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What is a private company limited by shares?

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Reviewed: 11th September 2019

If you are looking to incorporate your company you may be confused about whether it would be more appropriate to adopt the limited by guarantee or limited by shares model. While the two structures have several similarities, there are some crucial differences, particularly when it comes to how profits can be extracted from the company.

The most common type of company incorporation in the UK is the limited by shares model. This represents the optimal structure for a company which is set up with the purpose of generating profits for its directors and/or shareholders.

The limited by guarantee model, however, is more suited to not-for-profit organisations such as charities and sports clubs, where any profits made are simply reinvested into the core business activities.

The formation of a limited company by shares

A limited company in the UK must be registered with Companies House. This is done by sending Form IN01, the articles of association, and the memorandum of association, along with a £40 registration fee.

Limited liability in a limited by shares company

One of the primary advantages of incorporating as a limited company, as opposed to operating as a sole trader, is that as a company director you are able to benefit from limited liability. This provides a valuable level of protection against liability for company debts in the event of the company slipping into insolvency.

So long as no fraudulent trading or any other type of misfeasance has been committed, and excluding any personal guarantees which may have been given, a director’s personal liability for the debts of their company will be limited to the value of his or her shareholding.

This differs from the position an individual operating as a sole trader would be in should the debts of their business become unmanageable. As there is no legal distinction between a sole trader’s business and themselves as an individual, any debts accrued during the course of their business activities are the responsibility of the individual.

Understanding shareholding and how shares are issued

When a company limited by shares is incorporated, at least one share must be issued; the number of shares allotted to shareholders affects the distribution of dividends, voting rights in shareholder meetings, as well as the extent of shareholders’ liability should the company enter insolvency proceedings. Additional shares can be issued at a later stage in the event of a new business partner joining the firm, or for the purposes of securing investment. Shareholding percentages can be also be altered to reflect a change in ownership through the transfer and re-allotment of existing shares.

Public v Private limited company

A company limited by shares can take one of two forms: a public limited company, or a private limited company. The main difference between the two structures comes down to how its shares can be sold and traded. As the name suggests, a public company trades publically and is able to sell its own shares to the general public and trade on the stock exchange. A private company on the other hand is only able to sell its own shares to interested investors. The vast majority of start-ups are incorporated as private limited companies.

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