David Hyde
Barrister
Operating a business in the UK
Here is a summary of how an individual, or group of people, can
organise themselves to operate a business, or own property, in the
United Kingdom.
As you will see there is quite a selection of entities that can
be used. I have categorised them according to the relationship between
the owners and the managers. Although these are most often the same
people, where the ultimate power lies can prove to be of crucial
importance in a dispute or for tax purposes. You can view the various
entities under the categories listed below:
As an individual
Operating with others in:
- Partnerships
- Owner Managed Companies (Corporate Entities)
- Delegated Management Companies (Corporate
Entities)
The main features dealt with for each type of entity are:
Formalities of starting;
Ownership;
Management;
Liabilities of -and limitations to liability - the owners/managers;
Termination;
Taxation.
Just You!
Starting
There are no formalities, simply start doing business.
If you carry on business with a name that is not your forename
(or initial) and surname then you must identify yourself by putting
your name on all written documents issued for the business and state
an address for service of legal documents. You must also display
that information at each place at which you do business.
Many professions and activities are regulated, for example insurance,
financial services and law- you would need to comply with those
regulations where required.
Management
If you wish you can delegate the management of your business to
another person: they would operate within the terms set by you.
You would be liable for that persons actions on your behalf.
Liabilities
You are personally liable for all contractual obligations that
you incur and for all liabilities for civil wrongs (torts). All
your personal assets (including your residence), wherever they are
in the world, are available to satisfy your debts. Assets belonging
to members of your family are not available (provided they are not
part of an arrangement to cheat your creditors). There are limits
as to how much time can pass from the date the someone alleges that
you breached a duty to them and the date on whihc they start proceedings
in Court to recover what they claim. Generally this is six years
from the date of the claimed breach, but may be longer or less depending
on the type of claim.
Termination
You can taking on new business at any time, however you will have
a liability to fulfill any contractual obligations that you have
entered into (unless you can negotiate an early conclusion).
Lease obligation will not conclude until the termination of the
lease, unless you have expressly agreed that you should not be liable
beyond the end of your tenancy.
Insolvency - if you owe anyone more that £750 and do not
pay them within 21 days of them serving on you what is called a
'Stautory Demand' then you can e made bankrupt. That means that
all you assets are taken to pay off your creditors: you are then
left free of debt. You may make an offer to your creditors, which
if 75% of them agree means that you avoid bankruptcy providing that
you make the payments that you promised to obtain the agreement.
Taxation
If you are resident in the UK then you are liable to income tax
on on the income from the business wherever it is carried on in
the world. Relief is available against taxes paid on income from
your business that is taxed in other jurisdictionsIf you are resident
outside the UK then you will be liable to income tax on income from
your business arising from a branch or agency in the UK.
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Operating with others
There are two main types of business association
(1) Partnerships -where the members act as the agents for each
of the other member and;
(2) Companies- where there is a separate ‘legal entity’
which operates the business.
Limited liability is available for both kinds of association.
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Partnerships
A partnership exits whenever two or more persons (natural or legal)
are engaged in a joint enterprise with a view to sharing the profits
of that enterprise.
Starting
The partnership relationship is created by an agreement(oral, written
or by conduct) by each partner to act in the joint enterprise. All
that exists therefore is a state of affairs – there is no
separate legal person distinct from the partners
The lack of formality required to establish a partnership is a
very mixed blessing. It means that people can start business easily
and with the minimum of fuss or delay. On the other hand someone
can very easily commit themselves, perhaps even unwittingly, to
the unlimited liabilities that their partners incur for them, or
indeed having been successful in some venture they find someone
claiming a share of their profits as a ‘partner’.
There is a limit on the number of partners that a partnership can
have, which is 20, unless the partners are members of specified
professional bodies, in which case there is no limit.
Management
When an agreement that creates the partnership is made, each partner
can carry out the objects of the agreement. If more control is needed
(such as a management board) then that must be expressly provided
for. Again, a written agreement is much the best way of ensuring
that each partner knows what his rights and obligations are.
