How to Set Up a Limited Company
Learn what it means to be a limited company, what share information is required at registration, types of share and where to get started with the registration process. This is useful reading for those who are studying for either of the CII AF2 or J03 exams.
What does ‘limited by shares’ mean?
Most limited companies are ‘limited by shares’. What this means is that they are owned by shareholders who have certain rights. Most companies issue one class of ‘ordinary share’, which means shareholders get one vote per share and are entitled to receive dividends.
What is the price of an individual share?
The price of an individual share can be any value; a low share value is usually used, such as £1, to limit the shareholders’ liability.
What share information needs to be provided?
When a company is registered, share information has to be provided – known as a ‘statement of capital’ – this includes the number of shares issued and their total value (the company’s share capital) and the names and addresses of the shareholders.
What is share capital?
If a company issues 1,000 shares at £1 each, they are said to have a share capital of £1,000 (this is not linked to what the company is worth). Shares are typically issued at £1, but different denominations can also be used; this represents the amount of money the shareholder is liable to contribute per share if the company shuts down and owes money.
Companies have to include the rights that each type of share gives the shareholder.
Types of Share
As mentioned, generally the shares used to set up a company are ordinary shares. However, a company can issue many different types of share to raise extra capital. Preference shares usually provide shareholders with a fixed dividend and the right to receive this before ordinary shareholders, but they don’t usually come with voting rights (although there are exceptions to this).
If a company wishes to allocate different rights to different shareholders, they can create special classes called Alphabet Shares, which is the term used to describe different classes of shares denominated by a letter. For example, holders of say ‘A’ ordinary shares receive a dividend, whilst holders of ‘B’ ordinary shares may not.
Alphabet shares can also cater for different voting rights and other rights or restrictions.
Within small family companies, alphabet shares are often used to pay different dividends to different members of the family.
The Companies Act 2006 doesn’t specify what rights are attached to Alphabet Shares, but these will be stated in the company’s Articles of Association, and these should be checked to ensure the particular rights are clearly understood.
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The Registration Process
Companies must be registered with Companies House. If this is done through the gov.uk website, then the company will be registered for corporation tax at the same time. The Memorandum of Association and Articles of Association (unless Model articles are used) should be filed at the same time. Applications made online are usually registered within 24 hours, and it costs just £12.
There are forms available to notify Companies House of a change to share capital as well as notice of particulars of variations of rights attached to shares.
Prescribed particulars as set out by Companies House are:
- voting rights, including rights that arise only in certain circumstances
- dividend rights, i.e. the right to receive distribution of profits through dividend payments
- return of capital rights
- whether the shares are to be redeemed or are liable to be redeemed at the option of the company or the shareholder
Once the company is set up a ‘certificate of incorporation’ will be issued, which confirms that the company has been formed correctly.
Grab the resources you need!
If you’re studying for your CII AF2 exam, and you’re wanting to feel prepared on exam day, you’ll need to practise applying the knowledge. Grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the AF2 mock paper taster now!
Alternatively, you can download a taster for J03 if you are revising for that exam.