Company Formation and Administration Notes

Company Formation and Administration

Types of Business Entity

  • Distinction between sole traders, partnerships, and companies.

  • Understanding of limited liability:

    • Business owners are only liable for debts up to their investment in the business.

  • Types of companies:

    • Private Limited Companies (Ltd)

    • Public Limited Companies (PLC)

  • Concept of separate personality and veil of incorporation:

    • A company is a separate legal entity distinct from its owners.

Sole Trader

  • Capital: Funded by personal savings or loans.

  • Liability: Unlimited liability; personally liable for all business debts.

  • Ownership and Control: Complete control, treated as one entity with the business.

  • Regulation: Minimal accountability; no requirement to file annual accounts (must file tax returns).

Partnership

  • Definition: Business relationship between two or more persons to earn profit.

  • Capital: Typically comes from partners, often in equal shares.

  • Liability: Unlimited liability for all partners; personal assets can be targeted for debts.

  • Ownership and Control: Equal sharing of ownership/control unless specified otherwise.

  • Regulation: No external accountability; partners must file individual tax returns.

Limited Company

  • Capital: Contributed by shareholders.

  • Liability: Limited liability; creditors cannot pursue personal assets beyond share investment.

  • Ownership and Control: Owned by members/shareholders and managed by directors.

  • Regulation: Must file accounts with Companies House; more regulatory scrutiny for public companies.

Company Registration

  • Essential for legally starting a business.

  • Requires submission of various documents:

    • Application for Registration: Company name, registered office, liability type.

    • Memorandum of Association: Agreement from subscribers to form the company.

    • Articles of Association: Rules for management and operation; can adopt standard articles or amend as needed.

  • Certificate of Incorporation: Proof of legal formation of company.

Types of Capital

  • Share Capital: Raised through issuing shares, divided into ordinary shares and preference shares.

    • Ordinary shares: Voting rights, dividends.

    • Preference shares: Fixed dividends paid before ordinary shares during liquidation.

  • Loan Capital: Long-term borrowing, including secured loans (fixed and floating charges).

Dividend Policy and Capital Maintenance

  • Dividends can only be paid out of distributable profits; ensure net assets exceed subscribed share capital.

  • Capital Maintenance: Companies cannot reduce share capital without following specific legal procedures.

    • Requires shareholder and court approvals for public companies.

Borrowing and Charges

  • Types of Charges:

    • Fixed Charge: Attached to specific non-current assets.

    • Floating Charge: Applies to current assets until crystallization.

  • Borrowing powers established under Companies Act 2006 for both public and private companies; includes loans and overdrafts.

Important Legal Cases

  • Salomon v. Salomon & Co Ltd (1897): Established the principle of separate legal personality, highlighting that debts of the company do not affect owners personally unless under certain conditions.