We have spoken previously about the introduction of the Companies Act 2014 which came into effect on the 1st June 2015. I have decided to mention it again in this week’s article as its introduction seems to be causing some confusion among Company Directors.
While it all may seem a little complicated right now, the enactment of the Companies Act 2014 has actually managed to simplify and reform the Company Law obligations of smaller companies by introducing a new model for private limited companies as we know them. The Act does also make Company Law requirements easier to understand.
DAC – V – LTD
One of the most common questions we have been asked since the introduction of the Companies Act 2014 on the 1st June last is “What is the difference between an LTD and a DAC?”
Much of the confusion is that people think the Designated Activity Company (“DAC”) is the new company but in fact it is the structure that is the most similar to a Private Limited Company as we know it. As you can see from the details in the below table it is the Company Limited by Shares (LTD) which is the new simpler company model.
As the LTD company has the same LTD suffix at the end of its name people assume that it is the same Company type that they have already. This is where the similarity ends. The LTD is the new simple compliance company and is going to be the most common company type for trading companies going forward.
You will see from the table below that the biggest difference between an LTD and a DAC is that a LTD company may have just one Company Director which is a huge benefit for small to medium sized companies. The sole Director cannot act as the Company Secretary however so a second individual is still required but the Company Secretary has a lot less onerous obligations than a Company Director has.
Company Limited by Shares (LTD)
Designated Activity Company (DAC)
Company Directors are now examining their conversion options and how the options will affect their company. Some Companies see the DAC as the most appropriate company type for them. This is because they may be subject to other factors that require that they keep an objects clause or maybe the Company has investors or bankers that require them to be a Designated Activity Company (DAC).
As mentioned below there is “the Irish option”, that is do nothing and the Company will automatically be converted into a LTD company after the 18 month transitional period.
There are some issues with the “do nothing” option particularly in relation to the Memorandum and Articles of Association so it is important to obtain good advice in relation to this.
What is the Time Frame for Changes?
The Act provides for an 18 month transition period after the 1st June 2015 during which time private companies will need to decide which type of new entity best suits their needs.
1st June 2015 – 30th November 2016: All existing companies limited by shares will be treated as DAC’s until:
- They convert to a LTD company; or
- Re – register as a DAC.
As mentioned previously those that elect not to convert to either type of new entity during the transition period will be treated as a DAC for that time and at the end of the 18 month period will automatically become an LTD.