Company Formation

CLASSIFICATION OF LEGAL ENTITIES

When creating a , you are essentially setting up an entirely new legal ‘person’ which can sue, be sued, enter in to contracts etc. This is the basic principle.

Companies can be divided in to two basic groups – directors and shareholders. However, often one person can be both a shareholder and a director. This is, of course, an oversimplification, but is the basic principle.

Corporate Governance – A ‘soft law’ approach to preventing issues before they occur, setting up structures and processes to stop major frauds and scandals happening before they do.

Corporate Failure – How get in to trouble and the mechanisms that are in place to take effect after a company has run in to trouble. Mechanisms can be aimed to ‘rescue’ companies rather than to write them off. This can help protect those that work for the company or have interest in the company.

There are different types of legal entities as follows:

1) Sole Proprietor 2) 3) European Economic Interest Group 4) Unincorporated Associations 5) Trusts 6) , which can be incorporated as: i) A ii) A Societas Europeae (SE) iii) A Company iv) A Community Interest Company v) Other, including without statute

Company Formation

SOLE PROPRIETORS (SPs)

One person going into business on his own account – the simplest form of business structure. This is simply an individual carrying out on some form of business activity on his own account i.e. being self-employed.

Whilst sole proprietorships will be operated for that individual’s interests, they can also take on employees although the vast majority do not do so. The key element is that a is not incorporated, not do they carry out partnerships with anyone else.

Unlike incorporated structures, there is no separation between the SP and his business, and SPs do not have corporate personality. Accordingly, SPs own all of the assets of their business and is entitled to all the profits that the business generates but is also liable in full for any debts the business incurs.

Formation of SPs

Commencing business as a SP is very straightforward and involves little formality. Prospective SPs must register themselves with HMRC as self-employed.

SPs are generally not subject to the CA 2006, so do not need to file accounts at and are subject to much less regulation than companies. However, being self- employed means SPs must complete their own tax returns, so clear and accurate records should be kept of transactions entered into.

Finance of SPs

In terms of finance, SPs are at a disadvantage when compared to other business structures. Partnerships can raise finances by admitting new partners. Companies, especially public companies, can raise finance by selling shares. Neither of these options are available to SPs. A SP will either need to invest his own money (and risk losing it if the business fails) or obtain a loan. Banks are, however, generally cautious as SPs are often small affairs.

Liability of SPs

Unlimited and personal liability – you are accountable for all debts of the business as there is little to no difference between the company and you i.e. your personal assets and your business assets are in danger. If a SPs personal asset cannot cover the debt owed, he will likely be declared bankrupt.

Company Formation

PARTNERSHIPS – Partnerships Act 1890

Partnerships can be large and are not necessarily just two people but there must be at least two. Where there are lots of partners, the business will often be forced in to becoming a formal company. The only historical exception to this is professions such as lawyers and accountants were larger firms are allowed to operate under partnerships.

Section 1(1) Partnership Act 1890 - Definition of “Partnership”

"The relation which subsists between persons carrying on a business in common with a view to profit."

Types of Partnership

1) The ordinary partnership

Usually referred to as simply ‘partnership’.

2)

Formed under the Partnership Act 1907 – although are extremely rare.

3) Limited liability partnership

An incorporated business structure with limited liability. Discussed later.

The Relationship between Partners and other Partners

The PA 1890 established detailed rules regarding the relationship between partners. Many partnerships will have in place a written partnership agreement that sets out the rights and obligation of the partners.

Where a partnership agreement does not exist, s24 -25 PA 1980 set out a number of default terms that will apply. These terms also apply if a written partnership agreement does exist, unless the implied terms under these sections are inconsistent with or excluded by the written agreement. Company Formation

Examples of implied terms include:

• All partners are entitled to share equally in profits of the firm and must contribute equally to firm losses • Every partner must take part in firm management • No new partners can be admitted without consent of present partners • The agreement between partners can only be altered by express agreement of all partners • The majority of partners cannot expel a partner unless as express power to do so have been agreed upon by all of the partners

The Relationship between Partners and Third Parties

Sections 5-18 PA 1890 regulate the relationship between the partners and third parties. This includes the extent to which the partners can contractually bind the firm and the other partners to a third party, and the extent to which the firm and other partners can be liable for the acts and omissions of a single partner that causes a third party to sustain loss.

Agency

Regarding a partner’s ability to bind his partnership and co-partners to a third party, the key provision is Section 5 PA 1890.

