company formation uk

UK Introduction

The UK has a number of company forms to suit business needs, the most popular of which is the Private Limited Liability Company (usually referred to simply as a “limited company”). Most types of company are required to register with Companies House, and are subject to certain filing requirements (such as audited annual accounts) within prescribed periods. It is these registration and filing requirements, and the tax rules relating to each company form, that may be taken into consideration when deciding which type of company to use when carrying on business in the UK.

UK Private Limited Liability Company

The Private Limited Liability Company is the most widely used business form in the United Kingdom. The company name is followed by the suffix “Limited” or “Ltd”. The company is a “legal person” in its own right and is therefore separate from the finances of its owners.

A Private Limited Liability Company must have at least one director (who may also be a shareholder), and may have one or more shareholders. At least one director must be an individual. A company secretary, who usually undertakes the administrative duties in the company, may also be appointed.

Shareholders may be resident outside of the United Kingdom, and may be individuals or other companies. Shares in the company cannot, however, be offered to the public; nor can a Private Limited Liability Company be listed on any stock exchange. Each shareholder is liable only to the extent of the value of his share in the company, and is not liable for the company’s debts unless he has given a guarantee, such as a loan. There is no minimum or maximum share capital requirement.

Profits generated by the company, and in excess of profits put aside as working capital, can be distributed to shareholders as dividends. This is beneficial in terms of individual income tax as, depending on overall taxable income after allowances, dividends earned within the basic income tax rate threshold of GBP37,400 are taxed at 10% (compared to the basic income tax rate of 20%); dividends earned above that threshold are taxed at 32.5% (compared to a higher income tax rate of 40%). Individuals subject to the top 50% rate of income tax from April 2010 are taxed on dividends at a rate of 42.5%.

Private Limited Liability Companies must be registered with Companies House. The following documents are required in order to register:

Form IN01, which contains details of where the company is to be situated (i.e. England and Wales, Scotland, Wales, or Northern Ireland); the details of the directors and secretary; details of the subscribers (i.e. those who wish to take up shares at the time the company is formed); and, in the case of a company limited by shares, details of the share capital;

The Memorandum of Association, which contains the names and signatures of the subscribers, and, in the case of a company limited by shares, a commitment by the subscribers to take at least one share each; and

The Articles of Association, which gives details of the company’s internal management affairs, the running of the company and its liability.

The standard registration fee is GBP20, and the company is incorporated within eight to ten working days after receipt of the registration documents. A Same Day Incorporation service is also available, the registration fee for which is GBP50.

A Private Limited Liability Company’s accounts must be audited each year (although there are auditing exemptions for certain small and medium-sized companies), and accounts must be filed with Companies House within nine months after the end of the accounting period (or up to 21 months where the first accounts cover a period of more than 12 months). Failure to deliver the accounts to Companies House within the prescribed period will result in a penalty of up to GBP1,500. Failure to deliver accounts may also result in the director(s) being prosecuted in the criminal courts.

UK Public Limited Liability Company

Unlike a Private Limited Liability Company, a Public Limited Liability Company can offer its shares to the public, and thus can raise finance by listing on a stock exchange and selling shares on the stock market. The company name is followed by the suffix “plc”. The company is a “legal person” in its own right and is therefore separate from the finances of its owners. At least GBP50,000 must have been issued to the public before the company can start trade.

A Public Limited Liability Company must have at least two directors (who may also be shareholders), and must have two or more shareholders. At least one director must be an individual. A qualified company secretary, who usually undertakes the administrative duties in the company, must also be appointed.

Shareholders may be resident outside of the United Kingdom, and may be individuals or other companies. Each shareholder is liable only to the extent of the value of his share in the company, and is not liable for the company’s debts unless he has given a guarantee, such as a loan.

Profits generated by the company, and in excess of profits put aside as working capital, can be distributed to shareholders as dividends.

Public Limited Liability Companies must be registered with Companies House. The following documents are required in order to register:

The Articles of Association, which gives details of the company’s internal management affairs, the running of the company and its liability.

The standard registration fee is GBP20, and the company is incorporated within eight to ten working days after receipt of the registration documents.

A Same Day Incorporation service is also available, the registration fee for which is GBP50.

A Public Limited Liability Company’s accounts must be audited each year, and must be filed with Companies House within six months after the end of the accounting period (or up to 18 months where the first accounts cover a period of more than 12 months). Failure to deliver the accounts to Companies House within the prescribed period will result in a penalty of up to GBP7,500. Failure to deliver accounts may also result in the directors being prosecuted in the criminal courts.

