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<p>In this first of two blog posts outlining the corporate law framework in the UK, we cover the key legislation that dictates our rules of corporate law and take a look at the different types of companies that can be formed. We will also explore the duties of directors and boards when it comes to running a company.</p>
<h3>The Companies Act 2006</h3>
<p>Drawing on ideas developed in the French Code de Commerce, first passed in 1807, the UK’s Joint Stock Companies Act 1856 was the world’s first modern corporation statute. It allowed the registration of business incorporations while limiting business owners’ personal liability in the event of the business’s insolvency.</p>
<p>Today, the <a href="https://www.legislation.gov.uk/ukpga/2006/46/contents" target="_blank" rel="noopener">Companies Act 2006</a> (the Act) retains many of the same fundamental features of this law:</p>
<ul>
<li>The concept of limited liability</li>
<li>An administrative procedure for registering a company</li>
<li>The principle that a company is a separate legal entity from its shareholders, and</li>
<li>The requirement for companies to have articles of association</li>
</ul>
<p>With this much legacy, it is unsurprising that there is a common misconception that the Act – at 1,300 sections – is the longest Act in parliamentary history (the record is held by the Land Tax Commissioners&#8217; Act of 1821 at 1,141 feet unrolled).</p>
<p>As the UK’s key piece of legislation regarding the operation of companies, the Act is the primary source of corporate law in the UK and regulates companies from their formation to their dissolution.</p>
<p>This article sets out some of the fundamental aspects of corporate law that business owners should be aware of.</p>
<h3>Different types of corporate structures</h3>
<p>Several different types of corporate structures can be used to set up a business. Some businesses begin with individuals operating as sole traders who later establish a private limited company, while others may start out as a private limited company from their inception.</p>
<p>It is important to decide on the most suitable business structure to ensure that the business and its owners are adequately protected from both legal and financial repercussions. To do this, business owners must ensure they are familiar with the legal status of each corporate structure.</p>
<p>Some common examples of corporate structures are:</p>
<h4>Sole trader</h4>
<p>A sole trader is a self-employed individual who runs and owns the entire business. The business is not a separate entity. It therefore does not need to be registered at Companies House. However, the business owner remains personally liable for the business’s debts and obligations, which can pose significant financial risk.</p>
<h4>Private company limited by shares</h4>
<p>The business is established as a legal entity in its own right – a company. The company has its own separate legal personality, meaning it can enter into contracts, sue and be sued. The shareholders share in the profits and have limited liability. Plus, they are only responsible for the business’s debts up to the value they have agreed to pay for the shares they hold. Their personal assets are otherwise safe.</p>
<h4>Private company limited by guarantee</h4>
<p>As above, the business is established as a legal entity in its own right and has its own separate legal personality. The liability of members of a private company limited by guarantee is limited to the amount they have agreed to contribute in the statement of guarantee. All profits are invested back into the company.</p>
<h4>Partnership</h4>
<p>Partnerships in the UK can take three main forms: general partnerships (GPs), limited partnerships (LPs), and limited liability partnerships (LLPs), each with distinct liability structures and legal obligations:</p>
<ul>
<li>GPs: these are governed by the <a href="https://www.legislation.gov.uk/ukpga/Vict/53-54/39/contents" target="_blank" rel="noopener">Partnerships Act 1890</a>. GPs are quick to set up without registration requirements, but they expose all partners to joint and several personal liabilities for business debts.</li>
<li>LPs are regulated by the <a href="https://www.legislation.gov.uk/ukpga/Edw7/7/24/contents" target="_blank" rel="noopener">Limited Partnerships Act 1907</a>. They distinguish between general partners with unlimited liability and limited partners whose liability is capped at their investment. LPs require registration at Companies House but do not have separate legal entity status.</li>
