Law guide: Business start-up

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Appointing directors

Appointing directors

Appointing directors

Every limited company must have at least one director. If a limited company only has one director, that director must be an actual person, not another company.

A public limited company must have at least 2 directors.

Who chooses directors

In general, the shareholders can choose whom they want as director, as long as that person:

  • is aged over 16;
  • isn't an undischarged bankrupt; and
  • hasn't been banned by a court from being a director.

(Note that the last 2 conditions don't apply if a court allows it.) When appointing directors, shareholders ('members') must comply with the company's articles of association. These set out rules for how the company is run. For example, the articles might outline how many directors there should be and how long they can serve for.

The first directors will be those you named as directors on Form IN01 when you first formed the company (see How to form a company for more information).

Members can appoint subsequent directors by voting in meetings (passing a 'resolution') or by any other way set out in the articles (see Shareholder meetings for more information on resolutions).

The articles of association can also give the board of directors power to appoint additional directors.

Telling Companies House

You must tell Companies House within 14 days when:

  • you appoint a new director, using either form AP01 or AP02; or
  • there's a change in a director's details, e.g. name or address, using form CH01 or CH02.

Companies House will notify new directors that they have been appointed, and provide them with information on their duties.

Types of director

Directors are responsible for ensuring the success of the business and for making sure the company is operating within the law. The board of directors makes most of the major decisions of the company.

There are 2 types of director: executive and non-executive.

Executive directors

Executive directors perform operational and strategic business functions, such as:

  • Hiring and firing
  • Managing people
  • Looking after assets
  • Entering into contracts

They can also employ managers to help them with these tasks. Executive directors are usually employed by the company and paid a salary, so are protected by employment law. They're also taxed through the Pay As You Earn (PAYE) system.

Non-executive directors

Non-executive directors sit on the board, attend board meetings and so vote on major decisions, but don't get involved in the day-to-day running of the business. They might be appointed to carry out a specialist role on a part-time basis or for their expertise in specific activities, such as strategy and contract negotiation.

They might be employed by the company or work on a self-employed basis under a contract for services. They usually work part-time, attending board meetings and spending time on specific projects.

Non-executive directors bring an objective view of the business. They can improve the board's effectiveness at relatively low cost and provide valuable business connections. They have the same duties in law to the company as the executive directors, and are equally responsible for promoting the success of the company.

Powers of directors

Generally, the directors can take any action or make any decision on behalf of a company, unless the law or company's articles prevent or restrict them from doing so. Directors must fulfil their duties set out in the Companies Act 2006.

Once directors have been given a certain power, the power belongs to the board and can't generally be exercised by the shareholders ('members'). This means that the members can't overrule the board or change its decision. All that members can do if they dislike the way in which the directors are running the company is to change the directors. Generally, the directors are required to act collectively. However, it's common to find terms in the company's articles that allow directors to delegate their responsibilities. For example, the board can appoint a managing director to make day-to-day decisions on behalf of the company.

Directors' service contracts

Granting directors' service contracts

A director who carries out services for a company might have a service contract. This makes the director an employee of the company and gives them normal employment rights, e.g. statutory redundancy and unfair dismissal rights.

Under the model articles for a private company, the board of directors can vote to give a service contract to a director. The board would agree on the terms of the contract. Special rules might apply to prevent the director from voting and counting in the quorum at the directors' meeting (see 'Quorum for directors' meetings' under Board meetings for more information).

Note that if the board of directors wants to give a director a service contract for a fixed term of more than 2 years, they must get the members' permission first. The members can agree by passing an ordinary resolution at a general meeting. A record of the proposed service contract must be made available at the registered office for the members to inspect for 15 days before the general meeting. Alternatively, the members can agree to the service contract by written resolution, as long as the record of the service contract is sent to them with the written resolution (for more on written resolutions, see Shareholder meetings).

If the members don't approve a service contract with a guaranteed term of more than 2 years, although the other terms of the contract remain valid, the term isn't. The company would be able to end this contract at any time with reasonable notice.

Keeping copies of directors' service contracts

Your company must keep a copy of every director's service contract, whether the contract is for a fixed term of more than 2 years or not. This rule applies whether the service contract is a formal employment contract, a contract for services or an informal letter of appointment. If the contract isn't in writing, your company must keep a written document setting out the terms of the contract. Your company must also keep a copy of any variations to these contracts.

These copies must be kept at the company's registered office, or at another place for people to view, and you must have told Companies House about this place.

Your company must keep them for at least one year from the date the contract ends or expires.

A member is entitled to see any copy or document, and they must pay any fee that applies. You must provide the copy within 7 days after you've received the request from the member.

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