Because a partnership is not a legal entity it cannot legally own
property (that is to say it cannot have its name on the property
deeds). For partnerships of more than four partners some of the
partners, up to four, will have to be the legal owners ie have their
names on the title deeds or other evidence of ownership.
Termination
In the absence of express agreement to the contrary the partnership
will come to an end when its objects have been attained. If the
venture was to be a continuing one, for instance running a professional
practice, without some prior agreement for termination then it must
continue.
A dissatisfied creditor can apply to the Court for the winding
up of a partnership.
Partners breaching their obligations
The Court will exercise some supervisory control of partners who
breach their obligations in bad faith. This could be either the
expulsion of the defaulting partner, or if a minority of the partners
are being oppressed – an order for the winding up of the partnership.
Disclosure
If you carry on business with a name that is not your own and your
partners’ forenames (or initials) and surnames then you must
put your identify yourselves by putting your name on all written
documents issued for the business and state an address for service
of legal documents. You must also display that information at each
place at which you do business.
Liabilities
You are personally liable for all contractual obligations that
you and your partners incur and for all liabilities for civil wrongs
(torts) incurred in operating the business. All your personal assets
(including your residence), wherever they are in the world, are
available to satisfy debts incurred by the partnership. Assets belonging
to members of your family are not available (provided they are not
part of an arrangement to cheat your creditors.
There are limits as to how much time can pass from the date the
someone alleges that the partnership breached a duty to them and
the date on whihc they start proceedings in Court to recover what
they claim. Generally this is six years from the date of the claimed
breach, but may be longer or less depending on the type of claim.
Taxation
Each partner is liable to income tax/capital gains tax on his/her
share of the profits of the partnership.
Limited Partnerships
Limitation of the liability of partners is available, subject to
certain conditions, which are
there must always be at least one partner without limited liability
for the partnership debts;
the limited partners must not have any part in the management of
the partnership business the partnership must be registered with
the Registrar of Companies
where the names of the partners are shown their limited liability
status must be indicated.
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Companies
Companies are legal persons and can be the legal owners of property
and commence and be the subject of legal actions. There are several
types, varying as to the arrangements for management – owner
managed or where management is delegated, and whether limited liability
is available.
Owner managed companies
Limited Liability Partnerships (“LLP”)
Starting
Is by two persons associated for carrying on business signing an
incorporation document which is then registered with the Registrar
of Companies.
The company can assume any obligations that the incorporators had
incurred together in their business prior to the incorporation.
Management
The members manage the company by agreement (or if they are not
able to agree, in accordance with statutory provisions).
Status of members
Each member of an LLP is an agent of that LLP in it s business.
The LLP is liable for all the liabilities incurred by the member
in carrying on its business. The member is not an employee of the
LLP.
Termination
A member may retire, or be expelled, from the LLP in accordance
with the governing agreement. If there is no provision for retirement,
by giving reasonable notice to the other members; the member may
not be expelled.
The LLP may be wound in by agreement, or by being subject to insolvency
proceedings by the Court.
Limitation of liability
The members have no liability to contribute to the LLP’s
assets in the case of winding-up.
A member of an LLP may however be liable for a civil wrong committed
by him in the course of the LLP’s business eg negligently
causing personal injury, for which he would remain personally liable.
Formalities
The company must have a ‘Registered Office” in either
England and Wales or Scotland, depending on which jurisdiction it
will be incorporated in.
The joining and retirement of members must be notified to the Registrar
of Companies.
Disclosure
The LLP must produce accounts each year in accordance with the
rules that apply to Limited Companies.
Costs: The Registrar of Companies charges £25 on incorporation
and £30 for each annual return.
Taxation
A Limited Liability is not an entity for UK income tax purposes:
each member is liable to income tax on his/her share of the company
income and capital gains.
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Delegated management companies
There are three types of company where the owners (shareholders)
have a limited role in the management of the company business (which
is delegated to a board of directors) ; with two of these the members
have limited liability for the company’s debts;
(1) private limited company ;
(2) public limited company ;
(3) unlimited liability company.
All these types of company can become hybrid member-managed/delegated
management entities*.
