Setting Up a Limited Company 2 e Pocket Lawyer

Setting Up a Limited
Company

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This book is supported by a Companion
Website, created to keep titles in the
Pocket Lawyer series up to date and to
provide enhanced resources for readers.
Key features include:

◆

forms and letters, in a ready-to-use Word format
Access all the material you need at the click of a button

◆

updates on key developments
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www.cavendishpublishing.com/pocketlawyer


Setting Up a Limited
Company
Mark Fairweather & Rosy Border

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Second edition first published in Great Britain 2004 by
Cavendish Publishing Limited, The Glass House,
Wharton Street, London WC1X 9PX, United Kingdom
Telephone: + 44 (0)20 7278 8000 Facsimile: + 44 (0)20 7278 8080
Email:
Website: www.cavendishpublishing.com
Published in the United States by Cavendish Publishing
c/o International Specialized Book Services,
5824 NE Hassalo Street, Portland,
Oregon 97213-3644, USA
Published in Australia by Cavendish Publishing (Australia) Pty Ltd
45 Beach Street, Coogee, NSW 2034, Australia
Email:
Website: www.cavendishpublishing.com.au
© Fairweather, Mark and Border, Rosy 2004
The first edition of this title was originally published by The Stationery Office
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic, mechanical,

photocopying, recording, scanning or otherwise, without the prior permission in
writing of Cavendish Publishing Limited, or as expressly permitted by law, or under
the terms agreed with the appropriate reprographics rights organisation. Enquiries
concerning reproduction outside the scope of the above should be sent to the
Rights Department, Cavendish Publishing Limited, at the address above.
You must not circulate this book in any other binding or cover
and you must impose the same condition on any acquirer.

British Library Cataloguing in Publication Data
Fairweather, Mark
Setting up a limited company – 2nd ed – (Pocket lawyer)
1 Private companies – Great Britain 2 New business enterprises –
Law and legislation – Great Britain
I Title II Border, Rosy
346.4’10668
Library of Congress Cataloguing in Publication Data
Data available
ISBN 1-85941-857-0
1 3 5 7 9 10 8 6 4 2
Printed and bound in Great Britain


Contents
Welcome
Buzzwords
Frequently asked questions

ix
xv
xxv

1

Explore your options

2

Do you want to be a director?

15

3

What does the company secretary do?

23

4

I name this company …

27

5

Setting up your company

31

6

Sample letters, minutes and resolutions

43

Companies House guidance booklets
Useful contacts
Appendix: Table A
Index

CONTENTS

1

69
73
79
105

v



Disclaimer
This book puts you in control. This is an excellent thing,
but it also makes you responsible for using it properly.
Few washing machine manufacturers will honour their
guarantee if you don’t follow their ‘instructions for use’.
In the same way, we are unable to accept liability for any
loss arising from mistakes or misunderstandings on

your part. So take time to read this book carefully.
Although this book points you in the right direction,
reading one small book will not make you an expert,
and there are times when you may need to take advice
from professionals. This book is not a definitive
statement of the law, although we believe it to be
accurate as at December 2003.
The authors and publisher cannot accept liability for any
advice or material that becomes obsolete due to
subsequent changes in the law after publication,
although every effort will be made to show any changes
in the law that take place after the publication date on
the companion website.

About the authors
Mark Fairweather is a practising solicitor and is one of
the founding partners of the legal firm Fairweather
Stephenson & Co. He and Rosy Border have written 14
titles together, including five in Cavendish Publishing’s
Pocket Lawyer series. He has two children and lives in
Suffolk.
Rosy Border, co-author of this title and series editor of
the Pocket Lawyer series, has a first class honours degree
in French and has worked in publishing, lecturing,
journalism and the law. A prolific author and adapter,
she stopped counting after 150 titles. Rosy and her
husband, John Rabson, live in rural Suffolk and have a
grown up family. Rosy enjoys DIY, entertaining and
retail therapy in French markets.

vii


Acknowledgments
A glance at the ‘Useful contacts’ will show the many
sources we dipped into while writing this book. Thank
you, everybody. We would especially like to thank Nigel
Pratt, Chartered Accountant, for his helpful advice, and
John Rabson, Chartered Engineer, for his IT support and
refreshments.

viii

SETTING UP A LIMITED COMPANY


Welcome
Welcome to Pocket Lawyer. Let’s face it, the law is a maze
and you are likely to get lost unless you have a map.
This book is your map through the part of the maze that
deals with setting up your own limited company. If you
follow our advice you should end up with a limited
company which
❍
❍
❍

does what you want it to do;
is legally sound; and
you as a non-lawyer can control.

