If you are thinking about starting up a business in the UK, it’s useful to know about the different types of company that can be formed so you can choose the right legal structure for your business.
What ‘business vehicle’ you decide on is typically guided by:
- The type of business you are starting
- Whether you’re starting the business on your own or with others and
- Most importantly your approach to how much financial risk you want to take.
You may of course have decided to set up as a sole trader, or ordinary partnership if you are in business with others, however neither of these business vehicles are a type of ‘company’.
Both are set up through HM Revenue & Customs (HMRC) and mean that financial liability for the debts of the business rest with the individual in a sole trader business, or jointly with the partners in the case of a partnership.
By comparison a ‘company’ in the UK set up through Companies House and if you want to ‘limit’ your financial liability it is much more likely that you will set up a company.
So here we give an insight into the types of company that can be created in the UK and their main characteristics.
Private company limited by shares
This is by far the most common type of company incorporation in the UK, making up on average approximately 95% of all companies registered with Companies House.
All private limited companies must carry the word ‘Limited’, or the abbreviated form ‘Ltd’, as a suffix at the end of their name.
This is the easiest type of company to form as there is no stipulated ‘minimum capital requirement’ (i.e. no minimum amount the company must have in the bank in order to trade) and can be started even with a small initial investment of for example as little as £1.
Importantly also the financial liability of the directors and shareholders is ‘limited’ to the amount of unpaid shares held by them. In other words if a director or shareholder holds 1 share with a value of £1 their financial liability would be £1.
Private company limited by guarantee
In this type of company a guarantor’s liability is limited to a pre-agreed amount that must be paid if the company shuts down.
All non-profit organisations fall into this category of company as the liability limit is usually quite low and is therefore considered to be a safe option for ventures like charities, clubs, unions and other enterprises.
There are no shareholders in this type of company as there is no share capital. The company members double up as guarantors and the liability amount can be as low as £1 in case the company winds up.
Public limited company (PLC)
Often referred to simply as a “public company” or “PLC”, a public limited company is ideal for a large business that makes its shares available to the general public through the stock market.
The financial liability amount of the directors and shareholders is limited to the amount of unpaid shares held by them.
Many PLCs have actually started off as private companies and have then evolved into a public limited company after achieving a considerable measure of business success.
According to company law a business must possess capital of at least £50,000, out of which 25% should have been paid for, before the public company can begin trading legally.
PLCs usually enjoy higher prestige and reputation, therefore typically attracting greater financial backing.
This is the reason many shareholders incorporate a public limited company despite not being listed on the stock exchange as they want to appear larger and more influential in the eyes of investors.
Of all the different types of companies, only PLCs are entitled to raise funds by selling shares and debentures to the public.
Private unlimited company
The major distinguishing factor of this kind of company is that there is no limit to the amount the directors/members need to pay if the company fails and has to be shut down.
This is considered a good option only for those companies that carry a near 0% risk of insolvency.
Also, private unlimited companies are not bound by law to submit annual accounts to Companies House, making them an attractive proposition for those ventures that do not wish to divulge details about their finances.
Other types of company
There are a few other types of company which can now also be set up in the UK to meet the specific characteristics of organisations and these include:
- Community Interest Companies – These can only be registered by organisations which are for the good of the community.
- Charitable Incorporated Organisations (CIOs) – CIOs were made available in Scotland in 2011 and in England and Wales in 2012 and were introduced to provide a more efficient way to register an incorporated charity.
- Right to Manage (RTM) Companies – These companies were enabled by the Commonhold and Leasehold Reform Act 2002 which introduced a right for leaseholders to take over the landlord’s management functions of their block by transferring them to a special company set up for the purpose.
Before You Go …
Read our next article to find out more about the types or classes of share a company can have.
What Are The Different Types of Shares In A Limited Company?
