The pitfalls of incorporating your own company
- AuthorAndrea Smith
More and more people are incorporating their own company online because registering at Companies House can be a simple process and having your own company can be a great business structure to use as it limits your personal liability. However, many people simply incorporate and don’t tailor a company to the needs of the business. This can result in invalid decisions, disputes amongst members and even affect the ultimate sale value of your business.
Inappropriate Articles of Association
Articles of association are a foundational document for any company. These are a set of rules which a company is bound by and essentially dictate how a company is to be managed and governed and what its members and directors can do. When you incorporate online, you must adopt model articles of association as prescribed by the Companies Act 2006. Whilst these can be a good starting point for any company, much like shoes; one size does not fit all, each company will operate differently and have different needs and requirements. Take, for example a small owner managed company with one shareholder and director, model articles of association are not suitable because quorum is set at two so decisions will automatically be invalid until a second director is appointed. Another example would be for instance a medium sized company with investor shareholders. The investors are likely to want to have a representative involved in all decision making to protect their financial interests. Therefore, they may require that a certain director or their appointed director be present before quorum can be satisfied and this would need to be detailed in the articles of association. These are just two examples that demonstrate how vital it is to ensure that the articles of association are tailored on a company by company basis when incorporating online.
Not considering Shareholder requirements
Oftentimes the difference between shareholders and directors is overlooked. In small owner-managed companies they are often the same person and this can cause complications which whilst not insurmountable, need to be planned for. Many decisions of directors under the Companies Act 2006 can only be made with shareholder consent, therefore, in cases where these job titles fall under the responsibilities of one person; when making decisions it must always be considered with which ‘hat’ are you thinking to ensure that the appropriate documentation is prepared and signed. Any decision requiring shareholder consent is not in the articles but prescribed by the Companies Act 2006 and therefore is not evident if you do your own incorporation. You could then find yourself committing an offence under the Companies Act 2006 and facing a fine.
Where there are multiple shareholders, it is strongly recommended that you have in place a shareholder agreement. Unlike articles of association, this is not a public document but a contract between the shareholders in a company whereby they each agree how they will deal with one another and manage the company’s affairs. This can be crucial in preventing and navigating disagreements between shareholders and also serve to protect each shareholder’s interests. However, this is not a mandatory document and must be tailored to each individual business. Many people who incorporate online overlook this form of document and it only comes to their attention when it is too late and shareholders are already in dispute.
Failure to maintain company records
Directors are in charge of the day to day running of a company and must run it to the benefit of its members. There are strict obligations and limitations on their decision making abilities imposed on them under the Companies Act 2006. Moreover, although your liability as a shareholder may be ring-fenced you can still be held to account as a company director. It is not only important therefore to understand what these responsibilities are so the business is run correctly and compliantly from the start, but to evidence these decisions properly to show that you have done just that. Board minutes therefore are not only required under the Companies Act 2006 but are a crucial document for directors to demonstrate that they are operating correctly. Whatever means of incorporation you use, you will need to make sure that you maintain both your Board minutes and statutory books from the start. Not being aware of these obligations is not an excuse.
For more information or advice on incorporating your own company and how we can assist you, please feel free to contact me on 01604 828282 or via email