We put you in control
This book empowers you. This is a good thing, but being
in control means responsibility as well as power, so use
this book properly. Read it with care and don’t be afraid
to make notes – we have left wide margins for you to do
just that. Take your time – do not skip anything:
❍
❍

everything is there for a purpose;
if anything were unimportant, we would have left it
out.

Think of yourself as a driver using a road map. The map
tells you the route, but it is up to you to drive carefully
along it.
Sometimes you are in danger of getting out of your depth and you
will need to take professional advice. Watch out for the hazard sign.

Sometimes we pause to explain something: the origin of a word,
perhaps, or why a particular piece of legislation was passed. You do
not need to know these things to make use of this book, but we
hope you find them interesting.

WELCOME

ix

Sometimes we stop to empower you to do something. Look out for
the ‘Power points’.

Clear English rules OK
Client to solicitor who has just drafted a contract for
him: ‘This can’t be legal – I can understand it!’
Our style is WYSIWYG - what you see is what you get.
Some legal documents have traditionally been written in
archaic language, often known as ‘law-speak’. This term
also extends to the practice of using the names of legal
cases as shorthand for legal concepts. This wording has
stood the test of time – often several centuries – and has
been hallowed by the courts. Some of the words used
sound just like everyday language, but beware – it is a
kind of specialist shorthand. When we do need to use
technical language, we offer clear explanations: see
‘Buzzwords’, p xv. These words appear in the text in
bold so you can check their meaning.

A note on gender
This book is unisex. We acknowledge that there are both
male and female members of every group and we try to
allow for that in the text by using, wherever possible, the
generic they/them rather than he/she, him/her, etc.

A note on Scotland
Scotland is a separate jurisdiction from England and
Wales. The procedures for setting up a company are the
same, except that the Memorandum says ‘incorporated
in Scotland’ instead of ‘incorporated in England and

Wales’ (see ‘Useful contacts’ for the address and
telephone number of Companies House in Scotland).

x

SETTING UP A LIMITED COMPANY


Click onto the website
www.cavendishpublishing.com/pocketlawyer

What this book can do for you
This book provides general information that professional
advisers would give you on the subject if only they had
the time to do so, and if only you had the money to pay
them. It is suitable for straightforward cases, but it is no
replacement for the specific advice you may need on
your individual circumstances. For example, we do not
give specialist tax advice.
This book tells you:
❍

❍
❍
❍

the available options if you are setting up in
business for the first time;
what it means to be a director;
what paperwork you will have to do;

the buzzwords that are important in this area of the
law and what they mean.

It also:
❍

❍

❍

❍

❍

❍

gives examples of all the forms required by law to
set up a small private limited company in England
or Wales;
tells you what each form is for, so that not only do
you complete all the paperwork correctly but you
also understand what you are doing and why;
gives you samples of the letters, resolutions and
other documents you will need;
answers some of the most frequently asked
questions on the subject;
provides useful contacts and suggestions for further
reading;
is supported by a regularly updated website.

WELCOME

xi


What this book can’t do for you
It can’t:
❍

❍

❍

be a textbook. Its job is to help you to set up a
limited company, not to teach you the ins and outs
of company law. We aim to be streetwise rather
than academic;
help you to set up a public company. Public
companies – that is, the sort of company that is
quoted on the Stock Exchange – are outside our
remit. This book is confined to small private
companies;
help you to set up a company outside England,
Wales and Scotland.

