+ Managing a limited company

This note provides more detail on the initial and ongoing legal and administrative requirements if you decide to run your business as a limited company, as well as information about some useful legal documents that could help your business to manage risks and relationships.

+ Appointment of Directors

Every limited company must have at least one company director. At least one of the directors must be an actual person (as opposed to another company). Directors can also be shareholders or employees, but they do not need to be.

The first directors of a company are appointed by the shareholders. After that, any changes or additions to directors will be made via the process set out in the Articles of Association and must be reported to Companies House.

+ Responsibilities of Directors

Directors are appointed to manage the business by making strategic and operational decisions for the business and ensuring that the company meets its legal obligations.

The basic rule is that the directors should act together as a board but typically the board may also delegate certain powers to individual directors or to a committee of the board, in order to make the business run smoothly.

Directors must ensure that they:

  • act within the powers and for the purposes set out in the company’s constitutional documents;

  • act in good faith to promote the success of the company;

  • exercise independent judgment and take reasonable care, skill and diligence;

  • avoid situations where there is a conflict of interest; and

  • not accept benefits from third parties and declare any interests in proposed or existing transactions.

Directors have responsibility for ensuring that the company complies with the law. There is no requirement to appoint a company secretary, but if one is appointed then they share responsibility for the legal requirements with the directors.

The main ongoing legal requirements of a company are:

  • filing legally required information with Companies House;

  • maintaining the company's registered office;

  • keeping the company's statutory books, records and key legal documents;

  • organising and recording board meetings and general meetings of the shareholders; and

  • ensuring the required company details are disclosed on premises, stationery and the company's website.

There are a whole host of other legal requirements to consider including confidentiality, employment, health and safety, tax and data protection as well as more administrative tasks like managing buildings and arranging insurance.

+ What is a director’s service agreement and do I need it?

A director’s service agreement is not a legal requirement but it can be useful to help set out the rights and obligations that may arise where a director is also an employee and/or a shareholder. It can help to appropriately and effectively disentangle the relationship and provide protection for both parties where a dispute or disagreement arises.

Also, a director will have access to the company’s most valuable and confidential information including source code, business plan, strategy, employee data and client list. A director’s service agreement can help to protect the confidentiality of such information by including non-compete clauses so they can’t go and work for a competitor immediately after they go, other restrictive obligations including stopping them from taking the company client list with them and disclosing any confidential information.

+ What is a shareholders’ agreement and do I need it?

The company articles of association will usually set out shareholders' rights but you can use a separate shareholders’ agreement to cover other key issues. A shareholders’ agreement is a legal contract made by the shareholders of the company, a bit like a partnership agreement. It can be a useful tool to show potential investors that you have your “house in order” to manage shareholder issues.

A shareholders’ agreement is a far more detailed agreement than any agreement you may have in place between co-founders. A co-founders’ agreement will only contain a basic initial description of the intentions and business relationship between the co-founders. The shareholders’ agreement will cover all the people who own part of the business and contain far more detailed provisions.

The shareholders’ agreement:

  • outlines the rights, responsibilities, liabilities and obligations of each shareholder and states how the business should operate;

  • manages the manner in which shareholders contract with one another;

  • protects the company from any unforeseen circumstances that may arise between the shareholders that may potentially affect the success of the business;

  • helps to regulate:

    • when each shareholder gets their shares (vesting schedule);

    • whether there’s a grace period before any shares vest (cliff);

    • what happens if one of the shareholders doesn’t deliver what they promised; and

    • when and how shares are transferred

  • sets out any changes that may be made to the company in the future, e.g., how decisions will be made if the shareholders have a disagreement or if one wanted to leave or fell ill; and

  • provides mechanisms to give the company a right to buy the shares of a departing shareholder before they offer them to someone else.

+ What is a share transfer agreement and do I need it?

A share transfer agreement is an agreement for the transfer of shares. This may arise when you would like to change the share structure of your company; by either adding a new shareholder or by changing the existing portions of shares between the shareholders. Such transfer is the process of transferring existing shares from one person to another either by sale or gift.

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