<li>LLPs: created by the <a href="https://www.legislation.gov.uk/ukpga/2000/12/contents" target="_blank" rel="noopener">Limited Liability Partnership Act 2000</a>, LLPs are separate legal entities providing limited liability to all members (except in cases of negligence or misconduct), requiring registration and filings at Companies House. LLPs share similarities with private limited companies but differ in structure, taxation and operational transparency.</li>
</ul>
<h3>What is company formation?</h3>
<p>Company formation is the process by which a business is established as a legal entity, in this case, a company. This process is also known as incorporation. Parts 1 to 4 of the Act deal with the formation and constitution of a company.</p>
<h4>Company formation requirements</h4>
<p>A company must be registered with Companies House to be formed in the UK. On incorporation a director must be appointed, and a name for the company must be chosen that complies with Companies House guidelines and Part 5 of the Act.</p>
<p>Further, a company must have at least one shareholder.</p>
<p>Before registering with Companies House, company documents must be created, including the <strong>memorandum of association</strong> and <strong>the articles of association</strong>:</p>
<ul>
<li>The <strong>memorandum of association</strong> is a legal statement signed by all initial shareholders, which states that they agree to form the company together</li>
<li>The <strong>articles of association</strong> are the rules that govern how the company is to be run</li>
</ul>
<p>A company must also have the appropriate record-keeping infrastructure in place for accounting and persons of significant control.</p>
<h3>Duties and responsibilities of company directors</h3>
<p>There are certain strict legal obligations that a company must follow once formed. Directors of a limited company must:</p>
<ul>
<li>Follow the rules set out in the company’s articles of association</li>
<li>Keep company records and record changes</li>
<li>Manage and file company accounts and tax returns:
<ul>
<li>Annual accounts and a confirmation statement must be filed at Companies House each year, and</li>
<li>Companies must be registered with HMRC for corporation tax, PAYE if the company takes on employees, and VAT if the company’s sales cross the relevant threshold, and</li>
</ul>
</li>
<li>Disclose potential benefits from company transactions</li>
</ul>
<h3>Decision-making and governance</h3>
<p>Directors should always act in a manner that promotes the long-term success of the company, taking into account employee interests and the impact of company operation on the environment. Decisions made at board meetings should comply with resolution thresholds as set out in the company’s articles of association.</p>
<p>The board of directors, appointed by a company’s shareholders, is responsible for ensuring the company has strategic aims, set values and effective management.</p>
<p>The Act outlines seven key duties for directors to:</p>
<ul>
<li>Act within their powers under the articles of association</li>
<li>Promote the success of the company for the benefit of its members</li>
<li>Exercise independent judgment</li>
<li>Exercise reasonable care, skill and diligence</li>
<li>Avoid conflicts of interest</li>
<li>Not accept benefits from third parties</li>
<li>Declare an interest in proposed transactions or arrangements</li>
</ul>
<h3>Ongoing reporting obligations</h3>
<p>Under the Act, small and medium-sized enterprises (SMEs) must meet specific reporting obligations to ensure transparency and accountability, including:</p>
<ul>
<li>Filing annual accounts and confirmation statements at Companies House</li>
<li>Reporting changes to directors, company secretaries or registered office addresses</li>
<li>Updating the register of ‘persons of significant control’ (PSC) – someone with more than 25% of the company’s shares – to reflect changes in ownership or control</li>
</ul>
<p>Understanding and fulfilling these duties is crucial for a company’s reputation, as well as for fostering investor and customer confidence. For SMEs, understanding and adhering to these duties is critical for long-term success. Given the scale of the responsibilities outlined above, directors should consider appointing accountants, legal professionals and company secretaries.</p>
<p>For legal assistance on aspects of corporate law from corporate structures to share classes, <a href="https://www.linnearlegal.co.uk/get-in-touch/" target="_blank" rel="noopener">speak to a lawyer at Linnear Legal today</a>.</p>
<p>Stay tuned for Part 2 of our blog on corporate law, in which we give an overview of corporate finance and outline how to close a business.</p>


UK corporate law: overview (part 1)

Understand the key corporate law framework in England & Wales, including corporate structures, directors' duties and legal obligations. Learn how to form and manage a company.

UK corporate law: overview (part 1) | Linnear Legal

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