Company Formation Under the Companies Act 2006

Introduction

Company formation — or incorporation — is the process by which a company is created as a legal entity distinct from its owners. In the United Kingdom, the formation of companies is governed principally by the Companies Act 2006 (CA 2006), which provides a comprehensive code for the registration, organisation, and regulation of companies. The CA 2006 replaced earlier legislation dating back to the Companies Act 1985 and consolidated and modernised the law governing companies. The Registrar of Companies, operating through Companies House, administers the registration process.

The Process of Incorporation

Section 7 of the CA 2006 provides that a company is formed by one or more persons subscribing their names to a memorandum of association and complying with the registration requirements. The subscribers — who become the first members of the company — must each agree to become a member and to take at least one share in the company.

The application for registration must be delivered to the Registrar of Companies together with the memorandum of association, the articles of association, a statement of capital and initial shareholdings, a statement of the company’s proposed officers, a statement of the company’s registered office, and a statement of compliance confirming that the registration requirements have been satisfied. The statement of compliance must be signed by a person authorised to do so, and it is a criminal offence to make a false statement.

Upon registration, the Registrar issues a certificate of incorporation, which is conclusive evidence that the company is duly registered and that the requirements of the CA 2006 have been complied with (section 15). The certificate identifies the company by its registered number and specifies its type (private or public) and its date of incorporation.

The Memorandum of Association

The memorandum of association is a constitutional document that, together with the articles of association, governs the company’s affairs. Under section 8 of the CA 2006, the memorandum must state that the subscribers wish to form a company, agree to become members, and, in the case of a company with a share capital, agree to take at least one share each. The memorandum must be authenticated by each subscriber.

Historically, the memorandum also set out the company’s objects clause, defining the scope of the company’s activities. The CA 2006 abolished the requirement for an objects clause: unless the articles specifically restrict the company’s objects, a company’s objects are unrestricted (section 31). This reform removed the doctrine of ultra vires as a significant constraint on companies, although companies may still choose to adopt restrictive objects clauses.

The Articles of Association

The articles of association are the company’s internal rulebook, governing the management and administration of the company. The articles regulate matters including the rights of shareholders, the appointment and removal of directors, the conduct of board and general meetings, the declaration of dividends, and the maintenance of accounts.

Section 20 of the CA 2006 provides that the company may adopt any articles it chooses, subject to the provisions of the Act. If a company does not register articles, the model articles — set out in statutory instruments — apply by default. The model articles for private companies limited by shares provide a standard form of constitution that is suitable for most small businesses, while public companies and companies with more complex structures may adopt bespoke articles.

Limited Liability

The principle of limited liability is fundamental to company law. Section 3 of the CA 2006 defines the types of company: companies limited by shares, companies limited by guarantee, and unlimited companies. A company limited by shares is the most common form: the liability of members is limited to the amount unpaid on their shares (if any). In practical terms, for a company limited by shares whose shares are fully paid up, members have no further liability to the company’s creditors.

Limited liability encourages investment and entrepreneurial activity by enabling investors to participate in business ventures without risking their entire personal assets. The economic rationale is that limited liability reduces the cost of capital and facilitates the diversification of risk. However, limited liability also creates moral hazard, as shareholders may have less incentive to monitor the company’s activities. English law responds to this through the doctrine of piercing the corporate veil and through statutory provisions imposing personal liability on directors in certain circumstances.

The Corporate Veil

The corporate veil is the legal distinction between a company and its members. The company is a separate legal person with its own rights and liabilities, distinct from those of its shareholders and directors. The classic statement of this principle is Salomon v A Salomon & Co Ltd (1897), where the House of Lords held that a company is a separate legal entity even where one person owns substantially all the shares and controls the company.

The courts will pierce the corporate veil only in exceptional circumstances. In Prest v Petrodel Resources Ltd (2013), the Supreme Court clarified that the court may pierce the veil only where a person uses a company as a device or facade to conceal the true facts and to evade legal obligations. The court held that the doctrine is of limited application and that the circumstances in which it can be invoked are narrow.

Types of Registered Company

The CA 2006 provides for several types of registered company. Private companies limited by shares are the most common form, suitable for businesses of all sizes. Public limited companies (PLCs) may offer their shares to the public and must satisfy additional requirements, including a minimum share capital of £50,000. Companies limited by guarantee do not have a share capital and are typically used for charitable, community, and not-for-profit organisations. Unlimited companies do not provide limited liability for their members and are used primarily for certain professional and investment purposes.

Conclusion

Company formation under the Companies Act 2006 provides a flexible and efficient framework for the creation of companies as separate legal entities. The registration process, the constitutional documents, the principle of limited liability, and the variety of company types enable businesses to choose the legal structure that best suits their needs. The CA 2006 modernised and simplified company law while preserving the fundamental principles that underpin the English corporate law tradition.