A private unlimited company is perhaps the most unfamiliar legal structure available to prospective business owners in the UK. In this post, we look at what a private unlimited company is, how it’s different (and similar) to a limited company, its advantages and disadvantages, and how to set one up. Let’s get started.
What is an unlimited company?
Like a limited company, a private unlimited company is a business structure that must be incorporated (registered) at Companies House—the UK’s registrar of companies. An unlimited company must also:
- be formed with share capital (unlimited by shares) or without share capital (unlimited by guarantee)
- have a unique company name
- appoint at least one director
- have at least one shareholder or guarantor (member)
- maintain a registered office address (official correspondence address) in the country of incorporation within the UK
- adopt articles of association (a governing document that sets out the rules for running the company)
Whilst an unlimited company shares many similarities with a private limited company, there are several notable differences between these two structures.
1. Members’ liability for company debts
The members of a limited company have limited liability. They are liable for the nominal value of their shares or the guaranteed amount (in the case of a company limited by guarantee) they agree to contribute toward liabilities. This means that if a limited company becomes insolvent, its members are only liable to the company’s creditors up to this nominal amount.
Conversely, in an unlimited company, there is no cap on the amount members must pay toward business debts in the event of insolvency. Their personal liability is very much unlimited.
If the company is unable to pay its debts and subsequently enters liquidation, the creditors can use the personal assets of members (e.g. their homes, savings, and other assets) to pay off the company’s liability. They risk losing everything.
In an unlimited company with share capital, for example, the allocation of shares defines each shareholder’s rights within the company—but doesn’t set a fixed limit on what each shareholder is liable for.
If an unlimited company has more than one shareholder, their share split would theoretically determine how much each person is liable for (in percentages). However, if the company runs into trouble, and if one shareholder simply can’t pay, the debt would fall at the door of the other shareholder(s).
In this respect, the unlimited company structure is similar to that of a sole trader or traditional business partnership because it offers no financial or legal protection to the business owners.
2. No requirement to file accounts at Companies House
A private limited company must file annual accounts at Companies House every year, even if it’s not currently trading.
This is not a requirement for unlimited companies, provided the company is not a parent or subsidiary firm of a limited company or involved in specific industries (such as banking).
3. Share mobility
Unlimited companies are registered at Companies House and mainly follow the rules set out in the Companies Act 2006. However, limited companies have restrictions on returning capital to shareholders, which are not imposed on unlimited companies. This makes it easier to move capital in an unlimited company.
4. No option for public company status
Private limited companies have a public limited company counterpart that can trade on the stock markets. This avenue is unavailable to unlimited companies; they can only register a private company status.
5. No requirement to include ‘unlimited’ in their name
There are a few instances when a limited company can avoid having ‘limited’ or ‘ltd’ at the end of its name (for example, if it’s a registered charity). However, generally speaking, limited company names need to end with one or the other.
By comparison, an unlimited company can choose whether to use ‘unlimited’ at the end of its name or apply no suffix at all. This can make it tricky to identify an unlimited company.
How to determine if a company has unlimited status
To find out whether a registered company has unlimited status (as opposed to limited status), follow these steps:
- Visit the Companies House search tool
- Enter the company name
- Click on the appropriate result
- Under the ‘Overview’ tab, look at the ‘Company type’ field
It’s worth noting that, apart from an unlimited company not having to use a name suffix, the rules for naming a limited company also apply when choosing a name for an unlimited company.
Unlimited company and limited company similarities
As we touched on earlier, limited and unlimited companies share several characteristics. They are as follows:
- Must be incorporated at Companies House under the Companies Act 2006.
- Appear on the public register at Companies House.
- The same personal appointments are required to form and maintain each type of company—at least one natural director (to run the company) and one shareholder or guarantor (who owns and/or controls the company).
- Identify all people with significant control (PSCs) and tell Companies House who they are. These people hold at least 25% of the shares or voting rights in the company. In most companies, some or all of the members are the PSCs.
- Must maintain an appropriate address as a registered office. It must be situated in the same part of the UK where the company is incorporated (i.e. England & Wales, Wales only, Scotland, or Northern Ireland).
- Required to file a confirmation statement with Companies House on an annual basis.
- Must maintain accurate and up-to-date statutory company registers.
