation’.

To begin the process, the following are required:

  • A company name (subject to rules on what is permitted);
  • An address for the company;
  • At least one director;
  • At least one shareholder; (Note 3 & 4 can be the same individual)
  • Agreement of all initial shareholders (‘subscribers’) to create the company - known as a ‘Memorandum of Association’;
  • Details of the company’s shares and the rights attached - known as a ‘statement of capital’;
  • Written rules about how the company is to be run - known as ‘articles of association.’

Upon registration of the company, you will receive a ‘Certificate of Incorporation’. This confirms the legal existence of the company (showing the company number and formation date).

Sole Trader

Most small businesses operate as sole traders. If two or more people choose to go into business together then they may elect to trade as a partnership. Partnerships can be a good way of sharing management burdens and making sure people commit to the success of the business. However, if you choose to be a sole trader or a partnership you are personally liable for all your business debts.

Partnership

In a partnership, each partner is liable ‘jointly and severally’ for all the business debts of the partnership. This means that, if the business fails, you can end up having to pay your partners’ share of the debts, as well as your own. You may wish to have a “Partnership Agreement” in place in case of this scenario arising. Importantly, for income tax purposes each partner is only liable for their own share of the profits.

Limited Liability Partnership (LLP)

Limited liability partnerships are most often set up by professional services firms such as accountants or solicitors. This is a corporate body with its own legal identity and capacity. It must be registered at Companies House. A limited partnership has the organisational flexibility of a partnership but offers limited liability to members. Members are self-employed and taxed in the same way as in an ordinary partnership. Annual accounts must be prepared and filed, and there are other requirements similar to those for a limited company.

Unlimited Company

Since an unlimited liability company does not have any limit on the liability of its members, the rules relating to the maintenance of capital do not apply.

Consideration 2 – Company Logo

There is no legal requirement to register a company logo; however, it is highly advisable to get one designed and to register /protect its use and adoption by others.

To protect your Company logo from being used by other entities, the logo should be registered as a trademark. To meet the legal requirements of the Intellectual Property Office (IPO), a trademark must be a distinctive word, sound, logo or picture.

There are several restrictions on the choice of logo. It must not, for example, contain any offensive material, be misleading or describe the goods or services it represents. A registered logo cannot be a commonly-used statement, phrase or collection of words frequently used by the general public.

How do you register a logo?

  1. Search the trademarks database to check whether an identical or similar trademark has already been registered. In some cases, you may be able to obtain a letter of consent from an existing trademark holder allowing you to register a similar trademark.
  2. Applications to register a brand logo with the IPO can be completed online or by post. The following details will be required for the application:
    1. Type of owner – individual person/sole trader, private limited company partnership or limited liability partnership (LLP), trust or other;
    2. Company registration number (if applicable);
    3. Full registered company name (if applicable);
    4. Contact postal address, telephone number and email address.
      The cost of applying to register a trademark is £1701, which is non-refundable. Within 20 days, an ‘examination report’ containing feedback on your application should be received. If the examiner has no objections to the application, it will be published in the trademarks journal for two months. This is to give members of the public an opportunity to raise any external objections. Provided no objections are raised, a certificate of successful registration will be issued.
  3. In the event the trademark application is opposed, the IPO will inform you as soon as possible. Three options then exist in this scenario:
    1. Withdrawal of the application.
    2. Raise discussions with the opposing party.
    3. Defend your application.

Registration of the trademark will not be permissible until the matter has been completely settled. Legal costs may arise in the course of challenging the opposing party.

Consideration 3 – Company Domain Name

Once again not a legal requirement but a commercial must.

Where the company will operate using a web site, or wants any kind of social media presence it is imperative that the domain name is registered. A domain name is a name used to refer to the company website/domain.

There are a number of credible reasons for having a domain name and ensuring it is correctly registered:

  1. The domain name will move with the company, even if the server provider is subsequently changed. Therefore regular visitors or clients familiar with the current site name would not have to be informed about a change of web address.
  2. A domain name affords credibility. It is highly unlikely that future or prospective clients will be willing to deal with a company that does not have its own domain name.
  3. A domain name which compliments the business or name of the company allows clients to remember the name easily.

The easiest, quickest and most cost effective method of registering a domain name is by engaging the services of one of the many providers currently undertaking this type of work.

Consideration 4 - Trade Marks

A trade mark is a symbol, word, or words legally registered or established by use as representing a company or product.

A TM3 form is the most commonly used for registration purposes, which requires various levels of detail for each trade mark. If registering a name and a logo, two registrations would be required: firstly for any word you wish to trade mark and secondly for any image.

Class of business – the government has published a list which outlines the classes of business you may wish to have the trade mark in. One class is included in your application and if others are required then this is permissible but an additional fee is payable.

Costs (From the IPO):

  1. Fee £200 [Includes one class of goods or services] per application.
  2. £50 [for each additional class].
The registration process takes approximately 4 months provided there are no objections. Registered trade marks last 10 years.

