Forming a company is relatively straightforward. Deciding what that company should look like is not.
For founders planning to establish a UK private company, some of the most important decisions should be made before the Companies House application is submitted: who will own the business, how decisions will be made, what happens if a founder leaves, who owns the intellectual property, how the company will be funded and whether its activities require licences or regulatory approval.
The incorporation process should record a structure that has already been considered. It should not be the point at which the founders first discover the questions they need to answer.
This matters because some decisions are easy to change later. Others become considerably more complicated once shares have been issued, contracts signed, intellectual property developed or outside investment accepted.
What should founders agree before incorporating?
Before forming a company, founders should ordinarily have a clear position on:
whether a limited company is the right structure;
what the company will actually do;
who will own the company and in what proportions;
what rights attach to those shares;
who will be directors;
how important decisions will be made;
what happens if the founders disagree;
what happens if a founder leaves;
who owns existing intellectual property and other business assets;
how the company will initially be funded;
whether licences, permissions or regulatory approvals are required; and
who will be responsible for the company's ongoing administration.
For a sole founder, several of these questions may be relatively simple. With two or more founders, they can become some of the most important decisions made at the beginning of the business.
1. Is a limited company actually the right structure?
A company should not be formed simply because incorporation feels like the conventional next step.
A UK limited company is legally separate from the people who own it. The structure can provide limited liability, facilitate ownership through shares and make it easier to bring in investors. It also creates legal, accounting, tax and filing responsibilities.
Most commercial ventures using a company structure are incorporated as private companies limited by shares, but that does not mean this is automatically the right structure for every business.
The first question should therefore be:
What structure best fits what we are trying to build?
The answer may depend on the founders' commercial plans, expected investment, ownership arrangements, tax position, liability exposure and whether the business will operate internationally.
2. What will the company actually do?
Founders should define the company's intended activities before building a structure around them.
Companies House registration does not necessarily mean that a business is authorised to carry out every activity described in its business plan. Certain activities may require separate licences, registrations, permissions or regulatory approval.
This can be particularly important in sectors such as financial services, healthcare, education, immigration, security and other regulated industries.
Before incorporation, founders should therefore ask:
What will we sell, to whom, where, and does any part of that activity require separate authorisation?
That question can affect more than compliance. It may influence ownership, directors, capital requirements, contracts, operating arrangements and even where the business should be established.
For a business operating across more than one country, the same analysis should be carried out in each relevant jurisdiction.
3. Who should own the company?
For a company limited by shares, the founders need to decide who will own the company and in what proportions.
This should not be treated as a simple administrative decision.
A proposed 50/50 split between two founders may appear fair, for example, but economic ownership is only part of the picture. The founders also need to consider what happens if they disagree, if one contributes substantially more capital, if one stops working in the business or if an investor later requires new shares to be issued.
Before allocating shares, founders should consider:
each founder's contribution;
economic ownership;
voting control;
whether all shares should carry the same rights;
future investment;
employee or adviser equity;
dilution;
future transfers; and
what should happen if somebody leaves.
Some businesses need nothing more complicated than a single class of ordinary shares. Others may require a different structure.
The objective is not to create unnecessary complexity. It is to make sure the ownership structure reflects the commercial arrangement the founders actually intend.
4. Ownership and control are not exactly the same thing
A founder's percentage ownership does not always tell the whole story about who controls the business.
Control can depend on shareholdings, voting rights, board composition, constitutional documents and agreements between the founders.
Founders should therefore decide questions such as:
Who will sit on the board?
Which matters can directors decide themselves?
Which decisions require shareholder approval?
Should certain major decisions require enhanced consent?
Can one founder commit the company to significant expenditure alone?
What happens if the founders cannot agree?
This becomes particularly important where ownership is divided equally.
A 50/50 company without a sensible mechanism for dealing with deadlock can turn an ordinary commercial disagreement into a much more serious governance problem.
5. Who should become a director?
Being a founder, shareholder and director are different roles, even though the same person may hold all three.
A UK private company must have at least one director, and at least one director must be a natural person.
Founders should not automatically appoint everybody as a director without considering what the role involves.
Directors are responsible for managing the company and are subject to statutory duties. Those duties include acting within their powers, exercising independent judgement, exercising reasonable care, skill and diligence, considering conflicts of interest and promoting the success of the company in accordance with the Companies Act 2006.