UK Company Limited by Guarantee

A Company Limited by Guarantee has no share capital. Instead, each member of the company becomes a guarantor (rather than a shareholder) who undertakes to contribute a nominal sum should the company be wound up. The guaranteed sum can be as little as GBP1 per member. The company exists in its own right and is not owned by its members. The Memorandum and Articles of Association will set out the objects of the company (i.e. what the company is set up to do, such as to carry on a charitable organisation) and state the amount of money to be guaranteed.
This company form is often used for non-profit organisations (e.g. charities, clubs and associations) that require corporate status, which can prove useful where the organisation enters into certain contracts, such as to purchase land or assets, or employment/service provider contracts. Profits are reinvested back into the company and are not distributed to its members.

The company members may appoint directors, often referred to as “trustees”, to create and implement policies. A company secretary must be appointed.

A Company Limited by Guarantee is not required to suffix “Limited” or “Ltd” to its name; it must, however, note its limited liability on correspondence. It must be registered with Companies House; the following documents are required in order to register:

Form IN01, which contains details of where the company is to be situated (i.e. England and Wales, Scotland, Wales, or Northern Ireland); and the details of the directors and secretary;

The Memorandum of Association; and

The Articles of Association.

Accounts must be audited each year, and be submitted to Companies House and, if the company is a registered charity, to the Charity Commission. Failure to deliver the accounts to Companies House within the prescribed period will result in a penalty.

UK Unlimited Company

Unlimited Companies are rarely used. As the name suggests, members of an Unlimited Company are fully liable for the debt and winding-up costs of the company; however, the company is generally exempted from filing its annual accounts with Companies House. If, though, the company is a subsidiary of a limited company, or is a holding company, accounts must be filed by that subsidiary or holding company.

Examples of when an Unlimited Company may be a useful business vehicle are in cases where financial secrecy is desired; as a service company for a professional firm; and/or where there is minimal risk of insolvency.

Otherwise, to all intents and purposes, Unlimited Companies are incorporated in much the same way as for limited companies, and must meet the same requirements as per number of directors and shareholders, etc.

UK Partnership

A Partnership consists of two or more people who share the costs and liabilities of the business. Each partner is self-employed, but the partners together work for the benefit of the business as a whole.

Partners usually share in the management of and decision-making in the Partnership; the partners have no financial protection, however. It is possible to have one or more “sleeping” or “dormant” partners involved in the business, who invest money into the Partnership for an agreed return, but are not responsible for the day-to-day running of the business. If a partner resigns, becomes bankrupt or dies, the Partnership must be dissolved, although business can continue without that partner.

Profits are usually shared between the partners, in proportion to their share of the business (i.e. if a partner owns 30% of the business, he will receive 30% of the profits). If the Partnership’s combined profits exceed GBP68,000 per year, the business must be registered for VAT.

Each partner must keep his or her own accounts and submit annual self-assessment returns to HM Revenue & Customs (HMRC). Accounts must also be kept for the Partnership itself, and a nominated partner must submit a separate Partnership Tax Return to HMRC annually for the business. (Note, however, that all partners remain liable for the Partnership Tax Return, not just the nominated partner.)

Partnerships do not need to be registered with Companies House – indeed, any two or more individuals may form a Partnership for business purposes.

It is possible for companies to be officers in a Partnership, in which case the company is responsible for its own registration and reporting requirements in relation to its investment into, and profits earned from, the Partnership. The company must also pay corporate income tax on any profits it earns from the Partnership.

While not essential, a Deed of Partnership can be drawn up to create a legally binding agreement between the partners, the terms of which, for example, can avoid putting the business at risk in the event of a dispute between the partners, or resolving matters where, for example, a partner dies or resigns.

UK Limited Partnership

A Limited Partnership has one or more general partners, plus one or more partners with limited liability (i.e. who are liable for the debts of the entity to the extent of the amount they have invested in the partnership). It is distinct, however, from a Limited Liability Partnership. The Limited Partnership must be registered with Companies House, and all partners must sign the limited partnership statement on Form LP5. The registration fee is GBP20. A same day registration service is also available, the fee for which is GBP50.

Where a limited partner withdraws any of their investment in the partnership, or takes part in the management of the partnership, that partner loses the limited liability protection and becomes liable for the debts and obligations for that amount withdrawn or for any amount received back from the partnership.