Process:

  1. Once the application is submitted the nominated person will receive an email and/or letter to confirm that the application has been received;
  2. The application will be reviewed by the IPO;
  3. f the IPO have no objections a record of the registration will be published in their journal and remain there for 2 months. This is to allow any objections to be raised;
  4. f the IPO have no objections a record of the registration will be published in their journal and remain there for 2 months. This is to allow any objections to be raised;
  5. The IPO will set a date for when the objection period shall finish;
  6. If there are no objections or you have satisfied the IPO that your trade mark is different (different class of business etc.) you will receive a letter confirming the registration and a certificate. The trade mark will be registered and protected for 10 years.

Europe

If you require trade mark protection in countries which are members of the European Union (EU), it is necessary to apply for a Community Trade Mark (CTM) through the Office for Harmonization in the Internal Market (OHIM) in addition to the IPO requirements. The application can be made through the IPO, but this incurs a £15 handling fee. The trade mark application fee is €900 for up to 3 classes of goods and services, which rises to €1050 if filed on a paper form. Each additional class is €150.

Consideration 5 - Company Registration

You can register online with Companies House if your company is limited by shares and uses standard articles of association (known as ‘Model Articles’). Otherwise, a different method of registration must be used.

The company will also need to register for Corporation Tax within 3 months of commencing business (discussed later).

The company can be registered:

  1. Online - provided the company is limited by shares and uses standard articles of association.
  2. By post using form IN01.
  3. Using an agent.
  4. Using third-party software.

Online applications are usually registered within 24 hours and cost £15.

Postal applications take 8 to 10 days and cost £40 (paid by cheque made out to ‘Companies House’).

Same day service costs £100. Companies House must receive your application by 3pm with the delivery envelope marked ‘same day service’ in the top left-hand corner.

Consideration 6 - Company Name & Registered Office Address

Company Name

A limited company can trade under its registered name or use an alternative name, provided that the ownership and limited liability of the business is disclosed.

Private limited companies are not allowed certain names, such as “insurance”. There are a number of restrictions and controls of choice of a company name. Therefore, when starting a business you need to make sure that the name that you desire, or one close to it, is not being used by another firm in a similar line of business. To do this you should check the Companies House Index of Registered Limited Companies and LLPs at www.companieshouse.gov.uk/info, or employ a company registration agent for this task. This search will not include names of sole traders or partnerships, or ‘trading as’ names.

The name must not be misleading or offensive. The use of certain words is prohibited unless they can be qualified. You can find the GP1 booklet on the Companies House website for more information on prohibited words: www.companieshouse.gov.uk/about/gbhtml/gp1.shtmlor .

Registered Address

The registered office address is where official communications will be sent and must be:

  1. A physical address; and
  2. In the same country your company is registered in.

The company address will be publicly available on the register.

Consideration 7 - Shares and Shareholders

A company limited by shares must have at least one shareholder.

These shareholders are owners of the company and have certain rights, e.g. directors may need shareholders to vote to agree changes.

When registering a company a ‘statement of capital’ which provides the following is required:

  1. The number of shares of each type the company has and their total value - known as the company’s ‘share capital’;
  2. The names and addresses of all shareholders - known as ‘subscribers’ or ‘members’;
  3. Prescribed particulars - stating what rights each type (known as ‘class’) of share gives the shareholder, and must include:
    1. What share of dividends they will receive;
    2. Whether they can exchange (‘redeem’) their shares for money;
    3. Whether they can vote on certain company matters; and
    4. How many votes they will receive.
Consideration 8 - Memorandum and Articles of Association

When registering a company, the following are required:

  1. A ‘Memorandum of Association’ - confirms that the subscribers wish to form a company under the Companies Act and agree to become members of the company. In the case of a company that is to have a share capital, they undertake to receive at least one share each. The document must be in a prescribed form, be authenticated by each subscriber and, must be delivered to Companies House together with an application for registration of the company and the new company’s articles of association; and
  2. ‘Articles of Association’ - set out how the company is run, governed and owned. The articles can put restrictions on the company’s powers – which may be useful if shareholders desire safeguards to ensure that the directors will not pursue certain courses of action, at least without shareholder approval.

The exact wording of the memorandum cannot be changed. It is advisable to use a Memorandum of Association template to ensure the document is valid. The majority of companies use standard articles (known as ‘Model Articles’) which can be obtained online. Company specific articles can be written but this prohibits online registration.

In addition to the articles, which is a public document, the shareholders may enter into a shareholders’ agreement to augment the articles in relation to the running, governance and ownership of the company that they want to keep out of the public domain.

Consideration 9 - Financials

There are a number of pertinent issues that will need consideration.

    1. Bank Account

It is essential that a suitable bank is chosen and that a productive working relationship is promptly established. If the company has a sole director, the most convenient and the quickest option may be to use the bank who holds the current account for this director as they may be able to verify his/her identity and support the application based on the existing accounts.

