A limited company is one of the most popular business structures in the UK. The most attractive thing about limited companies is that, once set up, it has a legal existence which is separate from its members and directors. That means the company is its own ‘legal person’; it doesn’t belong to the company’s directors and shareholders. In order to become a limited company, it must be registered with Companies House.
The process of incorporating your limited company with Companies House involves appointing company directors and, in the case of public limited companies, a qualified company secretary. The company also has to supply articles of association and a memorandum of association. Before you set up a limited company, you need to be aware of the different types of limited company and the advantages and disadvantages of each.
What is a limited company?
A limited company is one where the company’s finances are separate from the company directors’ personal finances. This means a company director has a ‘limited’ liability. Shareholders in a limited company are exempt from responsibility for any debts run up by the company. Directors pay income tax and the company pays corporation tax on company profits. It’s this separate legal existence from its members that makes a limited company such an attractive option.
Other advantages include: 1) registering with Companies House will mean your company’s name is protected, 2) being a limited company will give you more flexible borrowing powers, and 3) it makes it easier to procure new shareholders and investors.
Types of limited company…
There are four main types of limited company: 1) private company limited by shares, 2) private company limited by guarantee, 3) public limited company and 4) private unlimited company.
A private company limited by shares, unsurprisingly, is all about shares. The company has shareholders, and their liability is limited to the amount they originally invested in the company. That means that if the company goes under, their personal assets are protected, although they will lose anything that they invested in the company. In a private limited company, shares cannot be offered to the general public.
Private companies limited by guarantee…
Next, we have private companies limited by guarantee. This option isn’t as popular. It tends to be a business structure used by not-for-profit organisations. This type of company doesn’t usually have any shareholders; instead, it has members who act as guarantors. In the case of insolvency, guarantors have guaranteed a set amount of capital to be handed over to creditors.
Public limited companies…
Of course, it’s not all about private companies. You can set up public limited companies too. Unlike private limited companies, public ones must have two company directors and a qualified company secretary. Public companies differ from private companies in that their share capital must be the equivalent of at least £50,000. They can also sell their shares to the general public on the stock market. Again, there is limited liability: members are only liable to the amount that is left unpaid on the shares.
Private unlimited companies…
A far more unusual type of company is a private unlimited company. Private unlimited companies are incorporated with Companies’ House, with or without share capital. However, if the company was to go under, the members or shareholders would be liable to meet any shortfall in the assets of the company. In other words: their liability isn’t limited.
This is a much riskier type of company, as the impact of insolvency on the shareholders and members’ personal assets can be much greater. So what are the advantages? A private unlimited company can be more secretive about its financial affairs, as, unlike a private limited company, it is not required to publish its company financial statements.
Once you have decided on the type of company you are going to opt for, you’ll need to register your company with Companies House.