- Management companies: type of company
Management companies: type of company
Management companies: type of company8th March 2021 - Published by Kuits Corporate team
Within this article and the series of two further articles on the subject to follow, Corporate Solicitor Sheridan Broude provides some insight and answers some common questions in respect of how and why you might set up a management company.
What is a management company?
Management companies are usually set up in order to hold the title to, and often manage, a block of flats or a development of houses.
Developers will often find it useful to set up a management company, but there are a couple of options as to what the company structure could look like.
Management companies often end up being a party to the lease for each flat or house and often need to exist indefinitely for as long as the flat or house exists and so they are actually a fundamental element of the development and shouldn’t be considered an afterthought.
Types of management company
The most widely used form of company is one limited by shares. However, a less well-known form is a company limited by guarantee, which can actually be a much more appropriate form of company for a management company. The developer is usually the first shareholder, or in the case of a company limited by guarantee, a member and when the last property is sold often the developer ceases its involvement with the management company. With a company limited by shares, the developer will then transfer shares, or shares will be issued to the owners of the properties being sold. Similarly, with a company limited by guarantee each owner of a flat or house will become a member of it when it acquires the property. It is often a condition of the purchase of the property that the owner becomes a shareholder or member, as the case may be, of the management company. Usually each property owner will have one share or be a member and they will have one vote for each property owned.
This is because the key characteristics are:
- No share capital – meaning it is much easier to change the members of the company from the old owner to the new owner each time a flat or house is sold. Where a company has a share capital, this would involve the transfer of shares from the current owner to the new owner which can be more of an administrative burden for a company when flats/houses often change hands relatively frequently. Instead, with a company limited by guarantee, on a sale of the property, the membership of the old owner ceases and the membership of the new owner begins. The procedure to follow to achieve this change of membership depends on the requirements of the company’s articles of association but typically it can be achieved with little more fuss than a letter of application being signed;
- No liability on members to contribute to a company’s capital while the company is a going concern – therefore there is no need for a developer, upon setting it up, to contribute to the company’s initial working capital by subscribing for and paying up the nominal value on the shares that are issued upon incorporation. The developer will agree to guarantee and contribute a sum on the winding up of the company, normally £1.00, and this obligation passes to each new member as the properties are sold;
- No share certificates – with a company limited by guarantee each time a member resigns and a new member is admitted the statutory registers are written up to reflect this but, share certificates are not required to be surrendered by the seller or issued to the buyer cutting down further on the administrative burden associated with the company each time a property changes ownership; and
- Simpler confirmation statements– again, making life easier when it comes to the annual filings, the details of who all of the members are and of any membership changes do not have to be notified to Companies House on the confirmation statements – unlike with a company limited by shares where shareholder changes have to be notified each year. The details of the persons of significant control does however need to be kept up to date at Companies House for both types of company.
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