Private company limited by shares: what you need to know
If you’re thinking about setting up your company, you might be unsure about choosing between the ‘limited by guarantee’ or ‘limited by shares’ model. Despite having similarities, there are important distinctions, especially concerning how the company’s profits can be taken out.
The most widespread form of company incorporation in the UK is the ‘limited by shares’ model. It is the ideal structure for a company established to generate profits for its directors and/or shareholders.
On the other hand, the ‘limited by guarantee’ model is better suited for not-for-profit organisations like charities and sports clubs. In such cases, any profits generated are typically reinvested into the fundamental business activities.
The formation of a limited company by shares
To establish a limited company in the UK, registration with Companies House is mandatory. This involves submitting Form IN01, along with the articles of association and the memorandum of association, accompanied by a registration fee of £40.
Limited liability in a limited by shares company
One key benefit of incorporating as a limited company, instead of operating as a sole trader, is the availability of limited liability for company directors. This offers a crucial safeguard against being personally responsible for company debts if the company faces insolvency.
As long as there is no involvement in fraudulent trading or any form of misfeasance, and excluding any personal guarantees made, a director’s personal liability for the company’s debts is confined to the value of their shareholding.
This differs from the situation faced by an individual operating as a sole trader if their business debts become overwhelming. Since there is no legal separation between a sole trader’s business and the individual, any debts accumulated during business activities become the personal responsibility of the individual.
Understanding shareholding and how shares are issued
When incorporating a company limited by shares in the UK, it is a requirement to issue at least one share. The allocation of shares to shareholders has implications for dividend distribution, voting rights in shareholder meetings, and the extent of shareholders’ liability in case of the company entering insolvency proceedings. If a new business partner joins or secures investment, additional shares can be issued later. Ownership percentages can also be adjusted by transferring and re-allocating existing shares.
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Public v Private limited company
A company limited by shares can assume either of two forms: a public limited company or a private limited company. The primary distinction lies in the manner in which their shares can be sold and traded. A public company, as implied by its name, can trade its shares publicly, selling them to the general public and participating in stock exchange transactions. Conversely, a private company is restricted to selling its shares solely to interested investors. The majority of start-ups typically opt for incorporation as private limited companies.
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