Section 5 Partnership Act 1890

Provides that teach partner is an agent of the firm and of his co-partners. Accordingly, providing a partner acts within his authority to act, he is able to contractually bind his firm and his co-partners to a third party.

In certain cases, a partner may even be able to contractually bind his firm to a third party where he exceeds his authority, or where he has no authority. As each partner has the power to contractually bind his co-partners, it follows that every partner is jointly liable for the debts and obligations of the firm incurred whilst he is a partner.

Liability

Liability in an ordinary partnership is unlimited and personal. Furthermore, a partner may be held liable in tort or found criminally guilty for the acts of other partners. Under Section 10 PA 1890, each partner is vicariously liable for the wrongful acts or omissions of another Company Formation partner, providing that the partner was acting within his authority, or that the act or omission was done whilst in the ordinary course of the firm’s business.

EUROPEAN ECONOMIC INTEREST GROUPING (EEIG) Arises as a part of our membership to the European Union. Designed to enable existing business undertakings in different countries to form body to provide common services ancillary to members’ primary activities.

• European Commission, Directorate-General Justice and Consumers “Notice to Stakeholders Withdrawal of the United Kingdom and EU Rules on Company Law” (Brussels, 21.11.17) • European Economic Interest Grouping Regulation 2137/ 85 [1985] O.J. L199/ 1

A. Nature Article 3(1) European Economic Interest Grouping Regulation 1985 Article 3(2) European Economic Interest Grouping Regulation 1985 Article 23 European Economic Interest Grouping Regulation 1985 Article 24 European Economic Interest Grouping Regulation 1985

B. Formation Article 1(1) European Economic Interest Grouping Regulation 1985 Article 3(2) European Economic Interest Grouping Regulation 1985 Article 3(3) European Economic Interest Grouping Regulation 1985 Article 4 European Economic Interest Grouping Regulation 1985 Article 5 European Economic Interest Grouping Regulation 1985 Article 6 European Economic Interest Grouping Regulation 1985

Advantages Encourages collaboration between existing organizations. Essentially a legal structure to enable businesses across Europe to collaborate with each other. Enables business in different countries to form a body to provide common services ancillary to members’ activities.

Disadvantages There are restrictions on how these operate. The purpose is to facilitate and develop members’ activities – it does not look to make profit for itself and only looks to serve its members. It cannot manage the members. It cannot hold shares in its members. Cannot employ more than 500 people. Main restrictions: Members of an EIG are jointly and severally liable for the debts (just like with partnerships).

Company Formation

THE UNINCORPORATED ASSOCIATION

Often referred to as ‘clubs. These differ from partnerships – partnerships exist to make profit (as per its definition), ‘clubs’ do NOT intend to make profit and, therefore, are not partnerships.

Conservative and Unionist Central Office v. Burnell [1982] 1 WLR 522 at 525 per Lawton LJ (CA):

"Two or more persons bound together for one or more common purposes, by mutual undertakings, each having mutual duties and obligations, in an organisation which has rules which identify in whom control of it and its funds rests and upon what terms and which can be joined or left at will."

TRUSTS

A way of carrying out an economic activity. In a business context, this is usually about holding property for the benefit of someone else. This is NOT trading with a common view to profit.

"An equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property) for the benefit of persons (who are called beneficiaries) of whom he himself may be one and any one of whom may enforce the obligation." (Underhill's Law of Trusts and Trustees)

Company Formation

THE

Sutton's Hospital (1612)

Sir Edward Coke: 'invisible, immortal' and existing 'only in intendment and consideration of the Law.'

Kyd on Corporations

"A collection of many individuals, united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by the policy of the law, with the capacity of acting, in several respects, as an individual."

DIFFERENT WAYS OF BEING INCORPORATED

l As a limited liability partnership l As a community interest company l As a societas europeae (SE) l As a Company

Company Formation

LIMITED LIABILITY PARTNERSHIPS – Limited Liability Partnerships Act 2000

Section 1 LLPA 2000 – Definition of LLP

‘There shall be a new form of legal entity to be known as a limited liability partnership’

Limited liability for partnerships was introduced as a result of large accountancy and law firms who, having operated under ordinary partnerships, felt the need to limited liability. Before the introduction of LLPA, partners in one state were liable for the actions of other partners that they have never met, even if they operated in a different country.

