Orr Litchfield

Solicitors and Business Lawyers

Private Companies Limited by Shares

This page provides information about setting up, managing and closing private companies limited by shares and related matters. If you have any specific questions relating to private companies limited by shares, please contact us on +44 (0)20 3126 4520 or by email at enquiries@orrlitchfield.com

1. What is a private company limited by shares?

In the UK, the majority of incorporated businesses are run through private companies limited by shares. A private company limited by shares is a type of company, which has a share capital divided into shares.  The value, class and rights attributable to each share will be set out in the Articles of Association of the Company.  The owners of shares are known as shareholders.

Unlike a company limited by guarantee, whilst the company is a going concern, the shareholders usually contribute to the working capital to the company by paying a sum equivalent to the total nominal value of their shares (together with any share premium) to the company. In most private companies limited by shares, this is usually a relatively small sum.

Whilst shares in a private company limited by shares may not be issued at a discount, the Articles of Association of the company may provide that shares must be fully paid or that they may remain partly paid or unpaid prior to an insolvent winding up.

However, upon an insolvent winding up, the shareholders will only have to make a contribution to the liabilities of the company to the extent that the total nominal value of their shares have not been paid to the company.

The majority of the features of a company limited by shares are the same as those for a private company limited by guarantee. It has independent legal capacity. Accordingly, it can enter into contracts in its own right, own property and other assets, and employ individuals.

2. Key features of a private company limited by shares?

(a) Independent legal capacity.

(b) No minimum issued share capital.

(c) Shares cannot be offered to the public.

(d) Liability for shareholders to contribute capital while company is a going concern (although the Articles of Association of the company may provide that shares may remain partly paid or unpaid prior to an insolvent winding up).

(e) Upon an insolvent winding up, the shareholders liability is limited to the outstanding unpaid nominal value of their shares (if any).

(f) The company must include the word ‘limited’ in its name (except in the case of certain older companies).

3. What are private companies limited by shares used for?

Private companies limited by shares are used as a practical way for business owners to establish, operate and manage businesses. Company law and the constitutional documents of the company provide a clear structure for the company and the financial liability of the members is limited.

Where the owners wish to have the benefit of limited liability, they will usually set up a private company limited by shares unless the company is to be a charity or other non-profit organisation (such as sports clubs, workers co-operatives, and membership organisations) or they are intending to offer shares to the public.

They are commonly used to run trading businesses where the organisation:

(a) may need a significant amount of capital or financial flexibility (for example, with regards to raising equity or debt finance),

(b) intends to distribute the profits to shareholders and/or grow and sell its business (or the owners intend to sell their shares in the company), and

(c) wishes to have the benefit of limited financial liability (for example, when entering into contracts) and a clear structure for running and managing the organisation.

A company limited by shares is likely to be a more suitable form of company where the company is to be set up to run a profit-making business in which the shareholders will keep the profits. This is because its structure is more flexible from a financial perspective (for example, with regards to raising finance) and will be more familiar to third parties (for example, banks) than a company limited by guarantee.

4. Who can own a private company limited by shares?

A private company limited by shares is owned by its shareholders. Any legal person (for example, individuals, companies or LLPs) may be a shareholder.

There is no statutory provision prohibiting a child from owning shares. However, at common law, a child will not be bound by a contract to buy shares. Accordingly, it may be difficult to enforce payment for any shares against a minor. For this reason, the Articles of Association of some companies require all shareholders to be at least 18 years old.

A company limited by shares must have at least one shareholder. There is no maximum number of shareholders that a company can have.

5. Who are the Shareholders of private companies limited by shares?

The first shareholders of a company limited by shares are the legal persons who subscribe to the company’s Memorandum of Association when it is incorporated.

The Articles of Association will contain provisions relating to shareholders including any qualifications for being a shareholder, the process for issuing and applying for any new shares and any procedures relating to the transfer of shares.

Part 3 (Shares and Distributions) of the current model Articles of Association for a company limited by shares (prescribed by The Companies (Model Articles) Regulations 2008) contains various provisions relating to shares and distributions. Paragraphs 21 to 27 of those Articles of Association relate to shares and include provisions relating to the issuing, transfer and transmission of shares.

Paragraph 22 of the model Articles of Association provides that (subject to the articles), the company may issue shares with such rights or restrictions as may be determined by ordinary resolution. It also states that the company may issue shares which are to be redeemed (or are liable to be redeemed at the option of the company or the holder), and that the directors may determine the terms, conditions and manner of redemption of any such shares.