Limited Liability Companies
Private Limited Company
Starting
Is by the signing of governing instruments- the Memorandum of Association
and Articles of Association (these provide the objects of the company
and for how it is to be governed) and application to the Registrar
of Companies for registration.
The company is formed when it is registered - it cannot undertake
any transactions before that date.
Disclosure
The company's name, registered office and place of incorporation
and registered number must be shown on all letterheads and other
forms of correspondence- failure to do so may mean a liability to
a fine.
The company's name must appear on all orders for good, money, bills
of exchange- failure makes the individual signatory(ies) liable
for the debt incurred.
The company must make a return each year of its directors and secretary(s)
to the Registrar of Companies (in practice the required form is
prepared by the Registrar and only amendments need to be noted).
A copy of the company's annual accounts, as set out in the form
required, must also be lodged with the Registrar of Companies.
Registers
The company must keep a register of directors and members. These
must be made available to any one who requires to inspect them.
Charges/Mortgages
Any mortgage or other charge over the company’s property
must be registered with the Registrar of Companies if it is to be
effective.
Accounts
The company must publish accounts each year in a form required
by statute – each member must be provided with a copy of the
full accounts. Those accounts may require to be audited by a qualified
person depending of scale of the company’s operations and
whether it is a member of a group. A copy of the accounts (in abbreviated
forms if so desired ) must be lodged with the Registrar of Companies.
Management
By Members (Shareholders/Stockholders)
(Individuals or Corporations become members either by being subscribers
for shares at incorporation or by having shares transferred to them.)
Rights
A member has the rights given in the company’s constitution
to the class of share that he holds. Most shares are what are called
‘ordinary shares’; these carry one vote each and an
equal share of the distributable income of the company. There are
variations, such as preference shares; where the share is paid a
dividend in preference to the ordinary shares, and many other weird
and wonderful variations depending on the needs of the promoters/financiers
of the company.
There is always a right to be given notice of and to attend meetings
of the company – but not necessarily to vote.
Management Powers
The members usually have a very limited role in the management
of the company; the appointment and removal of directors, varying
the authorised capital of the company and amending the governing
instruments. By consent even the requirement to hold annual meetings
and some other formalities can be waived.
Where a company is being operated to cheat the minority shareholders
the Court will, on application, require the majority to buy out
the minority at a fair price or order the winding up of the company.
The Court may also allow the minority shareholders to sue others
on behalf of the company.
Termination
A person can cease being a member by transferring his shares to
another person.
If a member wishes to terminate by selling his shares to the company
there must sufficient profits available to members for it to be
able to buy those shares. A limited company must not return it paid-up
capital to its members without the permission of the Court.
Limitation of Liability
The members are not obliged to contribute to the company’s
assets either during its operation or on a winding-up (unless there
are unpaid contributions on their shares, in which case those unpaid
contributions can be called for).
Formalities
Entry of the member’s shareholding in the Share Register
of the Company is essential to the exercise of shareholder rights.
Taxation
Companies incorporated in the UK are regarded as resident here
for tax purposes. They are therefore liable to corporation tax on
their worldwide income and gains. Relief is given for tax paid to
overseas jurisdictions on income there.
UK resident individuals who receive distributions (eg dividends)
from a UK resident company are liable income tax on that distribution,
less a credit for the lower tax liability (in other words you only
pay income tax if you are liable to higher rate tax).
Status of Directors
Creation
Directors are appointed by the members, or more often by the exercise
of powers given to them in the governing instrument to make appointments.
Management
The directors may exercise the management of the company’s
business as a body, or delegate to a sub-board, or even an individual
(a managing director).
The directors do not have the power to change a company’s
constitution- that is reserved to the members. They do most often
have the right to allocate any authorised but un-issued share capital-
that right can be used to alter the balance of power between the
members.
Duties to the company
A Director is a fiduciary
A director has a fiduciary duty to the company – that is to
say a duty to act in good faith to the company (as distinct from
the members)
Act with reasonable competence
A director must also act in the conduct of the company’s business
using the skills abilities with reasonable competence.
Liabilities of Directors
Acting on company’s business.