Established under the Limited Liability Partnerships Act 2000. In an LLP, you have ‘members’ who can be seen as both a shareholder and a director at the same time. The members have limited liability, unlike ordinary partnerships.

Some argue that an LLP is a hybrid organisation that combines the characteristics of a partnership with a company, which is true. They do, however, have far more in common with a registered company.

• LLPs are created by registering documents with the Registrar of Companies at Companies House • LLP is a body corporate (LLPA 1(2)) and therefore has corporate personality • LLPA refers to partners as ‘members’ • The members of an LLP will have limited liability • Generally, LLPs are regulated by company law, although some areas remain controlled under partnership law. Most of the apply to LLPs and virtually all provisions of the Insolvency Act 1986 apply to LLPs

Liability

The members of an LLP do not need to contribute to the debts of the LLP, with exceptions (e.g. members can be liable for wrongful trading).

Accordingly, the LLPS remedies the main weakness of ordinary partnerships and fulfil the purpose of the LLPA.

As LLPs have corporate personality, it follows that the LLP itself is liable for the debts of the company, and is vicariously liable for the acts and omissions of its members.

Company Formation

FORMATION AND - Section 2 LLPA 2000

(1) For a limited liability partnership to be incorporated— (a) 2+ persons associated for carrying on a lawful business with a view to profit must have subscribed their names to an incorporation document, (b) The incorporation document or a copy of it must have been delivered to the registrar, and (c) There must have been so delivered a statement ... made by either a solicitor engaged in the formation of the limited liability partnership or anyone who subscribed his name to the incorporation document, that the requirement imposed by paragraph (a) has been complied with. (2) The incorporation document must— (a)......

(b) State the name of the limited liability partnership, (c) State whether the registered office of the limited liability partnership is to be situated in England and Wales, in Wales (e) Give the required particulars of each of the persons who are to be members of the limited liability partnership on incorporation, (f) Either specify which of those persons are to be designated members or state that every person who from time to time is a member of the limited liability partnership is a designated member (g) Include a statement of initial significant control. (2ZA)The required particulars mentioned in subsection (2)(e) are the particulars required to be stated in the LLP ’s register of members and register of members’ residential addresses. (3) If a person makes a false statement under subsection (1)(c) which he— (a) Knows to be false, or (b) Does not believe to be true, He commits an offence. (4) A person guilty of an offence under subsection (3) is liable— (a) on summary conviction, to imprisonment for a period not exceeding six months or a fine not exceeding the statutory maximum, or to both, or

Company Formation

MEMBERSHIP

Section 4 LLPA – Membership

(1) On the incorporation of a limited liability partnership its members are the persons who subscribed their names to the incorporation document (other than any who have died or been dissolved).

(2) Any other person may become a member of a limited liability partnership by and in accordance with an agreement with the existing members.

(3) A person may cease to be a member of a limited liability partnership (as well as by death or dissolution) in accordance with an agreement with the other members or, in the absence of agreement with the other members as to cessation of membership, by giving reasonable notice to the other members.

(4) A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.

Regulation 8 Limited Liability Partnerships Regs 2001, SI 2001/1090 – Expulsion

“No majority of the members can expel any member unless a power to do so has been conferred by express agreement between the members.”

DEFAULT PROVISIONS OF LLPs

Regulation 7 Limited Liability Partnerships Regs 2001, SI 2001/1090

The mutual rights and duties of the members and the mutual rights and duties of the limited liability partnership and the members shall be determined, subject to the provisions of the general law and to the terms of any limited liability partnership agreement, by the following rules:

(1) All the members of a limited liability partnership are entitled to share equally in the capital and profits of the limited liability partnership.

Company Formation

(2) The limited liability partnership must indemnify each member in respect of payments made and personal liabilities incurred by him— a) In the ordinary and proper conduct of the business of the limited liability partnership; or

b) In or about anything necessarily done for the preservation of the business or property of the limited liability partnership.

(3) Every member may take part in the management of the limited liability partnership.

(4) No member shall be entitled to remuneration for acting in the business or management of the limited liability partnership.

(5) No person may be introduced as a member or voluntarily assign an interest in a limited liability partnership without the consent of all existing members.

(6) Any difference arising as to ordinary matters connected with the business of the limited liability partnership may be decided by a majority of the members, but no change may be made in the nature of the business of the limited liability partnership without the consent of all the members.

(7) The books and records of the limited liability partnership are to be made available for inspection at the registered office of the limited liability partnership or at such other place as the members think fit and every member of the limited liability partnership may when he thinks fit have access to and inspect and copy any of them.