It is important to consider in advance what type of account(s) and the level of access required and, in addition, the current services and facilities necessary for the company to function and how these will develop in the future.

Seeking specialist financial advice in respect of this is advisable.

Most banks will request to see:

      1. A copy of the business plan;
      2. Details of the source of the business finance;
      3. Copies of the Memorandum and Articles of Association detailing the business and its activities;
      4. An original copy of your Certificate of Incorporation (printed on the correct paper);
      5. Copies of any share certificates that have been issued;
      6. A driving licence or passport and a recent utility bill for each officer;
      7. A list of the people who can sign on the bank account and a sample of their signature.

Usually, all directors, or officers of the Company and signatories will be required to attend in person.

It can take as little as 15 minutes to apply for an account online, but it will usually take up to 4 weeks to complete the process of opening a new company bank account.

This lengthy time frame should be factored into any time scales drawn up in relation to setting up any company. Some of the newer challenger banks an you get you a bank account up and running in 48hours subject to you/the Company undergoing and meeting credit checks.

    1. Tax

Specialist tax advice is a pre-requisite to establishing a new company. Advice in relation to both of the following is particularly pertinent:

VAT

VAT registration is compulsory if your sales (“taxable supplies”) in a 12-month period exceed £81,000 or are expected to exceed this limit in the next 30 days alone. Most businesses can register online including partnerships and a group of companies registering under one VAT number.

VAT registration is compulsory if your sales (“taxable supplies”) in a 12-month period exceed £81,000 or are expected to exceed this limit in the next 30 days alone. Most businesses can register online including partnerships and a group of companies registering under one VAT number.

When you receive your VAT number from HMRC, you can sign up for a VAT online account and you should receive a VAT registration certificate within 14 working days, although it can take longer.

PAYE

If you are planning on employing people you must register with your PAYE tax office. If you are paid a salary by your own company, you count as an employee and are therefore subject to PAYE.

You can register as a new employer using the HMRC online services ( https://online.hmrc.gov.uk/registration/options ).

Corporation Tax

Post registration with Companies House, the company will need to be registered for Corporation Tax within 3 months of commencing business (‘business’ includes buying, selling, employing someone, advertising, renting a property and certain other activities). A penalty may be incurred for late registration.

Registering for Corporation Tax online requires the following information:

  1. The company’s 10-digit Unique Taxpayer Reference (UTR). This is posted to your company address by HM Revenue and Customs (HMRC), usually within a few days of the company being incorporated at Companies House;
  2. Company’s registration number;
  3. Date the company started to do business; and
  4. The date the annual accounts are made up to.

Once registered for Corporation Tax, you will be able to sign in and report it in your Company Tax Return. HMRC will also inform you of the deadline for paying Corporation Tax.

Insurance

You must ensure appropriate business cover is in place( buildings cover, business interruption, freight and carriage, cyber, some insurances are compulsory such as Employers’ Liability, and your requirements will be different depending upon the nature of your business.

Consideration 10 - Other Practical Issues
    1. Other legal requirements

It may be that your company will need a licence, approval or certification to carry out its business. Insurance companies, brokers or underwriting agents, will have to apply to the FCA for regulatory approval (you can do this by visiting the FCA website and by filling out the most applicable application pack for FCA authorisation). If your business deals with insurance for construction you may wish to look into Construction Risk and Insurance Specialist (CRIS) certification. You need to think carefully about what approvals your business needs. If you require further advice please do not hesitate to contact EC3\Legal.

    1. Finance

There are a number of pertinent issues that you will need to consider such as how the business is going to be financed; how much will different shareholders’ contribute and how profits (and losses) will be shared. Many of these issues can be dealt within the shareholders’ agreement. You should seek legal advice, when drafting, or agreeing to a shareholders’ agreement. If you are a shareholder, then you need to make sure that the security offered in the shareholders’ agreement is adequate to the risk, and the potential return. If you are putting capital into the company, then you need to be clear upon if, and when, you may need to contribute further capital, and the control of other shareholders. Further, you need to be aware of how long your capital is tied up in the company for. Do you have an option for the company to buy back your shares after a certain period?

When drafting a shareholders’ agreement, whether in a director or shareholder capacity, you should always seek independent legal advice. This is to ensure the shareholders’ agreement is legal, and that it addresses any outstanding issues, including how shareholder funds and shares will be managed.

    1. ‘Off-the-shelf’ companies

To speed up the process, you can buy an ‘off-the-shelf’ (ready made) company. However, you will need to change certain details of the company such as the officers, auditors, registered address, and the transfer of the shares. An additional fee will be charged. Therefore, it may be easier to incorporate a company from scratch and this way it can be tailored to the business needs from the beginning. Many reputable agents incorporate a company electronically on the same day without any additional fee.

Companies House provides guidance notes and forms to help you with the whole of your company formation process.

You can call Companies House on: 0303 1234 500, or visit them at their website: www.companieshouse.gov.uk

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