Company Formation and Legal Structures: A Comprehensive Guide

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Assignment 3

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Table of Contents
Introduction...............................................................................................................................................3
Steps were taken to form a Company......................................................................................................4
The nature and essential content of a company’s articles and memorandum of association...............6
Shareholder involvement in the expansion and the extent to which a shareholder can be liable for
the debts of a company..............................................................................................................................7
The nature of shares and the difference between ordinary and preference shares..............................8
The powers of the directors of the company..........................................................................................10
The duties, which directors owe to the company...................................................................................11
Conclusion................................................................................................................................................12
References................................................................................................................................................13

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Introduction
London Car Repair Ltd. is a limited liability company which is planning for its expansion. The
company may consider re-registering itself as public limited company which will help them in
raising funds. The following report consists the steps to be taken for the formation of the
company and the contents of the AOA and MOA.

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Steps were taken to form a Company
Company: A company has a distinct entity from its owners and the owners of the company are
known as the shareholders. Having a distinct identity suggests that the company may sue or get
sued in its own name. According to the company law there are various categories of a company
depending upon the nature of ownership or limitation of liability. Till now the utmost common
kind of company working in the UK is the PLC i.e. Public Limited Company (Kitching, et. al.,
2015).
In order to form a company following steps should be taken:
 Choosing a name for the company: The first step for forming a company is to choose a
name for the company. The name of the company must be unique and should not suggest
that the company is a part of a government organisation (Koh, et. al., 2017).
 Registered Office: The company needs to specify the full address of its registered office,
specifically the head office where the main operations of the company shall be carried
out.
 Appointment of the Directors: The third step is to appoint the directors of the company.
The directors of the company carry out day to day operation of the company.
 Details of the Shareholders: The Shareholders are the ultimate owners of the company.
Therefore, it needs to specify the details about the shareholders and number of shares
they own.
 Appointment of Employees: The company cannot be operated without the employees.
Hence, the last but important step of forming a company includes the appointment of the
employees who shall control the day to day operations.
As per the provisions of Companies Act, 2006; the legal formation of the company is done in the
following manner:
 The company comes into existence after the company registrar issues the certificate of
incorporation. The certificate of incorporation is issued after submission of documents
required by the registrar.

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 The documents which are required to be submitted with the registrar are as follows:
 Form IN01, the details regarding the name of the company, address of the
registered office, details of directors and shareholders.
 Memorandum of Association of the Company
 Article of Association of the Company

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The nature and essential content of a company’s articles and memorandum of association
The Article of Association contains bye-laws governing the management and the operations of
the company. List of guidelines provided by AOA are:
 Guidelines for the appointment of the directors
 The framework of General Meetings
 Guidelines for Accounting and Auditing
 Sub-division of shares and rights of shareholders
 The procedure of transfer and transmission of shares
 Rules for altering the share capital
 The procedure of Voting and specification of voting rights of the members
 Process of liquidation or winding up of the company
Memorandum of Association contains the basic information about the constitution of the
company. MOA must contain the following clauses:
 Name Clause: Name of the company is provided in this clause and a prefix ‘Ltd’ is
used limited by Shares Company and ‘Plc’ for public limited company.
 Domicile Clause: This clause contains the place where the registered office is located
of the company. If a company wants to change the location of its registered office, it
has to intimate the registrar of the companies 30 days before shifting to the new
office.
 Object clause: This clause contains the objective of the company i.e. the reason for
which the company was formed. A company may have several objectives, but an
object clause contains only one object.
 Liability Clause: Liability of the members is defined in this clause. For e.g. in limited
by shares companies liabilities of members are only limited to the unpaid portion of
their shares.
 Capital Clause: This clause specifies the authorised capital of the company and how
much capital has been raised by the company. It also specifies the preferential
allotment of shares.

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 Subscription Clause: Subscribers are specified in this clause along with the address,
contact details and the number of shares subscribed by them.
Shareholder involvement in the expansion and the extent to which a shareholder can be
liable for the debts of a company.
A company which is limited by shares imposes liability on the shareholders for the nominal
value of the shares. There is a corporate veil between the shareholders and the company hence
the shareholders are not held for the liabilities of the company (Ferran, 2016). The shareholders
of the company can be called for the unpaid amount on shares. Hence they have limited liability
for the debts of the company. Shareholders are the major investors of the company and the
ultimate owners of the company.

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The nature of shares and the difference between ordinary and preference shares
A company’s authorised capital is divided into sub units known as shares. These shares are
allotted a nominal value and each share is a complete unit on its own. Shares are held by the
shareholders of the company who have the ultimate right in the various decisions that are to be
taken in the meetings of the company.
Ordinary Shares Preference Shares
Definition These shares forms the basic
capital of the company
divided into sub units.
These shares are given
preferences over the ordinary
shares.
Dividend These shares do not have
mandatory rights over
dividend and it’s up to the
management to declare on
such shares.
These shares carry
mandatory and fixed
percentage dividend that are
to be paid periodically.
Right to Vote These shares have explicit
right over the decision
making process through
voting.
These shares carry no right to
vote and thus are act only as
a tool of receiving fixed
income.
Liquidation These shares have no
entitlement over the assets of
the company and are paid in
least when all the other
liabilities are settled in full.
Although they are to be paid
after the settlement of other
liabilities, they are given
preference over the equity
shares.

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How company resolutions are passed and the matters for which resolutions are required
Some of the matters of the company are outside the purview and jurisdiction of the Board of
Directors and are needed to be discussed in the meetings of the company. The decisions are
taken on a basis of voting and each share carries one vote i.e. if a person holds 20 shares, he/she
will have will have 20 votes in altogether in the voting process. There are 2 types of resolutions
governing different issues as per the importance the issue.
A special resolution requires a majority of 75% or more in favour of the issue discussed for it to
be officially accepted as approved in a meeting. Few of the issues requiring special resolution for
approval as follows:
 Change in the name of the company
 Make changes to the constitution of the company
 Modifying the nature of the company
 Approving a selective buy-back of shares
 Reduction of share capital
 Changing the address of the registered office when it is shifted to different states
 Liquidation or winding up
 Conversion of preference shares into ordinary shares and vice versa
An ordinary resolution requires a majority of 50% or more for the approval of an issue raised in
the meeting. It may be passed for approval of critical decisions which may include the following:
 Decisions relating to appointment and remuneration of directors
 Budget related decisions
 Declaring dividend
 Shares related issues such as public issue, buy back, rights issue etc.
 Deciding the modes of raising funds
 Deciding the remuneration of the major employees

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The powers of the directors of the company
Following are the powers which are conferred exclusively to the directors of the company:
 To introduce, amend or delete any clause in AOA.
 They have the power to issue ordinances.
 They have the authority to pass board resolutions
 Delegate powers

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The duties, which directors owe to the company
A company operates through its directors and the directors have several obligations which needs
to fulfilled by them. Following are some major duties which are imposed by law on the directors
of the company.
 The directors of the company should work in accordance with powers given to them
 The director must act in order to promote success of the company
 The directors must work according to the terms of its constitution but the director must
have its own judgement and act according to his diligence
 They must delegate powers in order to avoid conflicts
 They are restrained from making unauthorised use of the property
 The directors are the representatives of the company and hence they are obliged to work
in the interest of the company and hence should not accept personal benefits from the
third party (Kitching, et. al., 2015).

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Conclusion
Thus, the company is advised to consider re-registering itself as a public limited company which
shall help them in raising major funds. The duties and powers of the directors of the company.
The report will help the company in understanding the nature of the shares and to what extent
shareholders are liable for the debts of the company.