A company limited by shares is a legal entity that is owned by shareholders, whose liability to company creditors is limited to the amount they agree to pay for their shares. Designed for commercial (‘for-profit’) enterprises of all sizes, a limited by shares company is the most commonly used business vehicle in the UK after the sole trader structure.
Whether you are thinking about starting a business, or simply curious to know more about limited companies, read on to discover the key characteristics of this popular business structure.
Separate legal identity
Companies limited by shares are incorporated at Companies House (the UK registrar of companies) and exist in their own right, separate from the people who own and manage them.
They have independent legal capacity, which means that they are responsible for their own liabilities and actions, just like individual people.
This means that, upon incorporation, a limited company can employ staff, enter into contracts, buy and lease property, borrow and lend money, and sue or be sued in its own name.
Public or private
Limited by shares companies can be public or private, which refers to how they can sell their shares.
Public limited companies (PLCs) are larger entities that are legally permitted to sell their shares to the public through a stock exchange. They require a minimum issued share capital of £50,000 at incorporation.
Private limited companies are privately owned enterprises that can only sell and transfer shares privately. They can be any size and there is no minimum share capital requirement, so they are ideal for startups and SMEs.
A limited by shares company is owned by members, each of whom holds a minimum of one ‘share’ in the business. Thus, they are known as shareholders. The very first shareholders (those who set up the company) are also known as subscribers.
Both public and private companies require at least one member at all times. Any legal person (e.g. an individual or a corporate body) can be a shareholder, and there is no minimum age requirement.
Members provide capital to the company in exchange for shares. They are usually entitled to a portion of the company’s profit, and the right to vote on important decisions that affect the business.
Directors and company secretaries
Directors are responsible for running the company and managing its day-to-day affairs. They are appointed to the role by the members of the company, although it is normal for directors and members to be the same people.
PLCs require a minimum of two directors, whilst private companies only need one. By law, company directors must be at least 16 years old. They can be individual people or corporate bodies, though companies must have at least one ‘natural’ (human) director at all times.
Company secretaries advise and assist directors. PLCs are required by law to appoint at least one qualified company secretary, but this is an optional appointment for private companies.
The ownership of a company limited by shares is divided into shares, each of which represents a percentage of the company. So, for example, if a company issues one share, it represents 100% of the business; if it issues two, each one represents 50% of the company.
The minimum number of shares that a company must issue is one per member. The class, quantity, and value of each member’s shareholdings determine their percentage of ownership, how much profit they are entitled to, and the extent of their control over the company.
Limited liability is one of the main advantages of forming a limited company. Since companies exist as distinct legal entities, they are responsible for their own liabilities (e.g. debts, contractual agreements, and legal actions).
This means that each member’s personal liability for company debts is limited to the sum of money they agree to pay for their shares. Accordingly, shareholders only risk losing the amount the invest (or agree to invest) in the business, in addition to any personal guarantees they provide (e.g. for business loans).
Both private and public companies must adopt a governing document, known as the articles of association. This is a set of rules that regulates the way in which the company is run.
Companies can use default ‘Model’ articles of association, which are prescribed by the Companies Act 2006. Alternatively, they can create their own bespoke articles if the Model articles are unsuitable.
Many companies also supplement their articles of association with a private shareholders’ agreement. This is a private document that clarifies the rights and obligations of members and how the company must operate.
Registered office address
Every company must have an official contact address, known as a registered office. This address, which can be residential or commercial, is used for the delivery of statutory correspondence and is disclosed on the public register at Companies House.
Registered office details must be provided during the company formation process. The address must be situated in the UK jurisdiction (country) of incorporation – i.e. England and Wales, Wales only, Scotland, or Northern Ireland.
Tax on profits
Companies pay Corporation Tax on their profits. That is, the amount of money the business makes, minus its costs (e.g. money spent on salaries and wages, raw materials and stock, business premises and utilities).
Currently, the UK rates of Corporation Tax are as follows:
- 25% main rate – annual profit of more than £250,000
- 19% small profits rate – annual profit of £50,000 or less
If a company’s profits are between £50,000 and £250,000, they may be entitled to ‘Marginal Relief’, which provides a gradual rate increase between the small profits rate and the main rate.
Companies must also register for VAT if their turnover within a 12-month period is greater than £85,000. Voluntary VAT registration is available for companies whose turnover is below this threshold.
As the director and shareholder of a company limited by shares, you can receive a director’s salary (which is paid before the deduction of Corporation Tax) and dividends, which are paid from post-tax profits.
Directors and shareholders can significantly reduce their personal tax liability by paying themselves a low salary topped up with regular dividends.
Companies are subject to stricter reporting requirements than unincorporated businesses, such as sole traders and general partnerships. In accordance with the Companies Act 2006, they must:
- file an annual confirmation statement with Companies House
- prepare annual accounts for Companies House
- submit a Company Tax Return and full statutory accounts to HMRC each year
- report certain changes to Companies House, to ensure the public register remains accurate and up to date
- maintain a number of statutory company registers, including a register of people with significant control (PSC register)
The directors of a company are legally responsible for these duties, but such tasks are often delegated to a company secretary (if the company has one).
Why would I set up a company limited by shares?
You would set up a company limited by shares if you were planning to run a profit-making enterprise, with the aim of generating income for yourself (and your business partners, if applicable).
This type of structure is suitable for businesses of all sizes operating in any industry. It protects the personal assets of shareholders from being used to cover business debts, which is particularly beneficial when entering into high-value contracts, or working in industries with an increased risk of liability claims.
You can form a company by yourself or with other people, rather than operating as a sole trader or setting up a business partnership. Due to the way in which companies are taxed, they allow for greater tax efficiency and long-term tax planning than alternative business structures.
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We hope that you have found this post informative. Please comment below or get in touch with our company formation team if you have any questions, or need help setting up a company limited by shares.