Of all the business structures available to the prospective business owner in the UK, perhaps the most baffling is the private unlimited company. In this post, we take a look at what a private unlimited company is, how it’s different (and similar) to a limited company, its advantages and disadvantages, and how to set one up. Let’s get started.
What is a private unlimited company?
A private unlimited company is a business structure that, like a limited company, needs to be registered with Companies House, the UK’s registrar of companies.
Whilst it is similar to a private limited company in a number of ways, which we’ll look at shortly, there are a number of differences that set the structures apart.
Liability is unlimited
The shareholders (also known as members) of a limited company are liable for the nominal value of shares they own. This means if a company becomes insolvent, its shareholders must repay creditors this amount. In an unlimited company, there is no cap on the amount that shareholders must pay. Their liability is very much unlimited.
A private unlimited company can operate with or without share capital. In instances when it is running with share capital, the share allocation defines each shareholder’s rights within the company, but does not set a fixed limit on what each shareholder is liable for.
If an unlimited company has more than one shareholder, their share split would theoretically set out who is liable for what – in terms of a percentage. But, if the company runs into trouble, and if one shareholder simply can’t pay – the debt would fall at the door of the other shareholder(s). In this respect, the structure is similar to that of a sole trader, in that it offers zero protection to the business owner.
Accounts aren’t required
A private limited company needs to file accounts on an annual basis, even if it is not currently trading.
This is not a requirement for unlimited companies, provided that the company in question is not a parent/subsidiary of a limited company or involved in certain industries (such as banking).
Unlimited companies are registered at Companies House and mainly follow the rules set out in the Companies Act 2006. However, there are restrictions placed on limited companies when it comes to returning capital to shareholders that are not imposed on unlimited companies. This makes it easier to move capital in an unlimited company.
There’s no public structure
Private limited companies have a public limited company counterpart that can trade on the stock markets. This is not an avenue that is available to unlimited companies, with them all having to take on private status.
Not always an ‘unlimited’ in their name
There are a few instances when a limited company can avoid having ‘limited’ or ‘ltd’ at the end of its name (for example, it is a registered charity) but generally speaking, limited companies need to end with one or the other.
By comparison, unlimited companies can choose whether to use ‘unlimited’ at the end of their name or apply no suffix at all. This can make it tricky to ‘pick out’ an unlimited company.
To check if a company is unlimited:
- Access the Companies House Search the Register tool
- Enter the company name
- Click on the appropriate result
- From the ‘Overview’ tab, look at the ‘Company type’ field’
It’s worth noting that, apart from an unlimited company not having to use a suffix, all the same rules apply to naming an unlimited company that apply to naming a limited company.
Unlimited company and limited company similarities
The two structures share a number of traits:
- As mentioned, both are registered at Companies House under the provisions set out in the Companies Act 2006
- In turn, both appear on the Companies House public register
- The same appointments are required to form and maintain each type of company, with both needing at least one natural director (to run the company), one shareholder/member (who owns the company), and one person with significant control (who holds ultimate control)
- Both need a UK based registered office address
- Both need to file a confirmation statement on an annual basis
The advantages of private unlimited companies
There are a few reasons why you may consider setting up as an unlimited company rather than a limited company (see our post about the benefits of operating as a limited company).
Because an unlimited company does not need to file annual accounts, minimal financial information is available on the public register. This confidentiality could be appealing to the owners of the company, as their finances are protected from prying eyes (such as those of competitors).
As previously touched on, unlimited companies do not have to abide by the Companies Act 2006 when it comes to returning capital to their shareholders. This freedom could be attractive to the owners of the business.
Added impetus to succeed
Because so much is financially at stake for the members, their commitment to the company will be sturdy. This may be seen as a benefit to third parties too, as they recognise that failure would be catastrophic for the members. So, the members’ attentiveness won’t be in doubt.
The disadvantages of private unlimited companies
There are no doubt downsides to operating as an unlimited company.
By far the greatest problem for an unlimited company is how vulnerable the structure leaves its members, because there is no limit to the liability its members have financially should the business get into financial trouble.
Financial privacy could raise concerns
The fact that the company doesn’t need to file annual accounts (that are then displayed on the public register) means that potential customers, suppliers, and other third parties might not be able to do their due diligence. This could lead to the decision that working with the company isn’t a risk worth taking.
Fear of failure
The company could be held back from success and growth because its members stand to lose so much if a wrong decision is made.
A structure of confusion
Unlimited companies are shrouded in uncertainty. The unknown factor of the structure could have a negative impact on any business relationships that need to be forged. For example, accountants, lenders, and other professional service providers may be wary of getting involved with the company.
How to form an unlimited company
Unlimited companies can not be formed online and instead must be incorporated with the IN01 Application to register a company paper document.
To complete the form you will need:
- A unique company name
- To choose at least one SIC code (you can select up to four)
- A UK based registered office address
- Details for at least one natural director (full name, correspondence address, residential address, date of birth, occupation, and nationality)
- Details for at least one shareholder/member (full name, address, and number, currency, and nominal value of shares held – if the company is going to have a share capital)
- Details for at least one person with significant control (full name, correspondence address, residential address, date of birth, nationality, and nature of control)
- Memorandum and articles of association – see the below from GOV.UK in regard to these:
‘There aren’t any model articles provided for unlimited companies. However, an unlimited company can choose to use model articles as the basis of its own articles of association. The articles must not include the provision for the liability of the members to be limited and the members should consider including an article containing power for an unlimited company by special resolution to increase or consolidate share capital, subdivide or cancel shares or reduce share capital and any share premium account.’
Thank you for reading
We hope this post has answered all your questions about unlimited companies.
It is a peculiar business structure that combines the prestige of a limited company with the high financial risk factor of a sole trader. Because of this, we suggest seeking professional advice before committing your business to this particular model.
Please get in touch via a comment if you have any questions about unlimited companies, limited companies, and company formations in general.