(8) Each member shall render true accounts and full information of all things affecting the limited liability partnership to any member or his legal representatives.

(9) If a member, without the consent of the limited liability partnership, carries on any business of the same nature as and competing with the limited liability partnership, he must account for and pay over to the limited liability partnership all profits made by him in that business.

(10) Every member must account to the limited liability partnership for any benefit derived by him without the consent of the limited liability partnership from any transaction concerning the limited liability partnership, or from any use by him of the property of the limited liability partnership, name or business connection.

Company Formation

COMPANIES

TYPES OF COMPANY

1. Private with share capital 2. Private unlimited company without share capital 3. Private with share capital 4. without share capital 5. with share capital

PUBLIC vs PRIVATE COMPANIES

Section 4 Companies Act 2006

(1) A “private company” is any company that is not a public company.

(2) A “public company” is a company limited by shares or limited by guarantee and having a share capital—

a) Whose certificate of incorporation states that it is a public company, and b) In relation to which the requirements of this Act, or the former Companies Acts, as to registration or re-registration as a public company have been complied with on or after the relevant date (ss3).

When creating a company, the promoters are required to state whether the company is to be registered as a private company or a public company. A public company is a company limited by shares, or limited by guarantee and having a share capital. A public company will have a certificate of incorporation which expressly states that it is a public company.

A private company is simply described as a company that is not a public company.

The KEY DIFFERENCES:

1. Selling shares

A public company can offer to sell its shares to the public and, to facilitate this, may list their shares on a stock exchange (these companies are then known as “listed” or “quoted” companies) – the London Stock Exchange is the UK’s primary marketplace. This allows public companies to raise large funds to raise their capital very quickly. Private limited companies are NOT able to offer their shares to the public.

Company Formation

2. Formation differences

Public companies must meet the £50,000 minimum capital requirement to register. Private companies do not need any specific capital – the can be registered with a single 1 pence share.

3. Number of directors – Section 154 CA 2006

Both a public and a private company can be created with only one member. However, a public company must have at least two directors under s154 CA 2006.

4. Public company secretaries – Section 271

Public companies are required by law to appoint a company secretary. There is no such requirement for private companies, but they can if they wish.

5. Suffix difference: plc and ltd

Private limited companies MUST add ‘Ltd’ suffix to their name under section 59(1) CA 2006. Public companies must add ‘plc’ under s58(1) CA 2006.

LIMITED vs UNLIMITED COPMANIES

Section 3 CA 2006

(1) A company is a “limited company” if the liability of its members is limited by its constitution.

It may be limited by shares or limited by guarantee.

(2) If their liability is limited to the amount, if any, unpaid on the shares held by them, the company is “limited by shares”.

(3) If their liability is limited to such amount as the members undertake to contribute to the assets of the company in the event of its being wound up, the company is “limited by guarantee”.

(4) If there is no limit on the liability of its members, the company is an “unlimited company”.

Company Formation

The terms limited and unlimited do not refer to the company itself, but to its members. As noted, the liability of public company members MUST be limited. Where a private company is formed, the promoters must decide whether it will be a limited company or an unlimited company.

LIMITED COMPANIES

Most companies are registered as limited. As of December 2017, there were 4 million limited companies and only 4,500 unlimited companies.

Where the company is limited, the form and extent of the limitation will depend if the company is limited by shares or limited by guarantee.

• Where limited by guarantee, the liability of members is limited to the amount stated in the statement of guarantee (s74(3) Insolvency Act 1986) • Where limited by shares, the liability of the company members will be limited to the amount that is unpaid on their shares (s74(2) Insolvency Act 1986). Members who have fully paid for their shares are generally not liable to contribute anymore to the company. Most limited companies opt to be limited by shares.

UNLIMITED COMPANIES Less than 0.2% of companies are unlimited, simply because unlimited companies are subject to personal and unlimited liability.

Notable Section under Companies Act 2006 s. 59 CA 2006 – Name must end in “limited” s. 60 CA 2006 - Exemption? s. 65 CA 2006 - Inappropriate use of indications of type of company form s. 66 CA 2006 - Similarity to name already registered s. 69 – 74 CA 2006 - The company name adjudication procedure

Human rights issues

• Moscow Branch of the Salvation Army v. Russia (2007) 44 EHRR 4 • Church of Scientology Moscow v. Russia (2008) 46 EHRR 16