- Company profits are liable to Corporation Tax.
- Required to file a Company Tax Return and full annual accounts with HMRC every year (once they begin trading and become ‘active’ for Corporation Tax).
The advantages of a private unlimited company
There are a few reasons why you may consider setting up an unlimited company rather than a limited company (For comparison, please look at our post on the benefits of operating as a limited company):
1. Financial privacy
An unlimited company does not need to file annual accounts. Consequently, minimal financial information about the business is available on the public register. This confidentiality could appeal to the company’s owners, as their finances are protected from prying eyes (such as those of competitors).
However, this exemption from preparing accounts for Companies House does not apply if, during the relevant accounting period, the unlimited company was:
- the parent company of a limited company
- a subsidiary of a limited company
- a banking or insurance company (or the parent company of a banking or insurance company)
Or if each of the unlimited company’s members was:
- a limited company
- another unlimited company, each of whose members was a limited company
- a Scottish partnership, each of whose members was a limited company
Additionally, the directors must prepare full (statutory) annual accounts for the company’s members and HMRC.
2. Share flexibility
As mentioned, unlimited companies do not have to abide by the Companies Act 2006 when returning capital to their shareholders. This flexibility could be attractive to the business’s owners.
3. Greater motivation to succeed
Because so much is financially at stake for the members of an unlimited company, they will likely show more significant commitment to the business and utilise more effective risk management practices.
This may also benefit third parties, as they recognise that failure would be catastrophic for the members. Thus, the members’ attentiveness won’t be in doubt.
The disadvantages of private unlimited companies
Undoubtedly, there are a few notable downsides to operating as an unlimited company rather than a limited company:
1. Unlimited liability
The greatest problem for an unlimited company is how vulnerable the structure leaves its members. There is no limit to the financial liability of its members if the business fails and cannot afford to pay its debts or maintain other contractual obligations.
2. Financial privacy could raise concerns
The annual accounts of limited companies are disclosed on the public register at Companies House. This transparency can help build trust with third parties (such as prospective customers and suppliers), who can scrutinise companies’ financial management and health before doing business with them.
Since unlimited companies don’t need to file accounts with the registrar, it’s more challenging for third parties to perform due diligence on these businesses. This lack of transparency may be interpreted as an attempt to disguise poor performance or financial management, or it could lead to the decision that working with the company is simply not worth the risk.
3. Fear of failure
The company could be held back from success and growth because its members stand to lose so much if a wrong decision is made or the company ultimately fails. This fear of failure could make them more risk-averse, overly cautious, and hinder the company’s potential.
4. A structure of confusion
Unlimited companies are shrouded in uncertainty. A lack of familiarity with this structure could negatively impact any business relationships that need to be forged. For example, accountants, lenders, and other professional service providers may be wary of any involvement with the company.
How to form an unlimited company
You cannot form an unlimited company online. Instead, you must download and complete the paper form IN01 Application to register a company and send it to Companies House by post.
To complete this form, you need to provide the following information:
- A unique company name
- At least one SIC code (Standard Industrial Classification code) to describe the company’s activities. You can select a maximum of four
- A registered office address in the country of incorporation within the UK
- Details of every director—full name, service address (correspondence address), usual residential address, date of birth, occupation, and nationality
- Details of every shareholder or guarantor—full name, service address, particulars of shares or guaranteed sum
- Information on people with significant control—full name, service address, residential address, date of birth, nationality, and the nature of their control in the company
- Memorandum and articles of association—see the below excerpt from GOV.UK regarding these:
There aren’t any model articles provided for unlimited companies. However, an unlimited company can choose to use model articles as the basis of its own articles of association. The 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.
Upon registration, Companies House will issue a certificate of incorporation. The company can begin trading at any time after that. Within three months, the company must register with HMRC for Corporation Tax. Depending on the company’s circumstances, it may also be necessary to register for VAT and Pay As You Earn (PAYE).
Thanks for reading
We hope this post has answered all your questions about the private unlimited company structure in the UK.
It is a peculiar business vehicle that combines the prestige of a limited company with the high financial risk factor of a sole trader. Because of this, we suggest seeking professional advice before committing your business to this particular model.
Please post a comment below if you have any questions about unlimited companies, limited companies, and the company formation process in general.
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