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Broadly speaking, there are two ways you can start a company. You can either incorporate one from scratch or purchase a shelf company and repurpose it for your own use. Each option has advantages and disadvantages. This article will explore the advantages of buying a shelf company to help you determine whether it is the best way to start trading through a company in the UK. It will also contrast shelf companies with companies incorporated from scratch.
Incorporating a Company
You may assume that incorporating a company is the same as starting one. However, there is a subtle distinction. To appreciate this distinction, it is worth remembering that a company is a legal entity through which your business trades. It is not necessary to own a company to run a business. You can trade as a sole trader or through a partnership.
Incorporating a company is like creating a company from scratch. In effect, you file certain paperwork with Companies House, which then registers the information and produces a certificate of incorporation. This certificate of incorporation is akin to the company’s birth certificate. It contains the company’s name and its unique company number. At this point, the company has corporate life.
This may intuitively seem like the only way to start a company. However, nothing is preventing you from purchasing a ready-made company and repurposing it for your own needs. These ready-made companies are commonly called shelf companies.
Characteristics of a Shelf Company
Until the shelf company is purchased, it is not a trading company. That is, while it has legal existence because it is registered with Companies House, it has no liabilities. Nor does it have any capital invested in it.
Notably, all companies must have at least one shareholder and one director. In practice, the shareholder will be the law firm or registration agency. The director will be one of the managers of the business.
Likewise, it will also have a generic name. Most shelf companies have model articles of incorporation. However, certain law firms may incorporate the company with their bespoke articles.
Since shelf companies are intended to be bought and repurposed, once you acquire the company, you have the right to do with it what you want. In practice, you will want to:
- capitalise it with the necessary financing;
- issue further shares;
- change its name and registered office; and
- appoint additional directors.
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Advantages of Buying a Shelf Company
Before the advent of online company registration and incorporation, the greatest benefit to purchasing a shelf company is that it was the fastest way to begin trading through a company. You could avoid having to file and submit all the incorporation documents. Likewise, you would not have to wait for the Company registrar to issue the certificate of incorporation.
However, nowadays, you can file all the forms electronically through the Companies House website. In most cases, Companies House will return a certificate of incorporation within 24 hours (in fact, it is often much faster than that).
Likewise, it used to be cheaper to purchase a shelf company because you would not have to instruct a lawyer or company registration agent to file the incorporation paperwork. However, the associated fees with changing the company name and sorting through other administration work often cancel out the price difference.
Therefore, shelf companies may no longer be cost-effective for simple companies that may not need amended or bespoke articles. However, if you have an established relationship with a law firm and need a new company, such as to set up a special purpose vehicle, a shelf company can still be quicker and more efficient.
Formalities After Purchasing a Shelf Company
There are some formalities you will have to complete immediately after the sale. For example, you must alert Companies House to the fact that the directors’ details have changed. Many company registration agents will do this for you as part of their service.
Below are the key steps that either you or the agent will need to take after you purchase a shelf company:
- convening a board meeting announcing the sale of the company and approving any associated costs of the purchase;
- changing the company name (if appropriate), which will require you to submit a special resolution to the shareholders;
- amending the existing articles or adapting new ones — if you intend to issue different classes of shares, for instance, this may be necessary;
- changing the address of the company’s registered office;
- changing the company’s accounting date if you wish; and
- appointing any additional directors to the company.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
Key Takeaways
If you want to trade through the private company structure, you will need to acquire ownership of a company first. You can either create a brand new company or acquire a ready-made company and then adapt it to the specific needs of your business. These ready-made companies are commonly called “shelf companies”.
If you need help incorporating your business into a company, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A shelf company is a company already in existence but has yet to trade. You can purchase these entities from a company registration owner and use it to trade your business through it.
Compared to tailor-made companies, you can start trading as soon as you acquire shares in the shelf company. However, for tailor-made companies, you will have to wait for Companies House to issue you a certificate of incorporation before you can start trading.
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