As buy-to-let properties continue to increase in popularity, we have been seeing an increase in the number of requests we get for property management company formations. We also get a lot of questions about which is the best route to incorporation for this type of company - limited by shares or by guarantee?
Let’s take a closer look at the company types to help determine which one might be the right structure for your needs:
What to look out for when buying a flat
When buying a flat, a buyer should always consider the management structure the property has in place. Flats in well-managed properties are usually easier to sell and because they run smoothly and are often more likely to be a harmonious place to live.
The easily-recognised and most common structure for property management companies is a private limited company. Who owns the company will usually govern how well or badly management is controlled. Structures will vary according to the age of the block, where it is located, and the number of flats and also according to the method by which control of management has been acquired.
What to choose: A company limited by shares or guarantee?
If you opt for a company limited by shares, the company will normally issue one share to each flat owner. Each share will have a nominal value and upon payment for the share, each individual shall be entitled to and then become a member of the company and can vote as a member.
It will normally be a condition of ownership of the flat that the new tenant becomes a member of the company and the old tenant transfers the share. If there are two tenants of a single flat (e.g. husband and wife) then they will own the share jointly. However, there has been a shift in Companies House policy recently on joint subscribers. Their current view, based on their interpretation of the law, is that a subscriber must be one legal person, either an individual or a company. Be aware that applications for property management company incorporations should only include one of the tenants.
Once the company is incorporated and the subscribers have become its first members, joint membership becomes a matter for internal governance; the share can then be transferred into the tenants’ joint names. A company is free to have as many joint members as it wants.
Care must be taken to ensure that any joint subscribers are not issued one share each, as this will give them too many voting rights and upset the balance of power between flat owners.
This is usually the simplest form of property management company, especially if it is a relatively small block of flats. It is simple because it is much easier to deal with changes of ownership (the outgoing tenant resigns, the incoming tenant is admitted as a member) so there is no need to physically transfer shares of the company. The voting method is usually one member, one vote. There are also no share certificates are issued. Each member is entered on the register of members provided that he fulfils the necessary qualification for membership (i.e. owns one of the flats). Each member is removed if he or she no longer qualifies as one (for example, if the flat is sold).
If you have questions about which route would work best for you, or would like additional info about property management company formations, please feel free to get in touch with me.