Formalities and Procedure
Availability of Name
Every company must have a company name, and this must be stated in the Memorandum. Obviously a name has to be chosen when a company is first formed, but it is possible to change the name of a company if the shareholders agree to this by special resolution (i.e. a resolution which must be passed by a majority of 75% of the members present and voting in favour of it, and for which 21 clear days’ notice is required).
A name cannot be used if:
- it is ‘the same as’ a name already on the index of names at Companies House. Therefore it is important to check the index at an early stage to ensure that the desired name is not already in use;
- it is offensive;
- its use would be a criminal offence; or
- it includes the words ‘limited’, ‘unlimited’ or ‘public limited company’ anywhere except at the end of the name.
It is also essential to check the Trade Mark Register to ensure the proposed name is not already registered as a trade mark in your field.
In addition, some words have been deemed to be ‘sensitive’ and require the approval of the Secretary of State or other relevant body before they can be registered. For example names which give the impression that the company is connected with HM Government or with a local authority. Other examples of sensitive name include those which may imply national or international pre-eminence. For example, if you use the word Scottish or Scotland you must show that the companies’ main place of business will be in Scotland.
Incorporation from scratch
Introduction
Once it is established what sort of company is required, there are several ways of forming a suitable company. A “tailor-made” company can be incorporated at the outset to suit individual requirements but very commonly a “ready-made” company can be bought. The decision whether to form a new company, or purchase an existing “ready-made” company is usually determined by cost and time.
Ready-Made Companies
It is possible to buy a company, which has been incorporated and therefore already exists, i.e. a “shelf” company. The shelf company will not be trading, but will have been formed in anticipation of somebody wanting to buy it and use it as a method of running a business. Shelf companies are available from company formation agents. (Please contact us for our Company Secretarial Services.)
Shelf companies are generally formed with standard Articles and an objects clause stating that the company is a general commercial company .
Newly Incorporated Companies
The alternative is to incorporate a new company. When a name for the company has been selected, the following duly completed and executed documents must be sent to the Registrar of Companies. (Please contact us for our Company Secretarial Services)
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Memorandum - there must be at least one subscriber to the Memorandum (there are commonly two), who must agree to take at least one share in the company; the number of shares which each has agreed to take is shown against his name in the Memorandum. One witness must also sign against each subscriber.
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The amount of the company's authorised share capital (i.e. the nominal amount of the share capital of the company) will need to be decided.
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Articles - which again must be signed by the subscriber(s) and witnessed.
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The situation of the registered office of the company will have to be decided on before the formation papers are lodged at the Registrar of Companies (see below). The registered office is the address of the company to which Companies House letters and reminders will be sent.
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The names of the first directors and secretary and intended place of the registered office at the company must be submitted on Form 10. This Form must be signed by the first directors and secretary, agreeing to act in that capacity, and must also be signed by the subscriber(s) or their agents.
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A statutory declaration on Form 12 made by a solicitor or by one of the first directors or secretary confirming that the necessary documents have been properly prepared.
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Where appropriate, formal justification of a ‘sensitive’ name must be submitted with the incorporation papers.
- The registration fee payable.
If all is in order, the Registrar of Companies will issue a certificate of incorporation, bearing the date of incorporation, the company’s registered number and stating that the company is a private limited company. A private limited company may commence as soon as it becomes incorporated.
Converting an existing business or partnership to a limited company
It may be that, rather than incorporating from scratch, there is an existing business, whether it be a sole trader or a partnership, which is incorporated. There are a number of tax issues relating to the transfer, which could impact on the decision to incorporate an existing business.
Income Tax
From an income tax perspective, the business formerly carried on by the sole trader or partnership will come to an end. The impact of this needs to be taken into account and there are sometimes advantages to be had in timing the date of incorporation with care.
Capital Gains Tax Implications
When the business is transferred to a private limited company there will be a disposal to the company by the partners (or sole trader) of any assets of the business, which do not remain in their personal ownership. The Inland Revenue will treat these assets as chargeable assets for capital gains tax purposes. There are two reliefs commonly used, namely rollover relief on incorporation of business and hold-over relief on gifts. Each of these is subject to a number of detailed conditions and the choice between the two is normally driven by other tax planning considerations.
Where an asset is transferred for less than the market value, full or partial relief may also be available. If, however, the partner (or sole trader) receives something for the asset, (for example money or an asset in exchange) and its value exceeds the base cost of the asset, the relief is restricted.
Stamp duty
Stamp duty is chargeable on the purchase of assets, ownership of which passed to the company by document (for example a contract or conveyance); these are dutiable assets. Where ownership of assets passes by delivery (for example stock-in trade, machinery and plant which is not fixed to the premises), the assets are not dutiable (i.e. no stamp duty is payable).
Value Added Tax
If the company is not registered for VAT purposes before the sale to the company takes place, the sellers must charge VAT on the transaction; this is avoided by ensuring that the company is registered for VAT before the sale takes place.
In addition to the tax consequences, there are a number of other consequences, such as those outlined below.
Consents
Now that there is a company with a separate legal entity, any licences, consents or leases which have been obtained in the name of the sole trader/partnership will need to be assigned or re-issued (as the case may be) to the company.
Contracts
In addition, the benefit of any contracts entered into by the sole trader/partnership will need to be assigned to the new entity or even novated. Novation is a process by which an entirely new contract is entered into in which both the third party and the new company agree that the new company will take the place of the sole trader/partnership.
Employees
Where an existing business is transferred into a company, the Transfer of Undertakings (Protection of Employment) Regulations 1981 (as amended) will apply. The effect of this in general terms is that all employees will be employed by the newly formed company on the same terms as the were employed by the sole trader/partnership, and their period of continuous employment will run from the date on which they started working for the sole trader/partnership, rather than the date of incorporation. This has implications for unfair dismissal and redundancy claims.