Times are changing
At the time of writing, the government is preparing to
modernise company law. A White Paper that appeared
in July 2002 said:
The law has become encrusted with

amendments and case law over generations. It
has failed to adapt to meet the changing needs
of small enterprises, IT and international
markets. So the law needs to change. It needs
to modernise and reform. It needs to be fit for
the twenty-first century and beyond.
The next step – after careful consultation – will be a
Companies Bill (a Bill in this context is a draft Act of
Parliament). All the proposals are aimed at modernising
and simplifying the ways in which companies are
formed, take decisions and report to Companies House.
Also, possibly for the first time ever, directors’ duties
will be codified and directors will be given clear
guidance on their duties. With these proposals in mind,
whenever we discuss a topic which is likely to be
affected by the proposed legislation, we alert you to this.
You can read all about the proposed changes on the DTI
(Department of Trade and Industry) website (see ‘Useful
contacts’). In particular, we recommend the DTI leaflet

xii

SETTING UP A LIMITED COMPANY


Modernising Company Law: Small Business Summary,
available on that website, which condenses more than
100 pages of verbiage and ‘cuts to the chase’ most
admirably.

A word of encouragement: don’t be fazed
by the forms
Forms were invented to set out at a glance information
which might otherwise take a six-page letter, full of
irrelevancies, to deliver. The Companies House forms
were designed to give their staff the information they
need to process your business, in a format that they can
rapidly and easily understand. Companies House scan
their documents electronically, so they prefer clear black
type on good quality A4 paper (more about presentation
on p 34).
While accuracy is important, form-filling is not an exact
science and many people find it hard. Rosy, in particular,
complains bitterly that the space provided is always the
wrong size for what she wants to say, that she does not
understand the questions, or that the instructions are
ambiguous!
For readers like Rosy, we offer guidance on completing
the forms required to set up your company. Additionally,
we have always found the people on the Companies
House helpline approachable and helpful.

WELCOME

xiii



Buzzwords
Here are some terms you will come across in this book.

Please do not skip this section, because many of the
terms used by lawyers have special meanings. Here we
make them clear. When the words appear in the text,
they are in bold so that you can check their meaning.
accounting reference date – the date of the company’s
financial year end, in other words, the date that appears
on the company’s balance sheet.
A new company can set its own accounting reference
date by filing (see below) Form 225 with Companies
House. An accounting reference date, subject to certain
restrictions, can be changed in the same way. If no Form
225 is filed, the accounting reference date for a new
company will automatically be the last day of the month
in which the anniversary of incorporation falls. So, if you
set up your company on 1 May, your accounting
reference date, unless you state otherwise, will be 31
May. You can read more than you ever wished to know
about this subject on the Companies House website
www.companieshouse.gov.uk (see ‘Useful contacts’).
allotment – the allocation of new shares, as opposed to
the transfer of existing shares. Details of every allotment
have to be filed with Companies House on a special
form, Form 88(2).
Annual General Meeting (AGM) – an annual meeting
of shareholders to consider the company’s accounts and
directors’ report.
The first AGM must be held within 18 months of
incorporation. Thereafter there must be an AGM in each
calendar year and not more than 15 months can elapse
between one AGM and the next. A company can

dispense with an AGM by passing an elective resolution to
that effect (a sample minute of elective resolutions is
included on pp 47–49, and appears on our website).
Note that moves are afoot to remove the requirement for
private companies to hold AGMs – unless, of course,
members want them (see ‘Times are changing’, above).

BUZZWORDS

xv


Annual Return – Form 363, a snapshot of general
information about the company which has to be filed
each year with Companies House. Companies House
issue two kinds of Form 363: 363a and 363s. You can
read about them on the Companies House website
(www.companieshouse.gov.uk: click on the Annual
returns option in the ‘Information and guidance’ box).
The Annual Return gives details of the company’s
shareholders, directors etc.
This is one form that is not downloadable from the
Companies House website. Companies House sends it
automatically to companies for updating before
returning it by post (for more information, see the
Companies House booklet, available online) (see ‘Useful
contacts’).
Articles of Association – the internal rules of the
company – like the constitution of a club.
Where nowadays we refer routinely to a company’s

