Limited Company vs Unlimited Company in England and Wales

When structuring your business as a company, it is essential to consider the various types of company structures available to you. Perhaps you intend to incorporate your business into a company, but are not sure what the main difference is between a limited company and an unlimited company. This article will explain the key differences between the two legal structures and then highlight the advantages and disadvantages of both. 

Business Structures

There are several different business structures in England and Wales. The most common ones are:

• sole traders; 
• general partnerships; 
• limited liability partnerships; and 
• companies.

Likewise, within companies, we can distinguish between two different kinds: 

• limited companies; and 
• unlimited companies. 

Further, within private limited companies, there are two forms:

• companies limited by shares; and 
• companies limited by guarantee.

All companies share the commonality that they exist as their own legal entities. This means they can own property, enter into contracts, and be sued as well as sue others. This is why they are considered a type of “incorporated business structure” because the law recognises that they are their own legal person. They are legally distinct from their owners.  

Below, we examine the key differences between limited and unlimited companies in the context of a private company. 

Company Registers

When you incorporate a company in England and Wales, you must maintain a number of company registers at its registered office or at the Companies House. This template includes these company registers.

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Limited Companies

The overwhelming majority of businesses incorporated as companies in England and Wales are limited companies. Of all limited companies, nearly all are those limited by shares. 

As their names suggest, companies have in common the fact that their owners benefit from the legal principle of “limited liability”. 

All limited companies have an obligation to file accounts and keep Companies House up to date with key information regarding the company’s financial position and ownership. Companies House is the public body responsible for regulating companies. Likewise, all companies will have their articles, which are formal documents that outline how directors and shareholders will manage the company. 

Understanding Limited Liability 

Limited liability refers to the legal concept where the owners of a company are only partly liable for their company’s debts. 

Therefore, in the event the company ceases to trade, if it owes other parties money, these parties (often referred to as “creditors”) can only recover their debt from the company’s assets. Importantly, creditors cannot usually pursue the owners if the company does not have sufficient funds.

Companies Limited by Shares 

The basic principle of a company limited by shares is that a company’s owners (“shareholders” or “members”) own shares in the company, usually in exchange for providing the capital to trade and expand or for providing their services to the company (referred to as “sweat equity”). 

Shares are similar to money as their value is linked to the value of the company. They are also a measure of ownership within the company. 

Likewise, the company’s share capital will refer to the shares the company has issued to its shareholders. 

For Example

You own a company called FunCo Limited (“FunCo”), along with your business partners Maryanne and Connell. The number of shares issued to each shareholder is:

We would say FunCo’s issued share capital is 20,000 ordinary shares. This is because 10,000 + 5,000 + 5,000 = 20,000. Likewise, there is only one class of shares. 

Limited Liability in a Company Limited by Shares

If you own shares in a company limited by shares, your liability for the company’s debts will not usually exceed the amount of money you have invested in the company. 

Retuning to the example of FunCo:

When you and your partners incorporate FunCo into a company, each person contributed to FunCo a certain amount of money:

You will note that the amount invested seems to correspond to the number of shares each person owns. In practice, the number of shares does not always equate to the amount of money you invested for various reasons beyond the scope of this article. 

If FunCo makes a profit, because you own twice as much as your partners, you are entitled to 50% of any dividend declared. In contrast, Maryanne and Connel are each entitled to 25%, provided that all shareholders hold the same class of shares with the same dividend rights.

Suppose, after a year of trading, FunCo has a bad year because of an unexpected pandemic. 

Through no real fault of you and your business partners, you spent all of the company’s cash and could only generate £15,000 in revenue. However, you still owe £5,000 to your suppliers. 

In other words, FunCo is £5,000 in debt to its creditors. If you and your partners decide not to invest any more money in FunCo to rescue it, your creditors will want to recover their money. However, if there is no cash and not enough assets to sell to recover the debt, even though you effectively own 50% of the company, you will not be liable for the company’s debt. 

Liability Limited by Guarantee

At the point a company is incorporated as one limited by guarantee, each of the company’s owners (or “members”) states that if the company runs into financial difficulty, they will pay a certain sum of money to the creditors. This is called the “statement of guarantee”. By law, the members will owe no more than this guaranteed amount. 

In practice, the specified sum is generally a nominal amount such as £1. 

Since there are no shares, there is no share capital. Likewise, this makes it considerably more difficult for owners to share in the company’s profits compared to a company limited by shares. 

For the same reason, it is helpful for non-profit organisations to incorporate as a company limited by guarantee. The organisation can own property and enter into contracts. However, the owners will not be liable for the company’s debts beyond the amount guaranteed by them. It also removes the need to transfer shares each time a new owner joins the organisation. 

Unlimited Companies 

As you might guess, owners of an unlimited company do not benefit from unlimited liability. This means creditors can pursue each member of the company if it does not have enough assets to cover its liabilities. 

This is offset by the fact that there are fewer requirements for unlimited companies to file accounts and annual reports with Companies House. Its owners also have greater flexibility in managing the company’s share capital. 

However, if you run a business where limiting your liability is not a concern, but you do not want to disclose information as you would if you were a limited company, an unlimited company may be relevant. 

Key Takeaways 

The key difference between limited companies and unlimited companies is the extent to which the company’s owners are liable for its debts if the company is unable to satisfy its debts. For limited companies, the owners’ liability is either limited by the value of their shareholding in the company (a company limited by shares) or by an amount guaranteed at the time the company was incorporated (a company limited by guarantee). For unlimited companies, there is no limit to the owners’ liability for the company’s debts. Indeed, the vast majority of companies trade using the limited by shares model. 

If you need help deciding if a limited or unlimited company is right for you, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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