In 1884, Henry Royce started an electrical and mechanical business. He made his first car, a two-cylinder Royce 10, in hisManchester factory in 1904, and was introduced to Charles Rolls at the Midland Hotel in Manchester on 4 May of that year. Rolls was proprietor of an early motor car dealership, C.S.Rolls & Co. in Fulham.
In spite of his preference for three or four cylinder cars, Rolls was impressed with the Royce 10, and in a subsequent agreement of 23 December 1904 agreed to take all the cars Royce could make. There would be four models:
- a 10 hp (7.5 kW), two-cylinder model selling at £395 (£40,000 as of 2014),
- a 15 hp (11 kW) three-cylinder at £500 (£50,000 as of 2014),
- a 20 hp (15 kW) four-cylinder at £650 (£60,000 as of 2014),
- a 30 hp (22 kW) six-cylinder model priced at £890 (£80,000 as of 2014),
Rolls-Royce Limited was formed on 15 March 1906, by which time it was apparent that new premises were required for production of cars. After considering sites in Manchester, Coventry, Bradford and Leicester, it was an offer from Derby's council of cheap electricity that resulted in the decision to acquire a 12.7 acres (51,000 m2) site on the southern edge of that city. The new factory was largely designed by Royce, and production began in early 1908, with a formal opening on 9 July 1908 by Sir John Montagu. The investment in the new company required further capital to be raised, and on 6 December 1906 £100,000 (£9,000,000 as of 2014), of new shares were offered to the public. In 1907, Rolls-Royce bought out C.S. Rolls & Co. (The non-motor car interests of Royce Ltd. continued to operate separately.)
During 1906 Royce had been developing an improved six-cylinder model with more power than the 30hp. Initially designated the 40/50 hp, this was the company's first all-new model. In March 1908 Claude Johnson, Commercial Managing Director and sometimes described as the hyphen in Rolls-Royce, succeeded in persuading Royce and the other directors that Rolls-Royce should concentrate exclusively on the new model, and all the earlier models were duly discontinued. After the introduction of the Phantom model in 1925 this 40/50 model was referred to as the Silver Ghost. The new 40/50 was responsible for the company's early reputation with over 6,000 built. In 1921, the company opened a second factory in Springfield, Massachusetts in the United States (to help meet demand), where a further 1,701 "Springfield Ghosts" were built. This factory operated for 10 years, closing in 1931. Its chassis was used as a basis for the first British armoured car used in both world wars.