Although unlimited companies are registered at Companies House and share many attributes of private limited companies such as having members/shareholders and directors, the defining aspect of an unlimited company is that its shareholders are jointly and severally liable for the company’s debts in the event that it becomes insolvent.
The fact that there is no limit on the liability of shareholders to personally contribute towards any monetary shortfall on winding up, generally makes unlimited companies a less attractive choice of company formation when compared to limited companies. However, there are certain benefits to unlimited companies, which we will discuss below.
What is the difference between a limited company and an unlimited company?
The vast majority of companies in the UK are limited companies. According to Companies House statistics for 2018 – 2019, there were only 4,291 private unlimited companies in 2019, as compared to over 4 million private limited companies. But there are some significant exceptions to the rule, including the private family owned bank, C. Hoare & Co. which prides itself on its unlimited status:
“We continue to be owned entirely by the Hoare family on an unlimited liability basis with no external financing. As a result, we have a highly conservative attitude to risk which is monitored closely and managed within strict limits.”
A limited company is defined under section 3 (1) of the Companies Act: “A company is a ‘limited company’ if the liability of its members is limited by its constitution. It may be limited by shares or limited by guarantee.” The ‘liability’ in either case refers to the legal requirement for the members/shareholders to personally cover any monetary shortfall relating to company debts in case of insolvency. Limiting this liability, i.e. forming a limited company, essentially prevents creditors from pursuing company debts from shareholders personally (beyond the stake in their shareholding). The choice of ‘limited by shares or limited by guarantee’ means:
- Shares – the liability of members is limited to the amount the shareholders have agreed to pay for their shares.
- Guarantee – the liability of members is limited to the amount of the guarantee set out in the company’s articles (often a nominal amount).
Section 3 (4) goes on to define an unlimited company: “If there is no limit on the liability of its members, the company is an ‘unlimited company.” This definition itself provides a very clear distinction between limited and unlimited companies. The former includes a limit on the liability of members, i.e. the sum they paid for their shares or the amount of the guarantee, whereas the latter has no limit on the liability of members.
What are the benefits of an unlimited company?
Despite the lack of any limit to liability for its members, there are some notable benefits of unlimited companies:
- Confidentiality – unlimited companies are generally exempt from the requirement to file annual accounts with Companies House*. As such, they are able to keep their financial affairs private which can provide an advantage if they do not wish to disclose their finances, e.g. turnover and the amounts paid in dividends to their competitors, etc. Furthermore, shareholder dividends can remain private, which may be attractive to members.
- Simplicity – restrictions on return of capital, and return of capital to shareholders, which are contained in the Companies Act 2006 do not apply to unlimited companies. As such, capital can be moved more freely, e.g. between associate companies, compared to limited companies.
- History – in some cases, companies which have a long family history will be able to promote their values of family succession and low risk approach by not limiting their liability, e.g. C. Hoare & Co. – see above.
- Confidence – since its members have far greater personal exposure to the financial risks of business failures, third parties, e.g. clients and creditors may perceive an unlimited company as being at lower risk of insolvency. Although unlimited companies will normally have sufficient reserves of capital and are unlikely to rely on credit, this potentially makes it easier for them to obtain credit if required.
- Prudence – directors and executive management may adopt a more risk-averse approach to business decisions, since members often have far more at stake than in a limited company.
*An unlimited company is still required to file annual accounts with Companies House if it is:
- the parent company of a limited company
- a subsidiary of a limited company
- involved in certain activities such as banking and insurance
What are the risks of operating an unlimited company?
There are several drawbacks to forming an unlimited company, some more obvious than others:
- Liability – the biggest risk of an unlimited liability company is evident in its name. Shareholders are heavily exposed to the full extent of any financial fallout in the case of company insolvency and are personally responsible for repayment of creditors. As such, it may be difficult to attract directors and shareholders.
- Carefulness – although being more risk-averse can be viewed as beneficial to unlimited companies on the one hand, on the other hand being too cautious can impact the risk-reward aspect of running a business. Opportunities may be missed if the company always avoids risky ventures.
- Transparency – in a world where transparency is increasingly seen as a positive trait, not filing annual accounts may be viewed with a degree of suspicion by potential clients and partners. As such, the confidentiality of financial affairs can be a double edged sword.
- Personal guarantees – although unlimited companies are seen as more risk-averse, lenders may be more inclined to investigate the solvency of each shareholder and are potentially more likely to ask them for personal guarantees, etc.
- Unknowns – because there are hardly any unlimited companies in existence, they are a virtual unknown in the wider business community; it may be necessary to explain the reasons for operating an unlimited company to potential investors and partners, etc.
Who usually forms an unlimited company?
This type of business structure is unusual but, as has been outlined above, there are certain benefits to forming an unlimited company. It would normally be suitable for a business that wishes to keep its company accounts private and which has a very low (or ideally no) risk of insolvency.
In terms of financial risk, an unlimited company is similar to a sole trader or partnership, and it may be a suitable option for a sole trader or partnership that is not worried about liability, but would nevertheless like to trade as a corporate entity.
How do I form an unlimited company?
The process of setting up a private unlimited company is much the same as for a private limited company. It must be registered with Companies House in line with the Companies Act 2006; this process is known as incorporation and involves:
- Choosing a company name – although this must comply with the general company name rules, there is no requirement to use the term ‘Unlimited’ after the official name, i.e. as compared to the general requirement to affix ‘Limited’ or ‘Ltd’ in the case of limited companies.
- Choose directors and company secretary – there must be at least one director but a company secretary is optional.
- Designate the shareholders – there must be at least one (who can also be the director). As with a private limited company, there is no minimum capital requirement to register a private unlimited company.
- Identify people with significant control (PSC).
- Prepare a memorandum of association and articles of association. However, there are no specific model articles provided for unlimited companies. As per government guidance, 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.”
- Check what records the company needs to keep. Although annual accounts do not need to be filed with Companies House, accounts still need to be kept for tax purposes.
- Register the company. This can be done online when registering a limited company – but in the case of unlimited companies registration must be filed using paper (PDF) form IN01.
Re-register an unlimited company as a limited company
- A special resolution has been passed agreeing that the company will be re-registered as a limited company by shares or guarantee.
- The company has not previously been re-registered, i.e. gone from being a limited company to an unlimited company.
- The company makes any relevant changes to its name and articles.
- An application for re-registration is delivered to Companies House in accordance with section 106 of the Companies Act.
It is similarly possible to re-register a limited company as an unlimited company if all the members of the company have assented and the company has not been previously re-registered, i.e. gone from being an unlimited company to a limited company. Sections 102 – 104 of the Companies Act deals with this type of re-registration.
Find out more about unlimited companies…
To find out more about unlimited company structures or if you would like some help in forming an unlimited company, get in touch with Quality Company Formations. Call our Company Secretarial Team on 0203 984 5389 or email firstname.lastname@example.org and we will be happy to discuss, provide a quotation and form your unlimited company.