The world of company formation can seem like a complicated place when you’re unfamiliar with the terminology. That’s why we’ve created this guide to company formation jargon – to help you get to grips with the special words and expressions used by Companies House and agents like Rapid Formations.
This first installment covers the common terms that you’re likely to encounter when setting up a limited company or limited liability partnership in the UK. Why not bookmark the page so you’ve got a handy reference whenever you need it.
Articles of association
A legal document that sets out the rules and procedures for running a company. Every company is required to adopt articles of association during the incorporation process.
Typically, new companies use the default ’model’ articles issued by Companies House, which are suitable for most small firms.
However, some companies find it necessary to alter the model version or create bespoke articles to meet their particular needs.
Certificate of incorporation
An official certificate that Companies House issues to every new company or LLP when it is registered. It verifies that the company has been legally formed under the Companies Act 2006 or LLP Act 2000.
The certificate of incorporation also states the company’s official name, registration number, date of incorporation, and the UK jurisdiction in which it is registered.
Company formation
Company formation is the process of legally forming (incorporating) new or existing businesses as a:
- Public limited company (PLC)
- Private company limited by shares
- Private company limited by guarantee
- Unlimited company
- Limited liability partnership (LLP)
- Limited partnership
Once incorporated, the business becomes a legal entity in its own right. This means that its identity, income, assets, and liabilities are legally separate from those of its owners and directors.
Company name
The official name that a company is registered with at Companies House. There are strict rules when choosing a company name, so it’s important to make yourself aware of these in advance.
Company secretary
An officer of a limited company. They are responsible for important administrative functions and advising directors on matters related to corporate governance and compliance.
Appointing a company secretary is optional for private companies but mandatory for PLCs.
Company registers
Official lists contain information about a company’s past and present members, directors, secretaries, and PSCs.
By law, every company is required to maintain company registers at its registered office or SAIL address. They must be kept up to date and made available for public inspection.
Company registration number
A unique number that Companies House assigns to every new company upon its incorporation.
Company registration numbers (CRNs) are made up of 8 numbers or 2 letters and 6 numbers – it depends on the type of company and where it is incorporated.
Your CRN will be shown on your certificate of incorporation and disclosed on public record. It must also be displayed on your company’s website and official correspondence.
Correspondence address
Also known as a service address. This type of address must be provided by subscribers (founding shareholders/guarantors), directors and secretaries, PSCs, and LLP members during the company formation process. It will be disclosed on public record.
After incorporation, the requirement to provide and maintain a correspondence address applies to all of these company roles, with the exception of shareholders and guarantors.
Designated member
By law, limited liability partnerships (LLP) must have two designated members at all times. They are responsible for overseeing the LLPs’ statutory obligations, such as preparing confirmation statements and accounts, maintaining statutory registers, and reporting changes to Companies House.
Director
A company director is a person who is appointed by members (shareholders or guarantors) to manage the company’s activities and finances, meet all compliance requirements and try to make the business a success.
Guarantor
A guarantor is a member of a limited by guarantee company. The role of a guarantor is to provide a financial guarantee to the company (to be contributed in the event of its insolvency), make decisions about the business, and assume ultimate control over the company.
Incorporation
Incorporation is the process of forming/registering a company as a legal corporation – a distinct entity that is legally separate from its members and directors.
Issuing shares
The process of creating new shares in a company limited by shares. Also referred to as ‘allotting’ shares.
Shares must be issued during the company formation process. Additional shares can be allotted at any time after incorporation.
Jurisdiction
The part of the UK where a company is formed. You can choose to incorporate in one of the following legal jurisdictions: England and Wales, Wales, Scotland, or Northern Ireland.
Your registered office address must always be situated in your company’s jurisdiction of incorporation.
Limited company
A limited company is a type of business structure that is incorporated as a legal ‘person’ and provides limited liability to the people who own it.
This type of company has its own legal identity, exists separately from its owners and directors, and is responsible for its own debts.
There are two types of limited companies – public limited companies (PLCs) and private limited companies.
Limited liability
A legal condition whereby the personal liability of company members (shareholders or guarantors) and LLP members is limited to a fixed amount.
Company members are responsible for company debts up to the nominal value of their shares or personal guarantee. LLP members are responsible for LLP debts up to the sum they agreed to contribute in the event of insolvency.
Limited liability partnership (LLP)
A limited liability partnership (LLP) is a special type of business partnership that provides limited liability protection to its member (partners) whilst maintaining the flexibility of a traditional partnership structure.
An LLP is incorporated as a legal ‘person’. This means that it has its own legal identity, exists separately from its members, and is responsible for its own debts.
