What is a Limited Company?

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A limited company in brief

Most people require a standard limited company since this is suitable for nearly all types of trading.

A limited company is a form of business that is legally separate from its owners (shareholders) and managers (in formal terms known as directors).

This separate legal personality means that it is the company, not its members, that conducts the business. Even if a limited company involves only one person as its sole shareholder and director it remains, in law, a legal entity that is separate and distinct from that person.

The limited company can own property, employ staff, enter into contracts, sue and be sued in its own right.

Any profit that a company makes will be owned by the company after it has paid its corporation tax. This profit can then be distributed among the members in proportion to the shares in the company that each of them holds.

The owner/s of the company is/are protected by “limited liability”, hence it is a “limited” company. Except in a case of fraud, or other serious wrongdoing, the owners are liable for the debts of the business only up to the value of their original investment in the business.

Limited companies must be registered at Companies House and are subject to annual filings and payment of taxes.

Types of limited companies in the UK

  • Private company limited by shares.
  • Private company limited by guarantee.
  • Public limited company.

In a private company limited by shares the company’s capital is divided into shares that are allotted among its members and measure each member’s interest in and liability to the company. Members must pay the nominal value of their shares either upon allotment or subsequently. The total value of shares that a company is authorised to issue constitutes its authorised capital.

Such companies are classified as “private” since they are not “public”, which means that they are not allowed to offer their shares to the public at large. Their shares are allotted to the predefined circle of subscribers. A private company may also set restrictions on the transfer of its shares to third parties.

In a private company limited by guarantee its members must pay to the company an agreed nominal amount, known as the guarantee, in the event of the company being wound-up i.e. closed-down or liquidated. This kind of company is also legally separate from its owners, has separate legal personality and finances and is responsible for its own debts. Instead of shareholders, however, it has guarantors and, instead of share capital, it has the “guaranteed amount”. The company does not usually distribute its profits to the guarantors but reinvests them to promote its objectives which, as a rule, are of a not-for-profit nature.

A public limited company may offer its shares to the public and must comply with a number of statutory requirements that are far more complex than for private companies.

The name of any limited company, of whichever kind, must be followed by the words or abbreviations that indicate their legal status (the limited liability and the public status, as the case may be) as follows:

  • a private limited company’s name must end with ‘Limited’ or ‘Ltd’ or, in the case of a company registered in Wales, it may use the equivalent in Welsh;
  • a public limited company’s name must end with ‘Public Limited Company’ , ‘PLC’ or, in the case of a company registered in Wales, it may use the equivalent in Welsh.

Limitation of liability

The articles of association of a private company that is limited by shares usually stipulate that the liability of the members is limited to the amount, if any, that is unpaid on the shares which they hold.

This means that, when a company is wound up, a member of the company is liable to contribute to its assets only up to the value of any amount that is still unpaid on the shares that he-or-she holds.

A company’s separate legal personality does not, in itself, confer limited liability upon its members. For example, one can form an unlimited company, although this is quite rare. Since most companies are registered as limited companies, however, the principles of separate legal personality and limited liability are closely connected with each other.

When might shareholders become personally liable for a company’s debts?

Limited liability is a significant benefit which allows shareholders to manage commercial risk, since the so-called “corporate veil” protects them from personal liability for the company’s debts. In certain circumstances, however, the corporate veil can be used in ways that appear to be unjust to third parties, to the company’s creditors or even to the shareholders themselves.

In some cases a court may look behind the corporate veil and decide that it should be lifted to prevent abuse of a company’s separate personality. If the veil is lifted then, depending upon the court’s decision, the members’ right to limited liability may be lost.

Lifting the corporate veil is the exception rather than the rule. The courts are usually very reluctant to lift the veil to impose personal liability for the company’s debts on a shareholder or director.

It is quite hard to identify clear principles regarding the lifting of the corporate veil or to predict its likelihood in a particular case. At present the courts adhere to the following approach:

  • In the absence of fraud, shareholders can rely on the principle of separate corporate personality.
  • Circumstances in which a court might lift the corporate veil are:
    1. when the court construes that a statute, contract or other document requires that the veil be lifted, or:
    2. when the court is satisfied that the company is merely a “façade”, whereby there is an abuse of the corporate form, or:
    3. when it can be established that the company is an authorised agent of its controllers or its members.

Should a company become insolvent then, in certain situations, personal liability may be imposed on its directors and/or other persons involved in its management. This includes situations in which a director is found to have acted improperly regarding the company’s financial affairs, for example by using a credit facility while being aware of the company’s inability to repay that debt, or by continuing to trade despite being insolvent, or by falsifying accounts to defraud the company’s creditors.

Summary: The advantages of a limited company

  1. Versatility: A limited company is well suited for nearly all kinds of business activity.
  2. Flexibility: A limited company can be established with any number of shares and shareholders.
  3. Minimum capital: There are no minimum requirements for authorised or paid-up capital (for private companies).
  4. Limited liability: This protects the personal assets of the company’s members i.e. shareholders.
  5. Claims against tax: Unlike sole traders, a limited company may claim many more business costs as expenses for corporation tax purposes. The majority of the expenses may be offset against the limited company’s corporation tax liability.
  6. Transparency: The key information about a limited company is available, easily and for free, via the Companies House website. Publicly listed companies are subject to extensive disclosure requirements.
  7. Credibility: Clients and contractors usually have greater confidence in limited companies than in other business structures.
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