Creating a Company
If you incorporate a company you have the protection of “limited liability”, which means that you are not personally responsible for all the company’s losses. If you are trading as an individual you do not have this protection.
There are formalities involved in owning and transferring shares which you need to comply with. For example you need to follow “pre-emption” procedure in the Company Articles which give existing shareholders the right to bid for shares which another shareholder wants to sell. You also need to document share transfers and keep the company’s records (or “Statutory Books”) up to date. Share transfers also need to be accompanied by a “stock transfer form” to the receiver. If you don’t follow these procedures there will be uncertainty about your share ownership which could cost you when you seek investment or a sale.
If you grant options to someone to buy shares, there must be certainty as to when the options are to be exercised or to fall away. They must also be exercised at the latest if there is a sale of the company. If all this is not clear it will create problems for you with investors and buyers. Options also need to be structured carefully so that they are dealt with in a way that is tax-efficient for everybody – this normally needs legal advice.
Filing Records at Companies House
Companies have to comply with the Companies Act 2006 in the way that they file forms. There are many different types of form which must be filled in properly and delivered on time. If you don’t do this it can result in fines being paid by the directors or the company. It can also be expensive to put these kinds of mistakes right.
Directors have lots of duties. They must avoid conflicts between their own interests and the Company’s interests and they must take certain things into account when they are making their decisions. If Directors ignore these duties then it can result in transactions they are involved with for the Company being set aside. The Directors may even be liable personally for their failure to observe these duties.
When you share important information with others about the Company’s projects, plans or financial information, you should make sure that the information is properly protected by using a Confidentiality Agreement. This gives you a legal remedy if someone uses that information in a way which the agreement doesn’t allow. It will also give confidence to investors and shareholders that you are protecting information which is key to the company.
When you pay out “dividends” or profits to shareholders, there are rules you must comply with. Normally, you can only pay dividends out of genuine profits. If you don’t have those profits or you need to give capital back to shareholders and you still pay a dividend, you may be in trouble. Directors who authorise unlawful dividends may have to personally repay the money to the company.
Your Articles of Association
Company Articles are important. They are the operational rule-book for the company. So, they should be up-to-date and enable you to do everything that the company needs you to do. Issues to think about could include – if I want to sell the company can other minority shareholders be required to sell? Can they request that their shares are sold when other share sales are taking place? Do certain shareholders need particular controls which should be included in the Articles?
LawBite Legal Advice
LawBite professional advisors can help you straightaway with all of these issues and more. Just go to the the Legal Advice section and make your enquiry. We’ll get back to you within 24hrs with a meaningful response.
Clive Rich is a highly experienced entertainment and digital media lawyer, who has also successfully run digital businesses for companies such as Sony and Bertelsmann.
A qualified barrister, he has been a lawyer for almost 30 years and has drafted and crafted contracts for a broad spectrum of multi-nationals, major organisations and brands, including Yahoo, Apple, Napster, SanDisk, Myspace and the BBC.
He has also previously run his own legal practice, Rich Futures Ltd in association with the Top 30 UK law firm, Olswang LLP, representing a variety of technology companies and SMEs.
Clive is a qualified Mediator through the Centre for Effective Dispute Resolution (CEDR) and a qualified Arbitrator through the Central Institute of Arbitration (CIArb) in London.
As a negotiator, he is the author of “The Yes Book: the Art of Better Negotiation”, published by Random House in March 2013. Clive has also designed and successfully launched a negotiation App called “Close My Deal”, enabling people to understand the basis of successful negotiation and apply the skills to everyday scenarios. He has provided negotiating coaching and deal making services to a wide range of large organisations and SMEs. He has also been a board member of a number of digital SMEs.
Clive is a devoted father and husband, but when he is not spending time with his family, he likes to unwind by playing golf or watching a variety of sports (football, rugby, cricket). He's a lifelong Milwall FC fan... but don't hold that against him!
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This tip sheet covers "8 things" you really ought to know about forming a company and keeping proper, legal company records