A partner, whether general or limited, may be an individual or a company. An individual cannot be a general and a limited partner at the same time. Overseas limited partnerships cannot usually register with Companies House.

There is generally no requirement for Limited Partnerships to file accounts with Companies House; however, where the general partner is a limited company, normal filing requirements apply in relation to that partner.

UK Limited Liability Partnership

A Limited Liability Partnership shares similar characteristics to an ordinary Partnership (see above), except that liability is limited to the amount each partner – whether an individual or a company – has invested in the partnership. All partners therefore have some protection should the partnership run into difficulties. This business vehicle is particularly suited to certain professional firms – such as law or accounting firms – and for joint ventures.

Registration with Companies House is required using Form LL IN01; the registration fee is GBP20, although a same day registration service is also available, the fee for which is GBP50.

Limited Liability Partnerships must have at least two designated partners, who are given additional responsibilities under UK law. These include:

Appointing an auditor, if required;

Signing accounts on behalf of the partnership and delivering them to Companies House;

Informing Companies House of any changes (e.g. of registered office, or of partners in the firm); and

Preparing and signing the annual tax return.

Failure to submit annual accounts to Companies House within the prescribed periods will result in a penalty under the same rules as for limited companies.

UK Branch and Place of Business

An overseas company may set up a Branch in the UK, in order to conduct business in the UK on behalf of the company. The Branch remains a part of that company – it is not a separate legal entity.

A Branch must be registered with Companies House within one month of being established in the UK. The following documents are required:

A copy of the most recent audited accounts of the parent company; and

A certified copy of the company’s constitutional documents (translated into English, if the original is in a foreign language).

The standard registration fee is GBP20. A same day registration service is also available, the fee for which is GBP50.

Where a Branch becomes profitable through trade in the UK, it is required to submit an annual tax return to HMRC, taking account of any double taxation agreement that may exist between the UK and the country of residence of the overseas company. The audited accounts of the overseas company must be filed annually with Companies House within the prescribed period – late filing will result in a penalty (see under “Private Limited Liability Company” and “Public Limited Liability Company”, above).

A Place of Business is similar to a Branch in that it remains a part of the overseas company and is not a separate entity; however, a Place of Business, unlike a Branch, does not have the authority to carry on the main business of the overseas company. Instead, a Place of Business might, for example, provide certain services to the overseas company, such as IT support, warehousing or a representative office.

The registration, registration fees and filing requirements of a Place of Business are much the same as a Branch, except the registration form to be completed is Form 691.

If a Place of Business has authority to negotiate and conclude contracts on the overseas company’s behalf, it may be regarded as a Branch and therefore be subject to corporation tax in the UK.

UK Specialist Companies

Property Management Company – As the name implies, this type of company structure can be used to manage property. A Property Management Company can prove useful for certain individual taxpayers subject to the higher 40% and 50% tax rates, whose main business activity is investing in and managing property, whereby shareholders can be paid in dividends (see under “Private Limited Liability Company” above), which are subject to lower tax rates. The overall company profits are subject to corporate income tax.

Right to Manage Company – Under certain conditions, leaseholders (for example, the leasehold owners of apartments in an apartment block, and certain long-term tenants) can acquire and take over the responsibility for managing the block from the freeholder. Each leaseholder buys a nominal share of, say, GBP1 in the company. Registration with Companies House is required.

Community Interest Companies – These are generally companies limited by shares (see “Private Limited Liability Company” above) or by guarantee. The main aim of a Community Interest Company is, as the name suggests, to provide benefits to the community or to a special section of the community. As a registered company, it can raise funds in the same manner as a Private Limited Liability Company or a Company Limited by Guarantee, but is subject to regulation by the Community Interest Companies Regulator and by Companies House. A Community Interest Company cannot be a registered charity; however, a registered charity can own a Community Interest Company.

Franchise – A Franchise is a business often bought by an individual or partnership, in that they buy a licence that gives them the right to use the name and services (e.g. management, marketing) of, and sell the products of, an established business (the franchiser) within a specific geographical area. The most recognisable form of Franchise is a high street retail branch of a well-known brand. The licence agreement sets out how the business should be run, and for how long – the licence can usually be renewed so long as the franchisee meets the requirements and targets of the franchiser. A start-up fee and/or a percentage of profits are paid by the franchisee to the franchiser.

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