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A flat management company is a company that is set up to own the freehold of an apartment building and/or manage the common parts of the property. This type of company is most often used by the residents or leaseholders of a building that is divided into units, like a block of flats.
Whether incorporated as limited by shares or limited by guarantee, the company structure provides financial protection to members and allow every leaseholder to have an equal say in the running of the building.
In this post, we discuss the main functions of a flat management company, the registration process, and the legal obligations of the company after incorporation.
How does a flat management company work?
A flat management company is a very particular type of company that operates for the benefit of leaseholders or residents of a building, as opposed to operating as a profit-making business that trades goods or services.
It is sometimes referred to as a ‘property management company’, ‘residents management company’, or Right to Manage (RTM) company. However, RTMs have stricter criteria and are only available in England & Wales – they do not exist in Scotland or Northern Ireland.
The purpose of a flat management company is to enable the leaseholders of individual units (e.g. flats) within a larger building to jointly run the property, dealing with aspects such as management, repairs, and maintenance of the fabric of the building and its common areas.
In some cases, the company may also hold the freehold of the land on which the property is built. This is possible because a company becomes a legal person upon incorporation, thus allowing it to hold property and enter into contracts in its own name.
Flat management companies are typically used for:
- Blocks of flats
- Large houses that have been reconfigured and divided into flats
- Housing estates
- Commercial properties containing multiple individual units
They can be set up as private companies limited by guarantee or limited by shares, with each flat owner holding an equal interest as a member (shareholder/guarantor) of the company.
At least one of the members will be a director, and a managing agent may also be appointed to oversee day-to-day duties on behalf of the company.
What are the main functions of a flat management company?
The functions of a flat management company can vary. Some are set up for the sole purpose of holding the freehold title to the property and the surrounding land on which it stands. However, many flat management companies deal with all aspects related to the running of the property, including:
- Maintenance and repairs of the building structure – i.e. walls, roofs, gutters, windows and doors, loft space, insulation, plumbing, and electrics
- Cleaning and decorating communal halls and stairs
- Window cleaning
- Gates, door entry systems, and building security
- Garages and car parking spaces
- Maintaining the property’s grounds and gardens
- Concierge facilities
- Refuse and recycling facilities
- Fire alarms and sprinkler systems
- Health and safety measures
- Collecting and handling service charges from all leaseholders
- Obtaining quotes for works and services and paying communal bills
- Communal building insurance and public liability insurance
- Enforcing conditions of leases and handling any breaches
The director or managing agent of the company will deal with the company’s statutory filing obligations. This includes preparing accounts and confirmation statements for Companies House, and filing accounts and tax returns with HMRC.
Limited by shares or limited by guarantee company?
Flat management companies must be set up as private companies limited by shares or limited by guarantee. Both of these structures provide limited liability protection to the members, meaning that they cannot be held personally responsible for the company’s financial liabilities beyond the nominal (par) value of their shares or guarantees.
Whilst limited by shares companies are normally used for profit-making enterprises, they are perfectly suitable for flat management companies that operate in a not-for-profit capacity, provided that the articles of association are drafted appropriately.
Each leaseholder will be a shareholder and own one share in the company, with equal voting rights on company affairs. However, where a lease is jointly owned (e.g. by a husband and wife), they will jointly own the share – it is one share per lease, not one share per person. This is to ensure that each unit has equal say in the running of the building.
If any leaseholder sells their property, they will have to transfer their share to the new owner using a stock transfer form. A token payment for the nominal value of the share (usually £1) will suffice for the share transfer, so no Stamp Duty liability will apply.
The company must issue a share certificate to the new leaseholder, update the company’s statutory register of members, and report the change of shareholder to Companies House on the next confirmation statement.
If the company is set up as limited by guarantee, there won’t be any shares or share capital to deal with, which is often more straightforward. Instead, each leaseholder will be a guarantor with equal voting rights on company affairs.
Upon selling their flat or unit within the building, the leaseholder’s company membership terminates automatically, with the new owner of the lease taking their place in the company as a guarantor. There is no need to carry out a share transfer – the company simply adds the new leaseholder to its register of members.
Both structures are suitable, so it really depends on the preferences of the leaseholders who set up the flat management company. Limited by guarantee is the simplest form of company to deal with, but the limited by shares model is often preferable if the company is to hold the freehold of a property.
This is because each share provides a clear and simple form of ownership between the leaseholders (who own the company as shareholders) and the building (which the company owns by holding the lease).
How to set up a flat management company
To set up a flat management company, you must register a private company limited by shares or guarantee at Companies House. This registration process is known as ‘company formation’ or ‘company incorporation’.
You can set up a company online in a matter of minutes by purchasing one of our company formation packages and entering the following details on our simple application form:
- Company name, which must end with ‘Limited’ or ‘LTD’
- Registered office address
- Details of each director – minimum of one; no maximum number
- Details of each shareholder or guarantor – the leaseholders of the property
- People with significant control (PSC) – usually the leaseholders, freeholders, and/or managing agent
- Standard Industrial Classification (SIC) code to classify the company’s main purpose/activities
Additionally, you will need to create suitable articles of association to set out the rules of the company. You can do this by altering the ‘Model’ articles or creating entirely bespoke articles, but we recommend seeking independent legal advice to ensure that this governing document is drafted properly.
