Contact: Clarkslegal (Reading, England)
Introduction
There are great opportunities for foreign entrepreneurs and companies to make use of the dynamic and open business climate existing in the UK, as well as a highly skilled workforce. In addition a transparent tax regime, the familiarity of the English language and trusted legal and accounting systems makes the UK an appealing destination for many foreign companies.
Overseas based and owned companies are treated in the same way as UK companies with very few restrictions on foreign ownership and no limitations on the free flow of capital. A key benefit of the European Union is the single market which provides freedom of movement of people and goods, enables the flow of capital and the ability to provide cross border services between member states.
For anyone thinking about doing business in the UK, it is first important to consider the best legal structure to use. A number of issues will influence this decision, such as the size of the business, the resources available, the degree of risk that the business is prepared to incur, the strategic objectives and the tax consequences.
Business Structure
Setting up
The UK has an open, transparent and business friendly system to encourage the formation of new businesses. Permission is not required to establish a business presence in the UK, although there are regulations on the use of business names and certain business sectors which may require licences or authorisation (such as finance, defence and oil exploration).
Once the decision has been taken to set up a business in the UK, there are various legal structures available. The most appropriate structure will depend on a combination of commercial objectives, the degree of permanency required in the UK, alongside legal and tax considerations.
Structure
The majority of overseas investors will establish a registered company when setting up business in the UK. There are four types of UK registered company:
- Private company limited by shares
- Private company limited by guarantee
- Private unlimited company
- Public company limited by shares
The vast majority of overseas businesses are established as companies limited by shares, either as a private limited company or as a public limited company. Generally foreign companies will set up a private limited company as a subsidiary of the overseas company.
It is also possible to carry out business in the UK by:
- Opening a branch office
- Setting up a limited liability partnership
- Entering into a joint venture
- Appointing an agent, distributor or franchisee
- Acquiring an existing company
This guide will focus on the most common ways of doing business in the UK and those most likely to be of interest to the majority of companies and entrepreneurs.
1. UK Subsidiary
Incorporating a private company limited by shares (“limited company”) in the UK is a straightforward process and can be carried out within 24 hours. An “off the shelf” company can be bought which will not have previously traded and will be free from any liabilities, or a brand new company can be incorporated.
A UK subsidiary will have a separate legal identity from its parent company. The liabilities of the subsidiary are ring fenced from the liabilities of the parent company, and the parent company will have no liability for them, provided that no guarantees are given by the parent company.
A company’s main constitutional document is its Articles of Association which set out how the company will operate internally and procedures, such as for the transfer of shares, holding meetings, voting rights of shareholders, etc.
At least one director must be appointed, and a company secretary may also be appointed. It is no longer compulsory for a limited company to have a company secretary, but many still do as the company secretary can then deal with the statutory filing obligations of the company.
The directors of a UK company have prescribed responsibilities to that company. These duties include:
- to promote the success of the company
- to act within the powers of the company
- to avoid conflicts of interest
- not to accept personal benefits from third parties
- to declare interests in proposed transactions and arrangements with the company
- to use reasonable care, skill and diligence
- to exercise independent judgment.
The company must have a registered office in England or Wales and should usually retain its statutory books at the registered office.
There is no minimum share capital requirement for private limited companies and shares can be issued at a price above par value (known as a “premium”) and can have different rights and values. Shareholders may be paid dividends, which are treated as income.
Companies are required to register and make annual filings with Companies House. Any changes to the company, for example, changes to the board of directors or to its capital share structure, will need to be filed. The accounts for all UK companies must be filed at Companies House and therefore become available for public inspection.
2. UK Branch
If costs and levels of responsibility of owning a company in the UK are a concern, then consideration should be given to setting up a branch office. The UK branch will not have a separate legal identity from the overseas company and the overseas company will be fully responsible for the liabilities of its branch.
Within one month of opening a branch, the following information must be filed at Companies House:
- The name of the overseas company, its place of incorporation and legal status
- The branch address in the UK
- The company’s constitutional documents and directors’ details
- Details of the business activities
- Names and addresses of the authorised representatives in the UK
- Details of the overseas company’s appointed officers
The overseas company will be obliged to file its accounts with the Registrar of Companies in the UK every year. If the overseas company is required to publish audited accounts in its country of incorporation, these must be filed in the UK within three months of public disclosure overseas. Whether or not a private company is required to make its accounts publicly available under the law of its country of incorporation, once it opens a branch in the UK it will be obliged to make its accounts publicly available in the UK within 13 months of the accounting reference date.
3. Limited Liability Partnerships
LLPs were introduced in the UK in 2001 and are popular in the professional services sector, such as with lawyers and accountants. They are a separate legal entity subject to formal registration and incorporation requirements.
LLPs must have a minimum of 2 members. Members have a fiduciary duty to the LLP but not to each other (unlike partnerships), and unless the members agree otherwise the presumption is that they will share profits equally. The liability of members is limited to their capital investment.
Most LLPs will have an LLP Agreement between the members regulating how the LLP will operate, including structure, voting mechanism, profit sharing, removal of partners, etc.
4. Joint venture
If a UK business venture relies on the services or co-operation of another party to achieve a shared commercial objective, then a joint venture should be considered. There is no legal definition of what constitutes a joint venture, but this would involve a commercial arrangement between the parties and could take the form of a partnership, a corporate structure or a purely contractual agreement.
5. Appointing an agent, distributor or franchisee
Appointing an agent, distributor or franchisee can be an effective way of testing the UK market before setting up a permanent UK business and incurring the associated costs. An agent would act as an intermediary between the company and a third party by soliciting orders from the third party or by concluding contracts with the third party on behalf of the company. Unlike an agent, a distributor will take legal title to the goods in question and resell them to its own customers.
Agency arrangements can be complex, but are often seen as the preferred model. The agent is essentially the intermediary who will arrange and possibly negotiate any sale, though the contract for sale will be between the company and the end customer. The agent may be a marketing agent looking for opportunities or a sales agent who will negotiate and arrange the contract for sale. Note that agents selling goods (as opposed to services) are governed by the Commercial Agents (Council Directive) Regulations 1993 which impose a number of obligations which cannot be opted out of.
Distribution or franchises are regulated by contract rather than legislation. Such arrangements should be agreed in writing and could give rise to competition problems so advice should be taken. Franchise agreements are generally set up with a master licensee who will sublicense to further franchisees in the territory, on the basis that they have better knowledge of the local market. The master licensee will then pay a royalty to the franchisor.
6. Acquiring an existing company
An alternative to incorporating a brand new company in the UK is to acquire an existing company by purchasing the shares in that company. A share purchase agreement will be entered into which will typically include a range of warranties and indemnities in respect of the business. These are given by the seller to underpin the assumptions made by the buyer in agreeing to the price. Acquiring an existing trading company can allow a business to expand more rapidly in the UK as there is every likelihood that an established customer base and infrastructure is in place.
How we can help
Clarkslegal has helped a growing number of companies seeking to set up or do business in the UK and we work closely with UK agencies such as the UKTI in doing so. In particular, we can help with:
- setting up a company or branch office
- acquiring an existing UK business (or selling one)
- dealing with the lease of offices
- providing employment contracts for staff
- drafting/negotiating key commercial/trading contracts
- arranging back office help with payroll/accounting.