Member
A term that refers to a shareholder or guarantor of a limited company, or a partner in a limited liability partnership (LLP).
When a person decides to form a company or LLP and/or become a shareholder/guarantor/partner, they are agreeing to become a member of that company or LLP.
Memorandum of association
The memorandum of association is a legal statement that the founding shareholders or guarantors of a limited company sign during the company formation process. By doing so, they signify their agreement to form and become members of the company.
Model articles
The standard default articles of association that limited companies can use. This version is prescribed by the Companies Act 2006 and The Companies (Model Articles) Regulations 2008.
Model articles are suitable for most small private companies. They are applied by default unless alternative articles are supplied by the company.
Nominal value
This term relates to company shares. Sometimes referred to as the ‘par value’ or ‘face value’, it is the value assigned to a share when it is issued by the company.
The nominal value, which is usually £1, reflects the shareholder’s ‘limited liability’. It is the amount that the shareholder agrees to pay for the share and/or contribute to the company if it becomes insolvent.
Not to be confused with the ‘real value’ or ‘market value’ of a share, which can fluctuate in response to inflation and how much the company is actually worth.
Officer
The term ‘officer’ is another name for a director or company secretary. Collectively, they are known as the officers of a limited company.
Person with significant control (PSC)
A person with significant control, or PSC, is anyone who owns or controls at least 25% of a company. For example, a shareholder who owns 25% of the company’s issued shares, or a guarantor or LLP member who holds more than 25% of the voting rights in the business.
Prescribed particulars
Prescribed particulars are the specific rights attached to a company’s issued shares. Essentially, they describe the rights and entitlements that a shareholder gets when they buy a share.
Different share classes have different prescribed particulars attached to them, which can include the right to:
- dividends (a distribution of company profits)
- vote on company matters (make decisions for the company)
- receive a portion of the company’s capital
- be redeemed (reclaimed) by the company
Prescribed particulars must be outlined in a company’s articles of association and included as part of the statement of capital.
Registered office address
The official address of a limited company or LLP, where official correspondence from Companies House, HMRC, and other government bodies is delivered.
A company’s registered office must be situated in the jurisdiction of incorporation and will be displayed on public record at Companies House.
‘Sensitive’ and ‘restricted’ words and expressions
Certain words and expressions are regulated at Companies House and require prior approval before they can be used in a company name.
Service address
Also referred to as a correspondence address. This is an official address where certain individuals receive statutory correspondence about their role in a company or LLP.
Service address details are displayed on the public record and must be provided by every subscriber, director, company secretary, PSC, and LLP member.
SIC codes
SIC codes (Standard Industrial Classification codes) are five-digit numbers that define the trading activities of a company or LLP.
During the company formation process, you must provide at least one SIC code to describe what your new company does.
Shareholder
A shareholder is any person (human or corporate) who owns at least one share in a company limited by shares. They are often referred to as ‘members’, and the founding members are referred to as ‘subscribers’.
Shareholders usually receive a portion of the company’s profits and can make decisions about the company and the way it is managed. However, these rights depend on the types of shares they hold.
Shares
Shares are units of ownership in a company limited by shares. Each one represents a percentage (portion) of the company.
Company shares are owned by shareholders (members), who agree to contribute a sum of money in exchange for a percentage of ownership in the company.
Share capital
The amount of money (capital) that a company obtains by issuing shares. For example, if a company issues 10 shares with a nominal value of £1 per share, the total share capital of the company is £10.
Share capital also represents the ‘limited liability’ of the company’s shareholders. That is, the total sum of money they personally stand to lose if the business fails and can’t pay its debts.
Share classes
The ‘types’ of shares issued by a company. Different classes provide different rights and privileges to shareholders, e.g. the right to profits, and the right to vote on company decisions.
Most companies issue Ordinary shares, which means that every share carries exactly the same rights. However, you can issue different classes if you want to vary the rights or privileges of certain members.
Statement of capital
An official statement that provides an overview of a company’s share capital at a specific date. This information must be provided during the company formation process and as part of the confirmation statement if the company’s share capital changes.
Subscriber
A founding shareholder or guarantor of a limited company. A person who agrees to form and become a member of the company by subscribing their name to the memorandum of association during the company formation process.
So there you have it…
Our guide to company formation jargon explains the meaning of many common terms that you will come across when setting up a company or LLP in the UK. Our blog also features a number of posts covering each of these topics in more detail.
In the next installment, we’ll deal with limited company terminology that you’ll encounter after incorporation – when you’re actually running your new company or LLP.
If you have any questions about company formation or the words and expressions mentioned in this post, please leave a comment below.
