What is a limited company?
A limited company under UK law is one registered at Companies House. It must operate within the Companies Act 2006 and is governed by its own articles of association (companies registered before 1.10.2009 may have both a memorandum of association and articles of association). There are different types of limited company but they all have these qualities.
Once registered a company has corporate personality. It is a legal entity (or legal person) with its own legal rights and obligations, separate and distinct from those of its members and directors. The company’s property is its own and is not treated as belonging to the company’s shareholders and directors. The company itself can enter into contracts, employ people, sue and be sued and can be liable if it commits criminal offences. This has many practical implications.
Every company has a constitution in the form of articles (or, for older companies, memorandum and articles).
A company must have both directors and members. (Members are shareholders unless the company is limited by guarantee).
The key feature of a limited company is that it offers limited liability to its members. The company (as a separate legal entity) is liable for its debts and the members and directors are not personally liable (unless they have acted wrongly in some way). The members’ liabilities are limited to paying to the company the amount they have agreed to pay for their shares. This may be a purely nominal amount, for example if the shareholders have each taken one £1 share.
Most companies limited by shares are trading companies, but there are many different types of registered companies and they are used for many different purposes, some of which have nothing to do with running a business.
Although it is possible for companies to be created by royal charter (“chartered companies”) or by Act of Parliament (“statutory companies”), practically all modern companies are created by registration at Companies House. Nearly all companies are now registered on-line, though it is still possible to do it by submitting paper documents.
Fotis Grontas & Associates provides an expert service for the registration of all company types.
The basis of limited liability is that all debts incurred by a company are the company’s liabilities and are not directly the legal liabilities of the shareholders or of the directors of the company. The company is a separate legal person from its shareholders and the directors. The company incurs debts in the course of its business and only the company is liable for those.
In a company limited by shares, the shareholders’ obligation is to pay the company for the shares they have taken in it. Once the shares are fully paid for (and this would usually be the case with a private limited company) no further money is payable by the shareholders.
The members of a company limited by guarantee are bound by a guarantee in the company’s memorandum of association requiring them to pay the company’s debts up to a fixed sum, which is usually £1.
The directors incur no personal liability as all their acts are undertaken as agents for the company. However, there are certain circumstances where liability may be imposed by the court, particularly in respect of wrongful or fraudulent trading. Also some potential creditors of a small limited company may ask the directors to give personal guarantees of the money owed to them. This is routine if a small company requests a bank loan or overdraft or when taking a lease of premises.
Being able to set up a limited liability company quickly, cheaply and easily is an important incentive for those contemplating starting a business venture. It means that personal assets, such as the entrepreneur’s home or other wealth, are not put at risk. If the business fails, the owners can walk away from its debts. Only any capital committed to the company as share capital is liable to be lost if the venture fails. The UK is one of the easiest places in the world to set up a company. It is quick (on-line registration allows companies to be registered within hours), cheap (typically between £50 and £150 for a professional registration service) and easy (with the registered details being submitted on a website form).
Sometimes the easy availability of limited liability is abused, exploited by those who want to set up a business, run up debts and never pay them. Such conduct is fraud, if done deliberately, or may be wrongful or fraudulent trading. Apart from civil liability and criminal sanctions, someone behaving in this way may be made subject to a directors disqualification order. Nevertheless, there are sometimes complaints that it can be too easy for people to act in this way and avoid any legal recourse, at least for a while.