Memorandum and Articles, there may in future be just
one document. This is one of the measures proposed in
the White Paper Modernising Company Law (see ‘Times
are changing’, above, which directs you to further
reading).
auditor – the person appointed by a company to
examine its accounts each year and (if all goes well) to
certify that they ‘give a true and fair view’ of the
company’s finances – the top grade available in this
examination (other grades are possible, though not
desirable). In practice, a company’s auditor will be a
qualified accountant eligible to carry out audit work and
independent of the company.
Not all companies need to appoint an auditor (size
matters! – see p xxxiii). Even those that do not need an
auditor may choose to appoint one in order to give the
annual accounts the seal of approval.
Audit (like audition and auditorium) comes straight from the Latin
word for ‘hear’. Dare we say that auditors need perfect pitch to
discern the wrong notes in a company’s accounts? In the US, the
tone-deaf auditors were blamed for the Enron scandal and similar
corporate cockups.

xvi

SETTING UP A LIMITED COMPANY


Certificate of Incorporation – the document issued by
Companies House which certifies that the company is

registered with them, and which tells you the company
number and the date on which the company was
incorporated – that is, came into existence.
If you change the name of the company (have no fear:
we show you how on p 51), Companies House will issue
you with a new Certificate of Incorporation with the
new name.
clear day – a clear day is not necessarily cloudless!
When giving notice of a shareholders’ meeting, the
notice period is counted in clear days, that is, excluding
the date the notice is received and the date of the
meeting. So 10 ‘clear days’ could mean, allowing for the
postal services, 14 ‘ordinary days’ from the date you
send out the notice.
Companies House – the office of the Registrar of
Companies, which holds the public records of over a
million companies in Great Britain. Its main functions
are:
❍
❍

❍

to incorporate and dissolve companies;
to examine and hold documents under the
Companies Act and related legislation; and
to make this information available to the public.

Companies House is based in Cardiff, and it has five
additional offices nationwide (see ‘Useful contacts’ for

all the addresses, telephone numbers, the central general
enquiries helpline and the website address). Companies
House also publishes guidance notes, available free of
charge, which you can download from their website.
You will find a list of titles on pp 69–70 as well as on the
Companies House website.
company number – the unique number allocated to a
company by Companies House.
The company number is like your National Insurance
number: you can change your name, or the name of the
company, as often as you like, but the number stays the
same.
company secretary – the person who is usually made
responsible for keeping the company’s statutory records
and filing (see below) documents with Companies
House.
BUZZWORDS

xvii


At the time of writing, every company must have a
company secretary. However, the White Paper,
Modernising Company Law, proposes to abolish the
requirement for private companies to have a company
secretary, although they can still have one if they wish
(see ‘Times are changing’, above). For more information
about the role and responsibilities of company
secretaries, see Chapter 3.
debenture – strictly speaking, a written acknowledgment

of a debt by a company, which may be secured or
unsecured.
In practice, a debenture refers to a company’s secured
debt. It usually includes a floating charge (see below) and
may also include a fixed charge, such as over bricks and
mortar.
Scottish law on debentures and charges differs from English law on
this subject. Consult a solicitor qualified in Scottish law.

dividend – basically, a payment to shareholders of a
division or share of a company’s profits.
Usually a dividend must be recommended by the
directors and authorised by a resolution of the company.
Dividend comes from ‘dividendum’ – something to be divided; so a
dividend is your share of the proceeds. Rosy is old enough to
remember queuing for the family dividend, accumulated through a
year of shopping at a local Co-op, which sold everything from fish
to funerals and typically paid its faithful a dividend of a shilling in the
pound.

elective resolution – a resolution to dispense with
certain formalities (see the sample minute of elective
resolutions, pp 47–49). Elective resolutions are useful for
small companies.
Extraordinary General Meeting – see general meeting.
file – to send official documents about the company to
Companies House for inclusion on the public register.
Ordinary folk send, submit or even deliver by hand.
Company-speak goes in for filing. You can:

xviii

SETTING UP A LIMITED COMPANY


❍
❍

file paper documents by post, or
file online, using the Forms Online facility.

