In the UK, businesses can choose from various legal structures. A private company limited by shares is one of the most common company types. It’s designed to limit the financial risk of its shareholders while enabling flexible ownership. In this guide, we'll run through what a private company limited by shares is, the pros and cons, and how to set one up.
What does a private company limited by shares mean?
A private company limited by shares is a business structure where the liability of its owners (known as shareholders) is restricted to the value of their shares. Unlike a public limited company (PLC), the shares in a private limited company cannot be offered to the general public. This arrangement makes it a popular choice for small and medium-sized enterprises (SMEs).
💡Editor's insight: "The term 'limited by shares' just means that the liability of the shareholders is limited to the original capital invested. Their personal assets are protected in the event of insolvency."
Key features of a private company limited by shares
A private company limited by shares is one of the most common types of business entities in the UK. Some of the key features include:
Limited liability for shareholders
The main characteristic of a company limited by shares is that shareholders are only liable for the amount they have agreed to pay for their shares. If the company faces financial difficulty, shareholders are not personally responsible for its debts beyond their investment.
Ownership through shares
Ownership of the company is divided into shares, and each shareholder owns a portion of the business. This structure allows for clear division of ownership and profit distribution.
Separate legal entity
A private limited company is a separate legal entity from its owners. This means it can own property, enter contracts, and be held accountable for debts in its own name rather than that of its shareholders or directors.
Private ownership
Unlike public companies, private limited companies cannot offer shares to the general public. The sale and transfer of shares are often restricted by the company’s articles of association, keeping ownership within a closed group of individuals.
Director responsibilities
A limited company must have at least one director responsible for managing the company’s operations. Directors have duties to act in the best interest of the company and comply with statutory requirements, including filing accounts and returns with Companies House.
Company name requirements
The company’s name must include the word 'Limited' or 'Ltd' to indicate its limited liability status. This distinguishes it from other types of business structures.
Corporate governance structure
Private limited companies are governed by a memorandum and articles of association. These outline the rules for operating the company, decision-making processes, and shareholder rights.
Who is the structure right for?
A private company limited by shares is suitable for a wide range of businesses, especially those that want liability protection while retaining ownership flexibility. This structure works well for:
Start-ups that want to separate personal finances from business liabilities.
Family-run businesses that prefer to keep shareholding within a trusted group.
Small and medium-sized enterprises (SMEs) looking for a manageable structure without public listing requirements.
Pros and cons of a private company limited by shares
Pros ✅ | Cons ❌ |
|---|---|
Shareholders are only responsible for company debts up to the unpaid value of their shares | Incorporation requires registration with Companies House and annual filings |
The company can own assets in its own name | Certain details, like financial statements, are available to the public |
Companies can often pay less tax than sole traders or partnerships | There are fees for incorporation and ongoing costs for accountancy and legal compliance |
Corporation tax rates are typically lower than higher-rate income tax | Profits are distributed as dividends, which may be taxed differently from other business incomes |
Incorporating as an Ltd may boost credibility with customers and suppliers |
How to set up a limited company
Setting up a private company limited by shares involves several steps. Here’s a simplified guide, or head to our longer read on how to register a business in the UK.
Choose a company name: The name must be unique and meet specific rules (e.g. avoiding offensive terms).
Appoint at least one director: The director is responsible for the company’s management and compliance.
Decide on shareholders and share allocation: Define who will own shares and how many each shareholder will hold.
Draft articles of association: This document outlines the rules for running the company. Model articles are available, but custom articles can also be drafted.
Register with Companies House: Submit Form IN01 to officially incorporate the company.
Register for corporation tax: Within three months of starting a business activity, register with HMRC for corporation tax.
Comply with ongoing obligations: File annual returns, maintain accurate accounting records, and ensure compliance with company law.
FAQs
What is the difference between a private company and a private company limited by shares?
The term 'private company' is broad and can encompass various structures. This includes companies limited by shares or by guarantee. A private company limited by shares has shareholders and issues shares. On the other hand, a private company limited by guarantee typically operates without shareholders and is common for non-profits or charities.
What are the benefits of a company limited by shares?
Key benefits include limited liability for shareholders, the ability to raise capital by issuing shares, and potential tax advantages compared to sole traders or partnerships.
What types of companies are limited by shares?
Private limited companies and public limited companies (PLC) are the two main types. The former restricts share trading to private arrangements, while the latter allows shares to be publicly traded.
Is limited by shares different from limited by guarantee?
Yes, in a company limited by shares, shareholders invest capital and are liable up to the value of their shares. In a company limited by guarantee, members commit to paying a fixed amount (the guarantee) if the company faces financial trouble, often used by non-profits.
Final thoughts
Choosing a private company limited by shares offers business flexibility, liability protection, and the ability to raise capital. However, it comes with obligations and administrative tasks too. Understanding the pros and cons, along with legal requirements, can help you decide if this structure is the right fit.
Need legal advice? Get in touch today to see how our small business solicitors can help.
References
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant. Bear in mind that tax rules can change and will differ based on your circumstances.