That distinction matters.
A director appointed by or closely associated with one particular shareholder cannot simply treat themselves as that shareholder's representative in every board decision. A director owes responsibilities to the company.
Founders should understand who is taking on that role before appointments are made.
6. What happens if a founder leaves?
This is one of the easiest questions to postpone and one of the hardest to resolve once the relationship has deteriorated.
Consider two founders who receive 50% of the company each.
Twelve months later, one of them leaves the business permanently.
Do they keep all their shares?
Can the remaining founder buy them?
How will those shares be valued?
What happens if the departure follows serious misconduct rather than an amicable change of plans?
What happens if a founder wants to sell their shares to somebody outside the business?
These questions are not automatically resolved simply because the company has been incorporated.
Depending on the circumstances, the founders may address them through the company's articles of association, a shareholders' agreement and other appropriate arrangements.
A shareholders' agreement is not generally required simply to incorporate a standard UK private company. For a multi-founder business, however, it can provide an important framework for matters such as governance, reserved decisions, share transfers, exits, funding and disputes.
It is generally easier to agree what should happen if the relationship changes while everybody still expects the relationship to succeed.
7. Who owns the intellectual property?
A company does not automatically own an asset simply because the founders intend to use it in the business.
This can become particularly important where work has already begun before incorporation.
A founder may have personally created software, designs, written material, branding, databases or other intellectual property. Contractors, freelancers or agencies may also have produced work for the venture.
Ownership should therefore be checked rather than assumed.
Founders should identify:
what intellectual property already exists;
who currently owns it;
what the new company needs to own;
what the company only needs permission to use; and
whether any assignments or licences are required.
This can become highly significant for technology, creative and IP-led businesses.
An investor expecting to invest in a company that owns its core product may take a very different view if important intellectual property remains personally owned by a founder or external developer.
8. How will the company be funded?
“Putting money into the business” can describe several different transactions.
A founder might subscribe for shares, lend money to the company or pay expenses personally with the expectation of being reimbursed later.
Those arrangements should not be treated as interchangeable.
Before incorporation, founders should consider:
how much initial funding each person will provide;
whether that money will be equity or debt;
whether further funding is likely to be needed;
what happens if one founder can provide additional funding and another cannot;
whether external investment is anticipated; and
how founder remuneration will work once the business can support it.
The important commercial question is not simply how much money is going into the business.
It is on what basis that money is going in.
9. Do the standard articles fit the founders' arrangement?
Every limited company has articles of association. They form part of the company's constitutional framework and contain rules about how the company is governed.
Many companies use the standard model articles.
For a straightforward company with one founder and one class of ordinary shares, that may be entirely appropriate.
For a multi-founder company, joint venture, family company or business with different classes of shares, founders should consider whether the standard provisions actually reflect their intended arrangement.
The constitutional documents should support the commercial deal between the founders rather than forcing the founders to work around a structure they never properly considered.
10. Is the company name commercially usable as well as available?
Checking whether a company name is available at Companies House is only part of choosing a name.
Founders should also consider whether the proposed name conflicts with an existing trade mark, trading name or established brand.
Registering a company name at Companies House is not the same thing as securing trade mark protection.
It can therefore be sensible to consider:
Companies House availability;
relevant registered trade marks;
domain-name availability;
social-media handles; and
the intended trading brand.
Changing a name shortly after launch because of an avoidable branding or intellectual property issue can create unnecessary cost and disruption.
11. What address and administrative infrastructure will the company use?
A UK company needs an appropriate registered office address and a registered email address.
The registered office is publicly available through the Companies House register, while the registered email address is not displayed publicly.
Founders working from home should therefore consider carefully whether they want to use a residential address as the company's registered office.
They should also decide who will be responsible for:
Companies House filings;
accounting records;
tax administration;
company records;
banking;
insurance;
contracts; and
ongoing compliance obligations.
Incorporation creates the legal entity. Someone still needs to take responsibility for operating it properly.
12. What tax and employment registrations are likely to follow?
Not everything needs to be completed before incorporation, but founders should understand what is likely to follow once the business becomes active.
Depending on the company's activities and circumstances, this may include:
Corporation Tax obligations;
PAYE registration;
VAT registration;
payroll;
employment documentation; and
accounting and record-keeping requirements.
Tax should therefore form part of the structuring conversation rather than being considered only after the company has begun trading.
