Company Formation & Constitution — SQE1 FLK1 Business Law and Practice

Your client has freelanced as a software developer for three years, billing about £150,000 a year. She wants a company. She will be its only director, its only member, and she will take a single £1 share. There is nobody she could ask to join her. She has read online that a company needs at least two people, and that a one-member company is not a separate legal person until a second member joins. Can she do it? Yes.

Both of those things she read are wrong, and you will know exactly why. Company Formation and Constitution. Formation is the birth of the company. The constitution is its rulebook, and it turns out to be a contract nobody signed. Keep our developer in mind.

Here is the route. Incorporation first: what you file, what it costs, and the certificate that brings the company to life. Then the memorandum, which is far smaller than it used to be. Then the articles, the rulebook, and how you change them. Then the constitution and the statutory contract it creates. And last, the shareholders' agreement that sits alongside it.

Start with what incorporation does. Before it, you have people with a business idea. After it, you have something that can own property, make contracts, sue and be sued, all in its own name. A separate legal person. Section 7 of the Companies Act 2006 says a company is formed by one or more persons subscribing their names to a memorandum and complying with the registration requirements. One or more. So our developer is fine.

What goes to Companies House? Form IN01, the application itself. The memorandum, signed by every subscriber. Articles of association, unless you are content with the model articles. A statement of capital, for a company with shares. A statement of the proposed officers. And a statement of compliance. Then the fee.

Form IN01 is the heart of it. The proposed name, the registered office, whether liability is limited by shares or by guarantee, and whether the company is private or public. Then the first directors and any secretary, and the initial shareholders and their shares. Note what is not there. Nothing about whether the business is any good. The registrar does not assess commercial viability.

And the fees are examinable. Online, £100. Paper, £124. Same-day digital, £156. Those rose on 1 February 2026.

Then the certificate of incorporation, the company's birth certificate. From the moment the registrar issues it, the company legally exists. And section 15(4) makes that certificate conclusive evidence that the registration requirements were complied with and that the company is duly registered. Conclusive. Even if something in the process went wrong, the company's existence cannot be attacked afterwards.

Test that. A company is incorporated in March. Six months later a competitor discovers that one of the two subscribers was subject to a disqualification order at the time. It writes to the customers saying the company was never validly incorporated. Is it right? No. The certificate is conclusive. The company exists and its contracts bind it. The disqualified person has his own problems, and they are separate.

Now the flip side. Documents go in on the Monday, the certificate issues on the Wednesday, and on the Tuesday a founder signs a £50,000 supply contract on behalf of the company. The company did not exist on Tuesday, so it cannot be a party. Under section 51 the person who purported to contract on its behalf is personally liable, and the company cannot ratify afterwards. There was no principal in existence when the contract was made.

The memorandum next, and it is much smaller than you expect. Under the old law it ran to pages: objects, powers, liability, share capital. Under section 8 it now says one thing. The subscribers wish to form a company and each agrees to become a member and take at least one share. Signed by every subscriber. That is the whole document.

Two consequences. First, once the company is registered the memorandum cannot be amended at all. It is a historical record of who founded the company. Second, if an older company has an objects clause sitting in its memorandum, section 28 treats that clause as a provision of the articles, and articles can be changed. A company incorporated in 1995 that wants out of a furniture-only objects clause passes a special resolution. It does not need a new company.

The articles are the rulebook. How directors are appointed, how decisions are made, what powers shareholders have, how shares are transferred. Every company must have them, and if you register none, section 20 supplies them. The relevant model articles apply automatically, prescribed by the Companies (Model Articles) Regulations 2008. Three versions: private limited by shares, private limited by guarantee, and public. So our developer, who filed nothing of her own, has articles.

Most companies with outside investors want something tailored, and in practice you adopt the model articles and modify what needs changing. Know the private and public differences, because they are quick marks. Minimum directors: one for a private company, two for a public. Company secretary: optional for a private company, mandatory for a public one. Written resolutions: private companies can, public companies cannot.

