Charlotte Baker and Anna Taylor address the options for residential management companies
What sort of residents’ company? Surveyors who advise residential developers, lessees buying their freehold, or even private clients in need of a helping hand will be used to hearing this question. But the answer is not the same each time.
Residential management companies usually take the form of one of two corporate vehicles – a company limited by shares or a company limited by guarantee. Both structures are corporate bodies with separate legal identities to that of their members. In each case there is a distinct separation between the ownership and the management of the company. The members or shareholders are the owners of the individual dwellings, while the directors are responsible for the day-to-day management of the company. Often a number of the members will be appointed as directors and will arrange the appointment of a property management agent to assist with the running of the property.
The two structures have many similarities, which include being liable for their own debts and liabilities and offering the protection of limited liability for members on a winding up of the company. If the company goes bust, in most cases the members will not be personally liable for its debts (unless a member has expressly assumed liability for the company, for example by entering into a personal guarantee). Articles of association form the basis of each type of company’s basic administrative structure and management. Although the form of those articles of association will differ, both should contain the proviso that, to be entitled to become a member of the company, a person must hold a legal interest in one of the dwellings.
Company limited by shares
A company limited by shares must have an issued share capital of at least one non-redeemable share. One share is usually issued in respect of each dwelling in the building or development to the legal owner of that leasehold. Upon a winding up of the company, the liability of each shareholder is limited to the extent of any unpaid sums on the share(s) they hold, which will usually be nil.
Shareholders are able to participate in the profits of the company by way of receipt of dividends. In circumstances where the income of the company (principally received through service charge) is used to maintain the property and provide related services, members are unlikely to derive any significant financial benefit. However, if the company is formed to buy the freehold, and not all lessees participate, there may be future profit from the sale of lease extensions to lessees who did not join in the purchase, which may result in dividends being paid.
The company’s articles of association often contain provisions requiring a selling shareholder to transfer their share at the same time as the dwelling is sold, together with saving provisions allowing a director to execute the stock transfer form on behalf of the seller if they fail to do so. This transfer creates an administrative burden. Problems can arise if the parties fail to deal with the transfer of the shareholding at the same time as the property transfer or if the selling party’s share certificate has been lost. Although this can easily be fixed by the execution of a stock transfer form together with an indemnity in respect of the lost share certificate, it is surprising how often this is overlooked in practice. Once the transfer of the share has taken place, the company must issue a new share certificate.
Company limited by guarantee
A company limited by guarantee may be simpler, and less costly, to administer. It does not have a share capital or share certificates. Each member undertakes to contribute a specified sum to the liabilities of the company, which only becomes due when the company is wound up. Members are only liable to the extent of their guarantee. The articles of association set the level of the liability – generally a notional amount, such as £10 – and should provide that membership automatically ceases on the disposal of the dwelling.
A disadvantage of a company limited by guarantee is that, if the statutory records are not properly maintained, the membership is sometimes unclear. However, the membership of property management companies should directly reflect the ownership records of the dwelling. This means that property ownership information, together with service charge records, can be used to help reconcile membership records. There is no requirement to issue membership certificates, which reduces the administrative burden.
Depending on the provisions of the company’s articles of association, companies limited by guarantee have either limited or no ability to distribute profits. However, where creation and distribution of profit is not the company’s objective this is unlikely to pose a problem.
Which option?
Ultimately the intended objectives of a property management company dictate the nature of the corporate vehicle. These must be carefully considered in advance of incorporation. In practice, property management companies are often companies limited by guarantee owing to the reduced administrative burden. However, where the intended objectives of the company include its members sharing in the profits of that company, then a company limited by shares is invariably the most appropriate vehicle.
Statutory requirements
Companies limited by shares and companies limited by guarantee are subject to the following statutory requirements:
- At least one director (who is an actual person) and may have a company secretary
- A registered office in England and Wales
- Articles of association setting out the company’s basic administrative structure and management
- Ongoing administrative and filing requirements, including: annual filing requirements (annual return and account) and event-driven filings (to include appointment and removal of directors, change of registered office, alteration). Change in membership / shareholders is notified to Companies House in the annual return and not at the time of change
- Obligation to maintain statutory registers: registers of members, directors, mortgages and debentures, directors’ interests and, for companies limited by shares, share allotments and transfers.
Charlotte Baker is a senior associate and Anna Taylor is a paralegal at Wedlake Bell LLP
