COMPANIES: TYPES OF COMPANY IN THE UK

Although there are several different ways of creating a company in the UK most are created through the very straightforward process of registration.

(A) A NEW LEGAL ENTITY Setting up a new company in the UK involves registering or ‘incorporating’ the new legal entity at Companies House, which keeps records of company information and makes it available to the public. The principle of a company as a legal entity has its roots in the common law and was confirmed in the case of Salomon v Salomon and Co Ltd (1897). This case verified that it is the company itself, (and not its owners), which owns property, is liable for debts, can sue or be sued or can be a party to a contract. A company can be owned by multiple people or by just one individual, in which case it will be known as a single-member limited company, usually with a sole director. UK Company law is guided by the common law but is largely governed by legislation, most importantly the Companies Act 2006. There are three main types of registered companies.

(B) COMPANIES LIMITED BY SHARES Companies limited by shares account for the majority of private companies registered in the UK. This is probably due to the fact that the shareholders’ personal finances are protected and in the event of liquidation they only risk losing the amount they have invested in the company in purchasing shares. A shareholder is a person who buys and holds shares in a company which has a share capital. He or she becomes a member once their name is entered onto the company’s Register of Members, and on this basis, shareholders are all members. The terms can usually be used as synonyms when dealing with companies limited by shares. A company must have at least one shareholder and there is a clear separation between those who own the company as shareholders and those who run the company. The directors who manage and control the company are collectively referred to as ‘the board’. It is not a requirement for a director to be a shareholder, but generally they are. This type of company can be a private limited company (Ltd) or a public limited company (plc), and while both must be formed in compliance with the Companies Act 2006, there are significant differences between the two. For example, unlike a private limited company, setting up a plc requires a minimum capital of £50,000 and the plc can, if it chooses, offer its shares for sale to the general public. In either type of company limited by shares, the people who form it are called the ‘founders’ or ‘promoters’, and they must compile all the required set-up documentation to file with the Registrar of Companies at Companies House.

(C) COMPANIES LIMITED BY GUARANTEE Companies limited by guarantee are usually used for charities, clubs and other similar bodies and must be private rather than public. Most are not-for-profit companies, meaning that they do not distribute their profits to their members but either retain them within the company or use them for some other purpose. Companies limited by guarantee do not have a share capital, and consequently, their members are not shareholders. This type of company requires at least one member and that member, or multiple members, undertake to pay a specified amount of the company’s debts if the company is wound up. If the amount guaranteed is not sufficient to satisfy the company’s debts the liquidator can ask the previous year’s members to contribute towards liabilities incurred during that period.

(D) PRIVATE UNLIMITED COMPANIES Private unlimited companies are quite rare and as a general estimate there are fewer than 5000 of them currently registered at Companies House. It may not always be obvious that a company has this structure because they are not required to use ‘unlimited’ in their name. This low number is probably largely due to their very substantial drawbacks, not least that the members have unlimited liability for the company’s debts and liabilities. An unlimited company can only be private and does not have to file annual returns or financial statements with Companies House.