Terms:
Parent company/holding company = a company that owns (or partially owns) the shares in another company (the
subsidiary)
The subsidiary = a company where its shares are owned/held by the parent/holding company.
Paid up share capital = when a share is purchased, the buyer will either pay the full amount for the shares or pay a
partial amount. Any money which is paid contributes towards the ‘paid up share capital’.
Share capital = funds the company has made by issuing shares
Nominal value = the face value of a share without taking into consideration any premium charged by the issuer or any
increase in market value since the share was issued.
General information:
Company has no legal personality and cannot trade until it is incorporated s16 CA
Incorporation occurs when Companies House issues the certificate of incorporation – it is proof the company exists.
o Private companies – can trade at this stage
o Public companies – Registrar must first issue a Trading Certificate
A company cannot ratify agreements/contracts made before incorporation – individuals may be liable to the third party
for breach of contract – s51 CA.
o Once incorporated, the company could go on to indemnify the individual.
Information about private companies:
The name of a private limited company must end with ‘Limited’ ‘Ltd’ – s59(1)
The minimum number of shareholders is 1 – s7
The minimum number of directors is 1 – s154(1)
There is no need for a company secretary – s270(1)
Documents required before trading can commence: Certificate of Incorporation – s15 – trading can start when it is incorporated
The company must issue at least 1 share (and the shares do not have to be paid in full immediately). The shares cannot be offered
to the public.
Incorporating a private limited company -what needs to be sent off:
Application form IN01 require details such as company name, registered office, statement that the company is limited
by shares, statement it will be a private company, list of directors.
o Name: must observe provisions under s53-66, such as:
Name cannot already be registered -s66
Name cannot be similar to an existing name -s67
Name cannot be offensive -s53
It must comply with guidance on sensitive words – s55
o The name can be changed by special resolution – s77 / amend articles to change the name – s21 – special res.
Articles of association s9(5)(b) a copy of the articles – these will be unamended MA’s (s18(2) and s20(1)) unless special
articles are attached – company must send off any amended articles.
Memorandum of association s8 – this will state the shareholders details and confirm this wish to subscribe and create
a company and will take at least 1 share each – this memorandum must be authenticated by each subscriber.
Proposed officers details of directors and any company officers such as secretaries – s12.
Statement of capital this will detail the total amount of shares which the subscribers are subscribing to / the aggregate
nominal value of the shares / rights attached to shares / class and number in the class of shares / and how each
individual will take the company shares / the amount to be paid up on the shares (s10)
Statement of compliance – s13 – showing the company has complied with registration provisions under the CA.
Nominate a registered office – s86 or a SAIL via a form AD02.
Constitutional documents:
The articles of association (which may be the MA’s) created when the company is incorporated. It is a contract between the
company & shareholders detailing rights, obligations, restrictions a company has – s33.
The Model Articles the standard articles a company can adopt – or amend – it is quicker to adopt as is.
Memorandum of association states the shareholders wish to form the company / subscribe / will take at least 1 share – s8.
Objects:
Companies incorporated before CA 06- had to list all activities they engaged in – acting outside the object would be ultra vires.
These companies retain restricted objects and can amend this so have unrestricted articles -stating s28 does not apply.
Companies under CA – unrestricted objects (s31) – can engage in any type of business and things are only restricted if they are so
in the Articles. Even if there is a restriction, the validity of the action cannot be questioned (s39) meaning the third party is
protected even if the company lacked authority to enter into it due to the restriction. For contracts entered into pre-incorp,
company is not bound to these and the individual who did enter the agreement could be liable if the company does not ratify s51.
, Effect of registration:
Upon registration…
Company is issued Certificate of Incorporation – proof of registration s15
The company can begin trading / exercising powers – s16(3)
Subscribers to the memorandum become shareholders – s16(5)
Shareholders liability is limited to the extent of their unpaid shares
Those named in the statement of proposed officers are officially and automatically appointed - Directors /
secretaries– s16(6)
Company is a separate legal person capable of entering into contracts– Salomon v Salomon
Post registration considerations:
Directors required to appoint auditors unless reasonably not required to have auditors – s485
Directors may wish to change the accounting reference– s392 / MA 3
Register of persons with significant control:
All companies must keep a PSC register listing those who have significant control over the company. This will be those who
(s790):
(a) owns more than 25% of the shares in the company (this would include non-voting shares, such as preference shares); or
(b) owns or controls more than 25% of the voting rights in the company (this would usually be ordinary shares); or
(c) has the right to appoint or remove a majority of the board of directors of the company; or
(d) has the right to exercise, or who actually exercises, significant influence or control over the company.
