Choosing the right structure for your business is one of the first and most important steps when setting up a company. While most people are familiar with limited companies, you might have come across the term 'unlimited company' and wondered how it’s different. What does 'unlimited liability' really mean, and why would anyone choose this type of structure?
In this guide, we break down everything you need to know about unlimited companies. We explain how they’re formed, and their pros and cons so you can decide if it’s the right choice for your business.
Meaning of unlimited company
An unlimited company is a type of business structure where the owners (often called members or shareholders) are personally responsible for the company’s debts and obligations. Unlike a limited company, where liability is capped at the amount invested, an unlimited company puts the members' personal assets on the line if the business runs into financial trouble.
This setup is uncommon in the UK but is often chosen by those who prioritise privacy or are confident in their financial stability. Unlimited companies don’t need to publicly file accounts in the same way limited companies do, which is appealing to some business owners who value confidentiality.
How to form an unlimited company
Forming an unlimited company in the UK involves several steps. Despite its unique liability structure, the process is similar to registering other types of companies with Companies House.
Here are the key steps:
Choose a unique company name: Your company name must not be identical to an existing registered business. Check for availability on the Companies House website.
Prepare a memorandum and articles of association: Unlimited companies have a tailored memorandum and articles of association that define how the company will be governed. Legal advice is often recommended to draft these documents to fit the unlimited liability structure.
Register with Companies House: You will need to complete the IN01 form or register online, providing the following:
Company name and registered office address.
Details of directors and shareholders.
The type of company being formed (unlimited company).
Pay the registration fee: The fee for registering depends on the method of submission. Online registration is typically the fastest and most cost-effective.
5. Receive a certificate of incorporation: Once approved, you will be issued a certificate of incorporation confirming the company’s formation and status as an unlimited company.
Advantages of an unlimited company
1. Enhanced privacy for financial records
Unlimited companies in the UK are not required to make their financial statements public. Unlike limited companies, which must file detailed accounts with Companies House, an unlimited company can maintain confidentiality about its profits, losses, and other financial data. This is particularly valuable for businesses wanting to keep competitors, clients, or suppliers from accessing sensitive information.
2. Increased trust and credibility
Operating as an unlimited company demonstrates a high level of confidence and commitment to financial responsibility. Since shareholders have full liability for debts, partners, suppliers, and clients may view the business as more trustworthy and serious about its obligations. This reputation can lead to stronger business relationships and better contractual terms.
3. Flexibility in capital returns
Unlimited companies have more freedom to distribute capital back to shareholders. In a limited company, capital cannot always be returned easily. Limited companies can face certain formalities or reductions of share capital. Unlimited companies face fewer regulatory barriers.
4. Reduced compliance burden
Unlike listed or publicly traded companies, unlimited companies are subject to fewer compliance requirements. This makes them less burdensome to operate from a regulatory perspective. This reduced complexity can mean less red tape for business owners in specific circumstances.
Disadvantages of an unlimited company
1. Unlimited personal liability
The most significant drawback is that shareholders and owners are personally responsible for the company’s debts and liabilities without any limits. If the business cannot meet its obligations, creditors can pursue the personal assets of the shareholders or directors to recover debts. This risk can be substantial, particularly in industries with high financial exposure.
2. Limited appeal to investors
Raising external investment for an unlimited company can be challenging. Potential shareholders or investors are often reluctant due to the personal liability involved. In contrast, limited companies offer a safer proposition for shareholders by capping their financial exposure.
3. Higher risk for personal finances
The financial risk associated with unlimited companies is often seen as a major deterrent for entrepreneurs. Business owners must be highly confident in their market stability and financial management to mitigate the potential impact of losses on their personal wealth.
4. Complexity in structuring and legal advice costs
Setting up an unlimited company typically requires bespoke articles of association and careful legal structuring. Professional guidance is essential to ensure the governance framework appropriately handles the implications of unlimited liability. This guidance leads to increased formation costs compared to standard limited companies.
Unlimited and limited companies: What’s the difference?
Feature | Unlimited company | Limited company |
|---|---|---|
Liability | Unlimited - owners are personally responsible for all debts | Limited to the amount of shares or guarantee |
Privacy | Financial records do not need to be filed publicly | Financial statements are filed with Companies House |
Risk | Higher risk due to personal liability | Lower risk with limited liability |
Popularity | Rare in the UK | Most common business structure |
Should I set up my business as a limited or unlimited company?
💡Editor’s insight: “I always say that the choice between a limited or unlimited company depends on your business priorities. Consider your attitude to risk to help you make the decision. If you are risk-averse and prefer to operate in a safer environment, then a limited company may appeal. On the other hand, if you prioritise privacy and flexibility an unlimited company structure will be more suitable.”
Final thoughts
An unlimited company offers unique benefits but carries significant risks due to unlimited personal liability. While it provides privacy and signals strong financial commitment, the lack of liability protection can be a considerable disadvantage. Understanding the differences between limited and unlimited companies is essential for making an informed choice about your business structure in the UK.
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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.