Once your application is complete, we will submit it electronically to Companies House for processing and approval. In most cases, this takes no longer than 3-6 working hours. Your new flat management company will then be ready to use immediately thereafter.
We will email you digital copies of your company documents, which include:
- Certificate of incorporation
- Memorandum and articles of association
- Share certificates (if applicable)
- Minutes of the first board meeting
- Company statutory registers, with the first entries completed at the date of incorporation
You will also receive your WebFiling Authentication Code (required to use Companies House online filing system), a business bank account from one of our banking partners, telephone support for the life of your company, and access to our Online Client Portal to manage your company’s details and filing requirements for Companies House.
All of these company documents and extras are included in your package for no additional cost.
Articles of association for a flat management company
It is not possible to use the generic ‘model’ articles of association that Companies House provides. This is because a flat management company is not a standard trading company. Therefore, you will need to create specially drafted articles.
Bespoke articles of association for a flat management company are based on the foundations of the Model articles, but they will contain a number of important alterations relevant to the specific functions and requirements of the company.
The articles will vary from company to company, but should clearly set out the following:
- Company objects – i.e. managing the building; collecting fees and paying for maintenance and repairs; holding the freehold to the property address stated within the articles
- Allocation of shares – if the company is limited by shares, the articles must stipulate that the issue of shares is limited to one per lease; that a share can be held in joint names; and that a leaseholder’s share must be transferred to the new owner upon the sale of their unit
- Membership – whether the company is limited by shares or guarantee, there must be clear provisions to address the duties, rights, and liability of members; how decisions are made; and the requirement to contribute to the costs of managing and maintaining the building
- Appointing directors – the articles should specify the minimum number of directors; stipulate that only members of the company may be directors; outline what their duties and decision-making powers are; rules on board meetings; and the procedure for removing a director
Drafting bespoke articles for a flat management company can be complex. Therefore, we strongly recommend seeking professional advice from a solicitor, who can ensure that your articles cover all necessary provisions for your particular company.
Do flat management companies pay tax?
All companies are liable to tax, regardless of their functions. Therefore, unless the company is dormant, you will need to register with HMRC for Corporation Tax within three months of starting to ‘do business’ through the flat management company.
You can register for Corporation Tax online. To do so, you will need to create or sign in to your business tax account and provide the following information:
- Company’s 10-digit Unique Taxpayer Reference (UTR) – HMRC will post this to your registered office within 14 days of company formation
- The date on which the company started trading
- Company name and registration number
- Main address where business activities take place
- Nature of the company’s main business activities (SIC code)
- Date up to which you will make the annual accounts – this is the end of the company’s financial year, known as the ‘accounting reference date’ (ARD).
HMRC will use all of the information you submit to work out your Corporation Tax accounting period and deadlines for paying Corporation Tax and filing a Company Tax Return.
You may also need to register with HMRC for VAT if the company’s annual taxable turnover is greater than £85,000. However, voluntary VAT registration may be worthwhile if turnover is below the threshold and you are paying a significant amount of money for building maintenance and repairs.
Will I need to file accounts and a Company Tax Return?
Limited companies have a variety of filing and reporting requirements to fulfil each year. The director is legally responsible for all such duties, but it is not unusual for the managing agent or an accountant to take care of these obligations on behalf of the company.
For Companies House, you will need to prepare annual accounts at the end of your company’s tax year, in addition to an annual confirmation statement. You must also inform Companies House if any details about the company change, e.g. directors, members, registered office address.
If you register your flat management company for Corporation Tax, you will also need to file annual accounts and a Company Tax Return with HMRC each year. The accounts report the company’s financial activity, and the tax return reports the company’s profit or loss and any Corporation Tax liability.
You will need to prepare VAT Returns if you register for VAT, and enrol for PAYE online if you employ anyone through the flat management company, e.g. a managing agent, concierge, security staff, or groundskeeper.
Can a flat management company be dormant?
Some flat management companies are dormant. This may be the case if the property is small and has little to no maintenance requirements on a regular basis, or if the company’s only function is to hold the freehold title to a building.
If you think that your company is dormant, you will need to tell HMRC as soon as possible. They will treat it as such, provided that the company does not:
- allow under its articles of association, the appointment of directors who are not residents or leaseholders
- do anything other than manage the property in the interests of members
- make a profit
- owe more than £100 in Corporation Tax in a year
- receive any income from land
- pay dividends or other payments from profits to its shareholders
- own any assets that it is likely to sell that would give rise to a chargeable gain
- make any payments that require to be taxed
If the company satisfies all of these conditions, HMRC will register its trading status as ‘dormant’ and notify you by post at your registered office address.
You won’t have to file accounts or Company Tax Returns with HMRC for as long as the company remains dormant.
However, dormant companies must still fulfil the following obligations for Companies House:
- Prepare dormant accounts each year
- Submit an annual confirmation statement
- Report any changes to the company’s registered details
You will also need to keep statutory company registers up to date and maintain a registered office address to receive important communications from Companies House and HMRC.
Need help setting up a company?
At Rapid Formations, we can provide expert guidance and talk you through the entire process of setting up a limited by shares or limited by guarantee flat management company in the UK.
If you have any questions or need help with the company formation process, please get in touch with our company formation team or leave a comment below.