Converting a partnership to a company:
The conversion of a partnership into a company involves the sale of the partnership business by the partnership owners to the
new owner who is the company.
The formalities are as follows:
The owners of the partnership business will either form a company or purchase a shelf company and become the
directors and shareholders of that company.
The consideration for the transaction is likely to be shares/cash in the company in return for the company buying the
partnership business. The value of the partnership is what allows the partnership owners to buy the shares.
Once the company has been formed, it will purchase the partnership business, including all its assets. This will be
done under contract law via a sale agreement which will detail – the assets the company is buying, the shares being
sold, covenants on behalf of the company to indemnify the sellers regarding liability for debts…
If the company takes over the previous name of the business and this is not the same as the company’s name, it will
be necessary for the company’s stationery and a notice at the company’s place of business to state the company’s
name and address (CA 2006, ss 1202, 1204).
See above for company incorporation details.
Administration tasks:
Allot the shares in the company to the partnership owners who will become the shareholders in the company (Eqt
finance/allotting shares)
The company purchasing the partnership – SPT (as it is a transaction between the company and its ‘new’ directors) –
shareholder resolution to enter into the contract to buy the partnership and to enter into the SPT.
Once partnership owners become shareholders – update register of members / PSC?
Keep all board mins and resolutions for 10 years. (Allotting shares ordinary resolution need to be filed with CH)
Tax implications:
The individual partners will be assessed to income tax under the rules for the closing tax year of a business (see 24.2.4) up to
the date of the transfer of the business. Afterwards, the company pays corporation tax on profits. In so far as the partnership
sells to the company assets on which capital allowances have been claimed (eg machinery and plant), there may be a
balancing charge to income tax on any profit identified by comparing the sale proceeds with the assets’ writtendown value.
Example: machinery cost £50,000 when purchased three and a half years ago and capital allowances have been claimed
totalling £22,432, so that the written-down value is £27,568. If the value attributed to this machinery on the sale was £30,000,
there could be a balancing charge (increasing the amount of profit needing to pay tax on) to income tax on the £2,432 ‘profit’.
This ‘profit’ would be taxed as part of the trading income in the closing tax year. Conversely, if there is a loss calculated on the
same basis, there will be a deduction from profits for the final year for income tax purposes, known as a balancing allowance.
If the company is controlled by the sellers of the business, the company and the sellers can elect within two years that the
company take over the position of the sellers so no balancing charge occurs. (?)
Parent company/holding company = a company that owns (or partially owns) the shares in another company (the
subsidiary)
The subsidiary = a company where its shares are owned/held by the parent/holding company.
Paid up share capital = when a share is purchased, the buyer will either pay the full amount for the shares or pay a
partial amount. Any money which is paid contributes towards the ‘paid up share capital’.
Share capital = funds the company has made by issuing shares
Nominal value = the face value of a share without taking into consideration any premium charged by the issuer or any
increase in market value since the share was issued.
General information:
Company has no legal personality and cannot trade until it is incorporated s16 CA
Incorporation occurs when Companies House issues the certificate of incorporation – it is proof the company exists.
o Private companies – can trade at this stage
o Public companies – Registrar must first issue a Trading Certificate
A company cannot ratify agreements/contracts made before incorporation – individuals may be liable to the third party
for breach of contract – s51 CA.
o Once incorporated, the company could go on to indemnify the individual.
Information about private companies:
The name of a private limited company must end with ‘Limited’ ‘Ltd’ – s59(1)
The minimum number of shareholders is 1 – s7
The minimum number of directors is 1 – s154(1)
There is no need for a company secretary – s270(1)
Documents required before trading can commence: Certificate of Incorporation – s15 – trading can start when it is incorporated
The company must issue at least 1 share (and the shares do not have to be paid in full immediately). The shares cannot be offered
to the public.
Incorporating a private limited company -what needs to be sent off:
Application form IN01 require details such as company name, registered office, statement that the company is limited
by shares, statement it will be a private company, list of directors.
o Name: must observe provisions under s53-66, such as:
Name cannot already be registered -s66
Name cannot be similar to an existing name -s67
Name cannot be offensive -s53
It must comply with guidance on sensitive words – s55
o The name can be changed by special resolution – s77 / amend articles to change the name – s21 – special res.
Articles of association s9(5)(b) a copy of the articles – these will be unamended MA’s (s18(2) and s20(1)) unless special
articles are attached – company must send off any amended articles.
Memorandum of association s8 – this will state the shareholders details and confirm this wish to subscribe and create
a company and will take at least 1 share each – this memorandum must be authenticated by each subscriber.
Proposed officers details of directors and any company officers such as secretaries – s12.