This becomes particularly important where founders live in different countries, existing businesses or assets are being transferred into the company, intellectual property is involved or an international group structure is contemplated.
13. Companies House identity verification should be planned early
The UK company formation process has changed.
Companies House identity verification requirements now apply to key individuals involved with UK companies.
When registering a new company, proposed directors need to deal with the relevant identity verification requirements and Companies House personal codes as part of the incorporation process.
People with significant control are also subject to identity verification requirements under the applicable Companies House framework.
Founders should therefore identify the proposed directors and relevant people with significant control early enough for the necessary verification steps to be completed.
This is now part of preparing for incorporation rather than something that can simply be left until afterwards.
Common mistakes founders make before incorporation
Splitting shares before discussing control
An equal equity split may be commercially sensible, but ownership should be considered alongside voting, decision-making and deadlock.
Treating every founder as automatically entitled to a directorship
Ownership and management are separate questions. A directorship carries legal responsibilities.
Leaving founder departures for later
It is easier to agree what should happen if somebody leaves before anybody actually wants to leave.
Assuming the company owns everything
Pre-incorporation intellectual property, contractor-created work and assets acquired personally should be checked rather than assumed to belong to the company.
Assuming Companies House registration means the business can trade
Certain activities may require separate licences, registrations or regulatory permissions.
Using standard documents without reviewing the commercial arrangement
Default documents can be appropriate. They should be used because they suit the business, not simply because they are the easiest documents available.
A practical pre-incorporation founder checklist
Before submitting an incorporation application, founders should ideally be able to answer the following questions:
What legal structure are we using, and why?
What exactly will the company do?
Does the activity require regulatory permission?
Who owns what percentage?
What rights attach to each class of shares?
Who will be directors?
How will major decisions be approved?
How will deadlock be addressed?
What happens if a founder leaves?
How can shares be transferred?
Who owns the existing intellectual property?
What assets or contracts need transferring to the company?
How will each founder fund the business?
Do we need tailored articles or a shareholders' agreement?
Is the proposed name clear from both Companies House and trade mark perspectives?
What registered office and registered email will be used?
Who will manage filings, accounts, tax and company administration?
Have the proposed directors completed the required Companies House identity verification?
If several of these questions remain unanswered, there is usually value in resolving them before the company is formed.
Frequently asked questions
Do founders need a shareholders' agreement before incorporating?
No. A shareholders' agreement is not generally required simply to register a standard UK private company.
Where there are multiple founders, however, putting appropriate shareholder arrangements in place early can help establish how control, transfers, departures, funding and disputes will be handled before those issues become contentious.
Is a 50/50 share split a bad idea?
Not necessarily.
A 50/50 split may accurately reflect the founders' intended economic relationship. The important question is what happens when the two owners disagree.
An equal ownership arrangement should therefore be considered alongside appropriate governance and deadlock provisions.
Do all founders need to become directors?
No.
Founder, shareholder and director are separate roles. A person may hold all three, but somebody can be a shareholder without being a director.
The decision should reflect who is actually going to take responsibility for managing the company.
Can a director of a UK company live outside the UK?
Yes. A director of a UK private company does not generally need to live in the UK.
The company itself must have an appropriate UK registered office address, and internationally based founders should separately consider relevant tax, banking, management and cross-border issues.
Can the share structure be changed after incorporation?
Yes, company share structures can be changed after incorporation where the necessary legal and corporate steps are followed.
However, changes may involve approvals, filings, constitutional amendments and potential tax or investment consequences.
Where a future requirement is already foreseeable, it may be more efficient to consider it when the company is first structured.
Does registering a company protect its brand name?
Not necessarily.
Companies House registration and trade mark protection are separate systems. A founder should therefore consider both company-name availability and relevant intellectual property rights before investing significantly in a brand.
The commercial takeaway
The certificate of incorporation is the beginning of the company. It should not be the beginning of the founders' decision-making.
For many founders, submitting the incorporation filing is the simplest part of establishing the business.
The more important work happens beforehand: deciding ownership, control, responsibilities, funding, intellectual property, regulatory requirements and what should happen when circumstances change.
A company formed around decisions that have already been properly considered will generally be easier to operate and govern than one formed first and structured afterwards.
Sterling Legal Solutions supports founders and businesses with UK company establishment, corporate structuring and the corporate, commercial and operational requirements that sit around incorporation.