One thing before we move on. Before the 2006 Act the default articles were called Table A. A company incorporated in 1998 that adopted Table A and never amended it is still governed by Table A today. The 2006 Act did not rewrite the articles of companies already on the register. When you advise an established company, check what it actually has.

Changing the articles. You need a special resolution, and that means at least 75% of the votes cast. Not 75% of the members. Votes cast. So: 60,000 shares vote in favour, 30,000 against, 10,000 abstain. Carried? No. Abstentions are not votes cast, so the total is 90,000, the majority in favour is 66.7%, and that is short of 75%.

When does the change take effect? When the resolution is passed. Not when it is filed. But you must still file, and within 15 days: a copy of the special resolution, and a copy of the amended articles. Miss it and the company and every officer in default commits an offence, though the amendment itself stands. A board meeting held under a new quorum on 5 June, on a resolution passed on 1 June and filed only on 25 June, was perfectly valid.

Two limits on that power. Section 25 says an alteration requiring a member to take more shares, or otherwise increasing their liability to pay money to the company, does not bind them. Not unless they agree in writing. A majority cannot vote a minority into putting more money in.

The broader limit is that the power must be exercised bona fide for the benefit of the company as a whole. That formula comes from Allen v Gold Reefs of West Africa, from 1900.

Apply it. A shareholder holding 15% sets up a rival business selling the same lines to the same customers. The others insert an article letting the board require a competing member to transfer his shares at a fair value fixed by the auditor. Valid? Yes. Sidebottom v Kershaw, from 1920. Where the alteration serves the majority rather than the company, it fails.

Entrenchment next, and it is a favourite. Section 22 lets the articles make specified provisions harder to change than by special resolution. An article might require one named member's written consent. Powerful protection for a minority, and there are two catches. Section 22(3) means entrenchment can never make a provision absolutely unamendable: the unanimous agreement of all the members, or a court order, always overrides it.

The second catch is missed constantly. Under section 22(2) an entrenched provision can be created only in the articles on formation, or by an amendment agreed to by all the members. So an investor who wants entrenchment after the company is up and running needs every single member to agree. Holding 85% of the votes is not enough.

Now the constitution, which is bigger than the articles. Section 17 says it includes the articles and any resolutions and agreements to which Chapter 3 applies. Section 29 brings in special resolutions, and any resolution or agreement agreed by all the members that would otherwise have needed a special resolution. So special resolutions are part of the constitution. An ordinary shareholders' agreement about dividends and exits is not.

And here is the part that matters. Section 33 provides that the constitution binds the company and its members as if there were covenants by the company and by each member to observe it. A statutory contract. Nobody signed anything, and yet it binds. Three relationships come out of it. Company bound to members. Members bound to the company. And members bound to each other.

Take the first two. A company limited by guarantee runs a wholesale flower market, and its articles say that any dispute between the company and a member about membership goes to arbitration. It suspends a member's trading licence and he issues a claim in the High Court instead. Can the company hold him to the arbitration clause? Yes. The articles bind him, and this is a dispute about his membership. Hickman v Kent, from 1915.

Now the limit, and it is the trap in this topic. You can enforce the articles only in your capacity as a member. A solicitor drafted a company's articles providing that he would be its solicitor for life. He later became a member. The company stopped using him and he sued on the article. He lost. The right was given to him as a solicitor, not as a member. Eley v Positive, from 1876.

And the third relationship, member to member, is real. A small company's articles required every director to hold at least 500 shares. A member wishing to sell must notify the directors, who will take the shares equally between them at a fair value. A retiring member notified them and they refused to pay. He sued them personally and won, because on those articles the obligation bound them as members. Rayfield v Hands, from 1960.

Last section. The shareholders' agreement sits alongside the articles and is a separate contract between the shareholders, and often the company too. Why bother, when the articles are already a contract? It is private, so it is not filed and a competitor cannot read it. It changes only by the agreement of everyone who signed. It can cover things the articles cannot, like non-compete clauses. And it can bind people in non-member capacities.

Three founders incorporating a software company want a profit-sharing formula, non-compete obligations lasting five years, and buy-out options at a set valuation, and their competitor watches their filings. All of that belongs in the agreement. The articles go on the public register, and so does every amendment to them.