It is possible for a person acting on behalf of a company to bring
liability for the company’s debts by failing to ensure that
the company’s name is not shown on order for goods of money.
Liability for civil wrongs
A director is not liable for the company’s breaches of contractual
arrangements with other parties, except where his particular skill
was relied on by the other party.
A director of a company would be liable (along with the company)
for other civil wrongs committed by him in the course of the company’s
business. For example personal injury.
Wrongful trading
If the company, to the directors knowledge, becomes insolvent and
the directors decide that it should continue trading they may be
liable for any further losses that are caused to the creditors.
Fronting for others
If a director conducts the company’s business on the instructions
of some other person who has not been appointed –a so-called
“Shadow Director”, he and the “Shadow Director”
are liable for the losses that result.
Penalties
Where a company becomes insolvent the Official Receiver may apply
to the Court for an order that one or more directors be disqualified
from acting as a director for a period of up to 15 years
Termination
A director may terminate his office by resigning; by the expiry
of his term of office; or by removal by the members- the directors
do not have the power to remove one of their number.
Disclosure
A director must notify the Registrar of Companies his present name,
any previous names, his present residential address, occupation,
nationality and any other directorships of UK companies.
If a director's service contract is capable of extending for more
than 12 months then any member is entitled to inspect the contract.
Termination of the company
A company be wound up by a resolution of the members (if solvent)
or by a resolution of the creditors (if insolvent), or by order
of the Court. On a winding-up the directors lose their powers effectively
to manage the company. In the course of the winding-up the creditors
of the company are paid and any surplus is distributed to the members
in accordance with their entitlements.
At the end of the winding up the company is dissolved and ceases
to exist. However a person with a claim may apply to the Court for
the company to be re-instated.
There is an informal approach for termination which involves an
application to the Registrar of Companies to strike the company
off the register- the company must have been dormant for three months
and meet other conditions for the application to be granted.
Failure by the company to comply with the requirements to make
an annual return to the Registrar of Company’s for an extended
period may result in the company being struck off the register.
The company then ceases to exist and can do nothing until such time
the directors or members apply to the Court to have the company
restored to the register.
Insolvency
If the directors of a company see that it is in difficulties an
"Administrator" may be appointed. The Administrator must
be a licenced insolvency practitioner. The purpose of the administration
may be to try to save the company. The company is protected from
legal action whilst it is in administration.
If a company does not pay a debt where required to do so by what
is called a 'Statutory Demand' then the dissatisfied creditor may
petition the Court for the winding-up of the company. If that is
granted a liquidator will take control of the company's property
and sell it to pay the creditors. The company may propose an arrangement
to the creditors(typically to pay only part of its debts over time)
which, if accepted by 75% of them, will avoid bankruptcy provided
that the compamy fulfills its obligations under the agreement.
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Public Limited Companies
Creation
Such a company is created in the same was as private limited company,
except that it founding instrument states that it shall be a “public
limited company”. An existing private limited company may
also re-register as public.
Minimum share capital
A public limited company must have a minimum authorised share capital
on incorporations of £50,000, with £12,500 paid up.
Management
Members and Directors have largely the same rights, obligations
and liabilities as apply with Private Limited Liability companies.
Disclosure
Registers
The company must keep a register of directors and members. These
must be made available to any one who requires to inspect them.
Annual Returns
The company must make a return each year of its directors and secretary(s)
Charges
Any mortgage or other charge over the company’s property must
be registered with the Registrar of Companies if it is to be effective.
Accounts
The company must publish full accounts in form required by statute.
Those accounts must be audited by a qualified person. A copy of
the accounts must be lodged with the Registrar of Companies.
Termination
The company’s existence can be brought to an end by the same
procedures used to terminate private limited companies.
Unlimited Liability Company
Creation and Management
This is identical to the creation and management of a private limited
company, except:
The company does not have to maintain its share capital and can
return it to its shareholders;
Any member of the company is liable to make up the deficiency of
assets on a winding-up (to the total amount, not pro-rata). This
liability exists for the three years after the person ceases to
be a member.
There is no requirement to send accounts to the Registrar of Companies.
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