Statement of capital this will detail the total amount of shares which the subscribers are subscribing to / the aggregate
nominal value of the shares / rights attached to shares / class and number in the class of shares / and how each
individual will take the company shares / the amount to be paid up on the shares (s10)
Statement of compliance – s13 – showing the company has complied with registration provisions under the CA.
Nominate a registered office – s86 or a SAIL via a form AD02.
Constitutional documents:
The articles of association (which may be the MA’s) created when the company is incorporated. It is a contract between the
company & shareholders detailing rights, obligations, restrictions a company has – s33.
The Model Articles the standard articles a company can adopt – or amend – it is quicker to adopt as is.
Memorandum of association states the shareholders wish to form the company / subscribe / will take at least 1 share – s8.
Objects:
Companies incorporated before CA 06- had to list all activities they engaged in – acting outside the object would be ultra vires.
These companies retain restricted objects and can amend this so have unrestricted articles -stating s28 does not apply.
Companies under CA – unrestricted objects (s31) – can engage in any type of business and things are only restricted if they are so
in the Articles. Even if there is a restriction, the validity of the action cannot be questioned (s39) meaning the third party is
protected even if the company lacked authority to enter into it due to the restriction. For contracts entered into pre-incorp,
company is not bound to these and the individual who did enter the agreement could be liable if the company does not ratify s51.
, Effect of registration:
Upon registration…
Company is issued Certificate of Incorporation – proof of registration s15
The company can begin trading / exercising powers – s16(3)
Subscribers to the memorandum become shareholders – s16(5)
Shareholders liability is limited to the extent of their unpaid shares
Those named in the statement of proposed officers are officially and automatically appointed - Directors /
secretaries– s16(6)
Company is a separate legal person capable of entering into contracts– Salomon v Salomon
Post registration considerations:
Directors required to appoint auditors unless reasonably not required to have auditors – s485
Directors may wish to change the accounting reference– s392 / MA 3
Register of persons with significant control:
All companies must keep a PSC register listing those who have significant control over the company. This will be those who
(s790):
(a) owns more than 25% of the shares in the company (this would include non-voting shares, such as preference shares); or
(b) owns or controls more than 25% of the voting rights in the company (this would usually be ordinary shares); or
(c) has the right to appoint or remove a majority of the board of directors of the company; or
(d) has the right to exercise, or who actually exercises, significant influence or control over the company.
Converting a partnership to a company:
The conversion of a partnership into a company involves the sale of the partnership business by the partnership owners to the
new owner who is the company.
The formalities are as follows:
The owners of the partnership business will either form a company or purchase a shelf company and become the
directors and shareholders of that company.
The consideration for the transaction is likely to be shares/cash in the company in return for the company buying the
partnership business. The value of the partnership is what allows the partnership owners to buy the shares.
Once the company has been formed, it will purchase the partnership business, including all its assets. This will be
done under contract law via a sale agreement which will detail – the assets the company is buying, the shares being
sold, covenants on behalf of the company to indemnify the sellers regarding liability for debts…
If the company takes over the previous name of the business and this is not the same as the company’s name, it will
be necessary for the company’s stationery and a notice at the company’s place of business to state the company’s
name and address (CA 2006, ss 1202, 1204).
See above for company incorporation details.
Administration tasks:
Allot the shares in the company to the partnership owners who will become the shareholders in the company (Eqt
finance/allotting shares)
The company purchasing the partnership – SPT (as it is a transaction between the company and its ‘new’ directors) –
shareholder resolution to enter into the contract to buy the partnership and to enter into the SPT.
Once partnership owners become shareholders – update register of members / PSC?
Keep all board mins and resolutions for 10 years. (Allotting shares ordinary resolution need to be filed with CH)
Tax implications:
The individual partners will be assessed to income tax under the rules for the closing tax year of a business (see 24.2.4) up to
the date of the transfer of the business. Afterwards, the company pays corporation tax on profits. In so far as the partnership
sells to the company assets on which capital allowances have been claimed (eg machinery and plant), there may be a
balancing charge to income tax on any profit identified by comparing the sale proceeds with the assets’ writtendown value.
Example: machinery cost £50,000 when purchased three and a half years ago and capital allowances have been claimed
totalling £22,432, so that the written-down value is £27,568. If the value attributed to this machinery on the sale was £30,000,
there could be a balancing charge (increasing the amount of profit needing to pay tax on) to income tax on the £2,432 ‘profit’.
This ‘profit’ would be taxed as part of the trading income in the closing tax year. Conversely, if there is a loss calculated on the
same basis, there will be a deduction from profits for the final year for income tax purposes, known as a balancing allowance.
If the company is controlled by the sellers of the business, the company and the sellers can elect within two years that the
company take over the position of the sellers so no balancing charge occurs. (?)