Paragraph 26 of the model Articles of Association contains provisions relating to share transfers. It provides that shares may be transferred by means of an instrument of transfer in any usual form or any other form approved by the directors, which is executed by or on behalf of the transferor.  Importantly, it also provides that the transferor remains the holder of a share until the transferee’s name is entered in the register of members as holder of it and that the directors may refuse to register the transfer of a share.  It is common to remove or limit the directors’ right to refuse to register a share transfer.

Paragraph 27 of the model Articles of Association contains provisions relating to the transmission of shares. It provides that if title to a share passes to a transmittee, the company may only recognise the transmittee as having any title to that share. It goes on to provide that transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder’s death or bankruptcy or otherwise, unless they become the holders of those shares.  

Any new members of a company limited by shares must be entered in the register of members kept by the company. Similarly, their names should be removed when they cease to be members.

The model Articles of Association provide that a company limited by shares must issue each shareholder, free of charge, with one or more certificates in respect of the shares which that shareholder holds.

A company limited by shares may have different classes of shares with different rights. Where there are several shareholders, it is common for the Articles of Association to be supplemented by a shareholders’ agreement containing various rules, rights and duties relating to shareholders.

6. Who can be directors of a private company limited by shares?

A company limited by shares must have at least one director.

The first directors of a company limited by shares are those specified in the company formation documents when it is incorporated.

The Articles of Association will contain provisions relating to directors including any rules relating to such matters as their appointment, termination and payment.

Part 2 (Directors) of the current model Articles of Association for a company limited by shares contains various provisions relating to directors. Paragraphs 17 and 18 of those Articles of Association relate to the appointment and termination of the appointment of directors.

7. Does a private company limited by shares require a company secretary?

No. However, they may choose to do so. The current model Articles of Association for a company limited by shares refer to a company secretary in two places – Paragraph 9 (Calling a directors’ meeting) and paragraph 49 (Company seals) but, in each case, it uses the words “…the company secretary (if any)…”.

8. How do you form a private company limited by shares?

Companies limited by shares are set up in a similar way to private companies limited by guarantee. Any person wishing to establish a company must file the following documents with the Registrar of Companies in the UK and pay an incorporation fee:

(a) An Application form to register a company;

(b) The Memorandum of Association of the Company; and

(c) The Articles of Association of the Company.

9. What information is required to prepare an application form to register a company limited by shares?

In order to complete an Application form to register a company limited by shares, the applicant (or its agent) will require the following information:

(a) Directors - The names and addresses of the director(s). The application must include their countries of residence, nationality, date of birth, addresses and occupations.

(b) Shareholders - The names and addresses of shareholder(s).

(c) Company secretary - The names and addresses of any company secretary.

(d) People with Significant Control over the company (PSCs) - The names and addresses of any PSCs and information regarding the nature and extent of their control.

(e) Company name - The name must not be the same as or similar to the name of a company already on the Companies Register. In addition, it should not be misleading or offensive.

(f) Registered office – The formal registered office address of the company for correspondence and legal documents.

(g) Statement of capital - The value and number of the shares to be subscribed for by each initial shareholder of the company.

(h) Standard Industrial Classification ‘SIC’ code - These codes explain the nature of the company’s trading activities. A company can have up to 4 SIC codes.

While the majority of this information is normally on the public record, it is possible to elect to keep personal addresses private and include a service address instead.

10. What is included in the Memorandum of Association of a company limited by shares?

All limited companies must have a Memorandum of Association.

The Memorandum of Association of a company limited by shares is now a very simple document. In relation to new companies, it now usually only states the name of the company, the name of the subscriber to the Memorandum of Association (or, where there is more than one, each of them), a statement that they agree to become a member of the company and the date.

In older companies, the Memorandum of Association is likely to be longer. In particular, it is likely to contain a series of provisions setting out the objects of the company and related powers to manage it and short statements as to the capital of the company and liability of its members. Equivalent provisions are now contained in the Articles of Association of new companies.

11. What is included in the Articles of Association of a company limited by shares?

All limited companies must have Articles of Association.

The Articles of Association of a company limited by shares contain a range of provisions relating to the running and management of the company. This may include, provisions relating to directors’ powers and responsibilities, decision-making by directors, the appointment of directors, shares, dividends and other distributions, capitalisation of profits,  the organisation of general meetings, voting at general meetings, administrative arrangements, and directors’ indemnity and insurance.

Unless bespoke Articles of Association are created and maintained for a company limited by shares then the Model Articles of a company limited by shares created pursuant to the Companies Act 2006 and the Companies (Model Articles) Regulations 2008 apply by default. They will also apply to the extent that they are not excluded.

12. Model company formation documents for private companies limited by shares

It is possible to use model Memorandum and Articles of Association when setting up a company limited by shares. These are very simple documents. The model Articles of Association, in particular, may not be appropriate for certain companies.

