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Introductory Business Guide: United Kingdom's Legal Overview

Interlegal

Interlegal Permanent Officer

First published in 2019 - Updated from time to time.

Introduction

In 2019, Interlegal published its first joint book called Legal and Tax Issues Around the World - Starting and Growing a Business. It is the result of collective work with the accountants' firms network EuraAudit. This article aims to introduce the legal environment of United Kingdom for entrepreneurs who are interested in forming and financing their business in this country. Note that it is not equivalent to a complete professional analysis. Through this introductory guide, the network intends to help entrepreneurs to craft the questions they need to ask themselves in order to start, operate, and see their business thrive on the global stage. Therefore, Interlegal encourages entrepreneurs to obtain legal advice with Interlegal's firm on the issues arising from starting and running a business in United Kingdom.

Legal Overview

Summary

The UK is relatively lightly regulated when it comes to corporate formalities. Many documents can be executed in electronic format and company registrations are cheap, simple and many filings can be completed over the internet.

Registered Companies and Partnerships

The two most common ways for a non-UK company to establish a UK presence are through either a UK resident subsidiary company or a UK permanent establishment (such as a branch).

A company that is incorporated in the UK is automatically UK resident unless an applicable double tax treaty provides otherwise.

A non-UK incorporate company is UK tax resident if it has its “central management control” in the UK (subject to any applicable double tax treaty). Although in determining the status a number of factors must be considered and no single factor is necessarily conclusive.

Some businesses trade as partnerships. These are not as popular as they once were as the partners have unlimited liability. Partnerships, however, have the advantage that their accounts are private and are not open to public inspection unlike a company or an LLP.

In the UK it is possible to trade through a limited liability partnership (LLP). This has limited liability, like a limited company, but is taxed in a different way. A company in the UK is taxed on its profits. An LLP is not taxed on its profits but its members are taxed individually on the profits of the LLP as if they are partners. LLPs are often used for partnership arrangements and joint venture arrangements as well as for professional services businesses.

Classification of Registered Companies

In the UK there are four principal types of company:

  • Company limited by shares – these may be private or public companies. Private companies limited by shares constitute the vast majority of all companies registered in the UK;
  • Companies with unlimited liability which are rare because the shareholders have unlimited liability to the extent the company is unable to pay its debts;
  • Companies limited by a guarantee. These companies are normally incorporated for non-profit making functions, with no share capital and members rather than shareholders. The members undertake to contribute a pre-determined nominal sum to the liability of the company which becomes due in the event of the company being wound up; and
  • Community interest companies. These companies are designed for social enterprises and for using their profits and assets for the public good.
Memorandum and Articles of Association

The main constitutional document for a company is its articles of association. All registered companies must have articles of association and a company must register its articles of association at a public registry unless it adopts the statutory template model articles.

In addition to the new articles of association, a company has a memorandum of association. In the UK, this is a very simple document and provides basic information, for example, about the initial shareholders.

Share Capital

Share capital only applies to a company limited by shares.

The liability of the shareholders is limited to their contribution to the issued shares.

Public Offer of Shares

In order to be a public company, the company must have a share capital of at least £50,000. Additional restrictions apply to public companies. Public companies are also able to apply to list their shares for public dealing, for example on the London Stock Exchange or on the alternative investment market (AIM), but a company must comply with a whole range of detailed listing regulations if it wishes to go for a public listing.

This is often referred to as an IPO (Initial Public Offering). This can only be made by a public company, by listing shares on a recognised securities exchange, such as the London Stock Market. This is a detailed and costly process which also involves on-going listing/regulatory fees and charges. The listing process involves the circulation of a prospectus.

General Meetings

The rules applicable to shareholder meetings of companies vary depending on whether the company in question is a private limited company or a public limited company and also whether the company is a single shareholder company, a trading company, a listed company and a quoted company. The trend in the UK in recent years has been to relax the requirements for general meetings of private limited companies, particularly where they have a single member. For example, a public company must hold an annual general meeting each year, whereas many private limited companies do not require to hold annual general meetings at all.

Some of the decisions of a company, particularly major constitutional issues, must be decided by the shareholder(s) of the company.

Directors

A private limited company requires at least one director. The director or directors usually have the general day to day management of the business and take all decisions except for those reserved to the shareholders. The directors owe fiduciary duties to the company which are codified in company legislation. This means they under obligations, as an example, to act in the best interests of the company and not just follow shareholders direction.

Directors do not have to be UK citizens. They can be based outside of the UK provided the articles of association of the company contain appropriate provisions.

Financing of a Company

Companies are financed in a number of ways:

  • Capital contribution from shareholders in the form of shares.
  • Loan, debt and bank finance.
  • Equity investment from private equity funds.
  • Grants.

From the directors’/shareholders’ point of view the advantage of limited liability in practice might be negated to the extent that any personal guarantees are required to be given to third party funders.

Commencement of Business

There are various requirements that need to be filed before a company may commence business. A simple company formation will generally take about three days to register. A company will need to register with the tax authority and will need to open a bank account. For an overseas company it can take between 6 weeks to 12 weeks to be ready to trade.

Mergers and Acquisitions

Private limited companies are normally sold via private negotiations. Where one entity acquires the shares of another it is referred to as a “share-sale”. Sometimes it can be more preferable to purchase the business of another entity, leaving liabilities with the target corporate entity, referred to as an “asset-sale”.

Takeovers of public limited companies in the UK are strictly governed under the relevant codes of practice. There are restrictions on offering shares in private companies for sale to the public and such negotiations are usually conducted with a small number of interested parties on a confidential basis.

Corporate Insolvency

UK legislation protects creditors of companies.

If a company becomes insolvent the procedures that apply include a liquidation of the business, administration or some form of rescue package.

Where a company goes into administration or is wound up on grounds of insolvency, the directors’ conduct is reviewed. If directors have acted contrary to insolvency laws they can face disqualification proceedings, or in a serious situation, they can face proceedings to recover monies from them personally.

Rescue mechanisms include what is known as a “company voluntary arrangement”. This is when the company and its creditors come to an agreement which is implemented and supervised by  a qualified insolvency practitioner and may involve the creditors being paid a proportion of the monies they are owed in full and final settlement.

Under an administration, the company is given a breathing space under which there is a moratorium to allow it to be rescued or re-organised, or its assets realised following which the company is wound-up.

Winding-Up of Companies

Winding up or liquidation is the final resort, although it may be the simplest and most effective way of applying pressure to the company. This involves the appointment of a liquidator who must be a qualified insolvency practitioner who collects in and sells the company’s assets and distributes the resulting cash.

There are two types of liquidation, either a compulsory liquidation by order of the Court, or a voluntary liquidation by resolution of the company.

There are two forms of voluntary liquidation – either a members’ voluntary liquidation where the directors are willing to give a declaration that the company will be able to pay all of its debts within 12 months, or a creditors’ voluntary liquidation where the directors are not able to give that declaration.

For more information, please contact Andrew Bradley, Shulmans LLP, Abradley@shulmans.co.uk.

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