Companies House explains how to use Forms Online on
their website (see ‘Useful contacts’).
Once your company is up and running, you can (at the
time of going to press) use the Companies House Web
Filing Service for the following forms: 363 (Annual
Return), 287, 288a, 288b, 288c, 353, 353a, 190, 190a, 88(2)
and 123. Go to companieshouse.gov.uk, click on the
Tools to Help You button and select ‘File information’. If
you get stuck you can always call the Companies House
helpline – see ‘Useful contacts’.
People who do a lot of business with Companies House
– Mark calls them ‘frequent filers’ – can file
electronically. This system does away with the need for
signatures as such, replacing them with special
authentication codes. Check the website for a useful
guide that will help you to decide whether e-filing is for
you.
floating charge – a charge or mortgage that a company
gives over its current or ‘floating’ assets, such as stock in

a shop or warehouse, to provide security for borrowings.
Picture a river with the assets floating along like logs in
the current. While the water is still liquid – before the
floating charge ‘crystallizes’ – the company can buy and
sell its stock in trade (or whatever assets are subject to
the charge) without the lender ’s permission. If the
company falls behind with the repayments on the loan,
the floating charge ‘crystallizes’ – which prevents the
company from dealing in those assets. Then the river
freezes and the logs are stuck in the ice: the assets are
frozen. At this point, under the Enterprise Act 2002, an
Administrator – a sort of company doctor – can be
appointed to look at ways of paying off the creditors
without winding up (closing down) the company. One
option is for the Administrator to ‘thaw out’ the frozen
assets and run the company as a going concern.
This type of security is unique to companies. Private
individuals (and that includes sole traders and
partnerships) can only provide security with what are
called ‘fixed’ assets, such as bricks and mortar, but also
equipment, vehicles, bank deposits, etc. The problem
with giving security over fixed assets is that whenever
BUZZWORDS

xix


you sell one, you must persuade the lender to release the
security. This is, of course, time-consuming and
impracticable for assets such as stock which are bought

and sold on a daily basis! A floating charge solves this
problem for companies, and enables them to use their
stock in trade, which may be valuable, as security to
raise money.
general meeting – a meeting of shareholders. A general
meeting which is not an Annual General Meeting is called
an Extraordinary General Meeting even if the business
transacted is actually fairly routine.
When a meeting is to be held, proper notice has to be
given to everyone entitled to attend, unless all (well,
sometimes 95% – Hair Splitters Limited) consent to short
notice. Furthermore, notice of shareholders’ meetings
should be given to all company directors (even if they
are not shareholders) and the company’s auditor (if the
company has one). The period is counted in clear days –
that is, excluding the day the notice is received and the
date of the meeting.
incorporate – to bring (a company) into existence
(incorporate means, literally, to embody).
issued share capital – the shares actually allotted to the
shareholders.
Memorandum of Association – the document which
sets out what the company is allowed to do and the
powers it has for that purpose. The Memorandum also
states the company name and other details (see also
Articles of Association).
minutes – the permanent written record of shareholders’
and directors’ meetings and also of any resolution passed
without a meeting. These are recorded in the minute
book.

nominal share capital – the shares which a company is
allowed to allot to its shareholders, whether it has done
so or not.
Nominal share capital is also known as authorised share
capital. The two are the same.
non-executive director – a director who is not involved
in the running of the company on a day to day basis.
ordinary resolution – see under resolution.

xx

SETTING UP A LIMITED COMPANY


proxy – a person appointed by a shareholder to vote on
their behalf.
A proxy cannot vote on a show of hands (that is, one
vote per shareholder), only on a poll (that is, one vote per
share) unless the company’s Articles of Association
provide otherwise. The Articles of Association in this book
(see pp 57–68) specify ‘a show of hands, unless any
shareholder present in person or by proxy demands a
poll, whether before or after the show of hands’.
proxy notice – a statement on a notice convening a
shareholders’ meeting, saying that a shareholder can
appoint a proxy to attend and vote on their behalf and
that the proxy does not have to be a shareholder in the
company.
quorum – the minimum number of people needed at a
meeting to transact business. The adjectives are quorate

and inquorate.
The Directors of Pedants Limited would like to remind you that
quorum is the genitive plural of the Latin pronoun qui (who) as used
in the phrase ‘quorum vos (duos/tres or whatever number) esse
volumus’, that is, the minimum number of people needed to carry
out a task.

registered office – the address to which official
correspondence for the company will be sent and where
the statutory registers and minutes of shareholders’
meetings must normally be kept and available for
inspection.
If you trek to the registered office of a listed public company in the
hope of inspecting their register of shareholders, more often than
not you will be disappointed. This is because companies with large
numbers of shareholders, and whose shares change hands
frequently, tend to use independent registrars to keep the list of
shareholders at their own place of work, handy for updating.