13. Written resolutions

Ss288-300 of the Companies Act 2006 contain a statutory procedure for written resolutions of private companies (whether limited by guarantee or limited by shares). This procedure cannot be overridden by the company’s Articles of Association.

The statutory procedure for written resolutions cannot be used in relation to (a) a resolution under section 168 of the Companies Act 2006 removing a director before the expiration of his period of office, or (b) a resolution under section 510 removing an auditor before the expiration of his term of office.

14. Converting to a company limited by shares

Part 7 (Re-registration as a means of altering a company's status) of the Companies Act 2006 makes provision for a private company limited by shares to re-register as:

(a) a public company (see sections 90 to 96 of the Companies Act 2006); or

(b) an unlimited company (see sections 102 to 104 of the Companies Act 2006).

However, there is no statutory procedure for re-registering a company limited by shares as a company limited by guarantee. However, it is possible to achieve the same effect by:

(a) Changing the name of the existing company limited by shares so that it may be used by the new company limited by guarantee;

(b) Registering the new company as a company limited by guarantee; and

(c) The two companies entering into a business sale agreement or asset sale agreement (as the case may be) to transfer the business and/or assets from the company limited by shares to the new company limited by guarantee.

It will also be necessary to deal with a number of administrative, financial and practical issues as the new company will be a separate legal entity (for example, tax registrations and bank accounts).

15. Exemption from requirement to use “limited” under Section 60 Companies Act 2006

S59 Companies Act 2006 provides that “the name of a limited company that is a private company must end with “limited” or “ltd” (or welsh equivalents). However, Ss60-61Companies Act 2006 sets out some exceptions to this rule so that certain types of companies can apply to dispense with the word ‘limited’ or “ltd”. In so far as this provision relates to companies limited by shares, it must have been registered in Great Britain on 25th February 1982, and had a name that, by virtue of a licence under section 19 of the Companies Act 1948 (or corresponding earlier legislation), did not include the word “limited” or any of the permitted alternatives. There are similar provisions for companies registered in Northern Ireland.

These companies will remain exempt provided that they continue to meet 2 conditions and do not change their name. The conditions are (i) the objects of the company are the promotion of commerce, art, science, education, religion, charity or any profession, and anything incidental or conducive to any of those objects, and (ii) that the company's articles meet various financial criteria.

16. Winding up a private company limited by shares

It may be necessary to wind up a private company limited by shares because it is no longer required even though it is solvent or because it has become insolvent. In each case, the procedure for winding up a private company limited by shares is very similar to that for a private company limited by guarantee.

Unless specified otherwise in the Articles of Association, a resolution to wind up a private company limited by shares will require a special resolution (75% of the votes of the members in attendance at the relevant meeting). Procedural rules relating to, among other matters, notice and holding of meetings must be followed. The quorum for general meetings is 2 members (unless the Articles of Association specify otherwise). However, where the company only has one member, the quorum will be one.

17. What are the differences between companies limited by shares and companies limited by guarantee?

 

Company limited by shares

Company limited by shares

(a) Are members liable for the company’s debts on a winding up?

Yes. Liability is limited to the amount of the relevant member’s shares

Yes. Liability is limited  to the total outstanding nominal value of the relevant shareholder’s shares

(b) Do members have to contribute to the capital of the company when it is solvent?

No

Yes. However, depending on the Articles of Association, these may be fully, partly or nil paid

(c) Are members’ contributions an asset of the company?

No. There are no member’s capital contributions unless and until insolvent winding-up

Yes. They form part of the working capital of the company

(d) Can it dispense with the word ‘limited’ form its company name?

Yes (subject to certain conditions)

No (except in very limited circumstances)

(e) Can membership of the company be offered for sale to the public

No

Yes, but only where it is a public company

(f) What are the main uses for the company

Charities and other not for profit organisations

Trading organisations

 

18. What are the advantages and disadvantages of companies limited by shares?

The main advantages of a company limited by shares are (a) independent legal personality (so that it is responsible for its debts and liabilities and the liability of members is limited save in certain cases, such as fraud), (b) the enhanced level of credibility implied by limited company status, (c) the stability of a clear set of statutory and constitutional rules which may assist the company to achieve the company’s objectives, and (d) the potential for efficient tax and financial planning (by way of example, national insurance contributions are not payable on dividends).

The disadvantages of being a company limited by shares include (a) the fact that details of the members, directors, constitutional documents and accounts become part of public record, (b) the increased setting up and running costs arising from statutory compliance, increased administration and ongoing filing requirements at Companies House, and (c) corporation tax will be payable on the profits of company.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full Legal Notices on our website or contact us for further information.

This page reflects our view of the law at the date on which it was created or last updated. Whilst we aim to keep this information up to date, we do not do so on a regular basis.

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