Two consequences follow. First, the agreement can be varied only by all of its parties. Four shareholders sign; three years on the holders of 90% want the acquisition threshold raised; the holder of 10% says no. It does not change. That immunity from the majority is exactly why a minority shareholder wants protection in the agreement rather than in the articles, which 75% of the votes cast can rewrite.

Second, it binds only the people who sign it. An investment firm subscribes £2 million for 25% of a company whose founders signed both documents. On completion, which binds the firm? The articles, automatically, from the moment it goes on the register of members. The agreement, only if it executes a deed of adherence. Making that a condition of the investment is standard practice.

What if the two conflict? Do not ask which wins. The articles govern the company, so a dividend declared by ordinary resolution under the articles is validly declared. The shareholders who voted for it may still be in breach of an agreement requiring unanimity, and liable in damages to the shareholder who objected. Both things are true at once.

And one hard limit. All five shareholders and the company sign an agreement that the articles will not be altered and no new shares issued without written consent from everyone. Enforceable? Against the company, no. A company cannot fetter its statutory powers. Against the four shareholders personally, yes, because that is an ordinary contract about how they will use their own votes. Russell v Northern Bank, from 1992.

A word on how SQE1 tests this. You will not be asked to name a case or quote a section number. You get a scenario, five answers, and one instruction: pick the best one. So learn the rules, and how they decide facts. The names in this episode are memory pegs, nothing more.

If you keep only three. Hickman v Kent, for the rule that the articles bind you as a member. Eley v Positive, for the limit that they bind you only as a member. And Allen v Gold Reefs of West Africa, because every alteration of the articles must be bona fide for the benefit of the company as a whole.

Four traps the examiners set. One: the fees. Online, £100. Paper, £124. Same-day digital, £156. This is exactly the practical detail the paper likes to test, and there is nothing to work out. You either know it or you do not.

Two: the memorandum cannot be amended. Once the company is registered it is a historical record of who founded it, and that is that. But an objects clause sitting in an older company's memorandum now counts as an article, and articles can be changed.

Three: 75% means 75% of the votes cast. Not of the members, not of the shares in issue. Abstentions are not votes. A member who stays away, or attends and abstains, drops out of the calculation altogether.

Four: where the articles and a shareholders' agreement conflict, do not look for a winner. The articles govern the company, so the corporate act stands. The agreement binds the people who signed it, so they may be in breach and liable in damages. Both at once.

Quick check, and it turns on that limit. A woman helped to establish a private company and drafted its bespoke articles. One article provides that she is to be retained as the company's consulting engineer at £95,000 a year. She subscribed for 5,000 shares on incorporation and has been a member ever since. After three years the board engaged a different firm and terminated her retainer. She has no service contract apart from the article.

Can she enforce the article as a member? Three candidate answers. One: yes, because a member may enforce any provision the articles contain. Two: yes, because the article identifies her expressly, making the right a personal one. Three: no, because the right is given to her as engineer, not as a member. Pause here if you want a moment.

The answer is three. The statutory contract operates only on rights held in the capacity of member. A provision conferring rights in some other capacity is an outsider right, and section 33 does not reach it, even where that person is also a member. Her retainer is a right of exactly that kind, and she has nothing else to sue on.

Why the others fail. One is too wide: section 33 does not make every article enforceable by every member, only membership rights. Two sounds persuasive and is wrong. Being named in the article does not turn an outsider right into a membership right, and drafting them yourself confers nothing either.

Five things to take away. One: one person can form a company, and it exists from the moment the certificate is issued. That certificate is conclusive evidence that the registration requirements were met. Two: register no articles and the model articles apply automatically.

Three: change the articles by special resolution, 75% of the votes cast. It takes effect when passed, and both it and the amended articles go to the registrar within 15 days. Four: section 33 makes the constitution a statutory contract binding company and members, on membership rights only. Five: a shareholders' agreement is private, changes only by unanimity, and binds only those who sign.

And our developer? One subscriber, one £1 share, one director. A valid company from the day the certificate issued, on model articles she never had to file. Next time, Directors: appointment, removal and disqualification.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.