It is sensible to make the company’s registered office the same as
the Company Secretary’s place of work. Then all the
documentation is handy.

BUZZWORDS

xxi


A company’s registered office can be different from its
trading address – they could have a registered office in

London and offices and factories worldwide. Wherever
else the company is active, its registered office must be in
England or Wales.
resolution – a formal decision of the shareholders or
directors, which must be passed by the appropriate
majority.
A resolution may be passed at a meeting on a show of
hands (that is, one vote per shareholder) or on a poll
(being one vote per share). A poll may be demanded
before the resolution is put to the vote, or immediately
after the result on a show of hands (see also proxy).
Instead of calling a meeting, a resolution can be passed –
but in this case it has to be unanimous – by getting
everyone to sign a copy of the resolution (not necessarily
the same copy). In the case of a shareholders’ written
resolution, a draft must be made available to the
company’s auditor (if the company has one – see
p xxxiii). A written resolution cannot normally be used
to get rid of a director or an auditor.
All resolutions should be recorded in writing and some
resolutions have to be filed at Companies House.
The basic forms of shareholder resolution are:
1

2

3

xxii

Ordinary resolution – not less than 14 clear days’
notice of meeting and a simple majority, in other
words, over 50%. The notice of meeting must, at
least, indicate the general nature of the business to
be transacted, and should preferably specify the
intended resolution. Copies of some ordinary
resolutions have to be filed at Companies House,
such as an increase in nominal capital and the
dismissal of a director.
Special resolution – not less than 21 clear days’ notice
of meeting. The notice must specify the intended
resolution. The requisite majority is at least 75%.
Copies of all special resolutions have to be filed at
Companies House.
Elective resolution – not less than 21 clear days’
notice of meeting and unanimous decision. Copies
of all elective resolutions have to be filed at
Companies House.

SETTING UP A LIMITED COMPANY


You will find samples of all three in this book and on our
website.
Note that the government intends, as part of its
modernisation programme for company law, to change
the law to simplify the rules on resolutions to make it
easier for private companies to take decisions (see
‘Times are changing’, above).
share premium – on an allotment of new shares, the price

per share may be greater than the face or nominal value.
When people say ‘Cup Final tickets are at a premium’
they mean the fans may end up paying £100 for a £10
ticket. That £90 difference is the premium. It’s similar
with shares – except that it’s the company, not a tout,
selling its own shares at more than their face value.
special resolution – see resolution.
statutory forms – forms that the law requires companies
to file with Companies House.
statutory registers – the registers that the law (statute is,
of course, another word for legislation) requires a
company to keep.
For a private company these are:
❍
❍
❍

❍

register of members – that is, shareholders;
register of directors and company secretary;
register of directors’ interests – that is, the
company’s shares and debentures;
register of charges – charges in this context means
liabilities, such as mortgages and debentures.

The statutory registers, along with the minutes of
meetings and records of resolutions, must normally be
kept at the company’s registered office.
subscriber – someone agreeing to take shares in a

company.
The subscribers who sign the Memorandum of Association
will be the first shareholders in the company.
Table A – the statutory ‘off the peg’ form of internal
rules of the company which apply by default if a
company does not have its own ‘customised’ rules – that
is, rules drafted with that particular company in mind.

BUZZWORDS

xxiii


The internal rules are known as the Articles of Association
(see above). The customised rules of a company can use
Table A as a starting point, and that is the approach we
adopt here. So the Articles of any company formed using
this book comprise the customised rules which we
include, and Table A as varied by those rules.
The variations we have made to Table A are intended to
make the Articles more suitable for a small private
company. A professional could look at our Articles,
compare them with Table A and say ‘Ah yes, they’ve
done so-and-so’. A copy of Table A itself is included in
this book (see p 79) and on the website. You do not have
to file Table A with Companies House – they have
already seen it many times!
At the time of writing, Table A is likely to be replaced by
a user-friendly model constitution for small companies,
as part of the government’s proposals to modernise

company law (see ‘Times are changing’, above).

xxiv

SETTING UP A LIMITED COMPANY