Private company limited by shares: definition and advantages

Limited liability companies can be private or public. In this article, we will endeavour to share all you need to know about private companies that are limited by shares with you. 

Keep reading.

What is a private company limited by shares?

A private company limited by shares (LLC) is a type of company incorporated under UK law with the unique attribute of its liabilities being limited to the original starting capital from the shareholders. 

This means that, since the limited company is incorporated as a separate legal entity from its owners or shareholders, the personal properties of the shareholders are protected if the company goes under for any reason.

It is important to point out here that private limited liability companies can be owned by a single individual. What that connotes is that a single person can be both the director and the shareholder at the same time. 

In such a case, the owner of the company is not sharing liabilities with any other shareholder but his company is a separate legal entity from it. That way, if the company faces insolvency, his properties are protected.

Ultimately, the private company limited by shares setup is the most common for small companies.

Can a private company be limited by shares or guarantees?

While a limited liability company cannot be limited by both shares and guarantees at the same time, it can be limited by either of both. This means that a company limited by shares cannot be limited by guarantee at the same time, and vice versa.

A private company limited by shares is usually for profit making and the shares from each shareholder depend on how much capital they are willing to put forward at the start of the company. That way, one person can own more or fewer shares than the other.

In the articles and memorandum of association of the company, the sharing of the shares for each shareholder must be stated clearly for presentation to the Companies House.

The private company limited by guarantee on the other hand has members and not shareholders. This type of company legal structure is most common for charities, cooperative societies, and clubs. The starting capital put forward by the members is more of a guarantee than shares. If the company faces insolvency, the guarantors are liable for the original amount they agreed to guarantee the company.

Differences between a private limited company and a public limited company

There are a few differences between private and public limited companies. Some of these are – 

1. The private limited company’s shares cannot be owned by the public while the public limited company can obtain shares from the public through an IPO (Initial Public Offering).
    
2. It is easier for the public limited company to raise capital from the public while the private limited company can only raise shares from its original starting shareholders.
    
3. A private limited company can easily be sold off if a major shareholder sells his shares while a public limited company is not easily dissolved.

How to form a company limited by shares?

Companies limited by shares, either public or private, are registered with the Companies House. It is important and legally required that company formation be done, and company registration, with the Companies House before the company transacts its first business.

Company formation can be done personally via the Companies House online portal, through a third-party agent or website, or via post. It costs just £12 to register a company in the UK. If you are afraid of this, you can also get help from professionals like HelloPrimo, who will help you with all the administrative steps. 

That said, the following are required for registration and must be kept handy to be submitted as when due during registration with the Companies House.

1. Unique company name
2. Company SIC code (Standard Industrial Classification code) – this is provided on the Companies House website and is used to describe the business activity of the company.
3. Company registered office address – this could either be physical or virtually obtained,
4. Details, including addresses, of the company’s directors, secretary (not compulsory), shareholders, and PSC (persons with significant control).
5. Company’s statement of account – the statement of account must show the initial starting capital, both cash, and kind.
6. The company’s article and memorandum of organization – should be drafted by legal personnel. The Companies House provides a general one that could be used during registration, although you may want to have a unique one.

Advantages of a private company limited by shares

The advantages of a private company limited by shares are as listed below:

• Liabilities are shared among the shareholders.
• The company is a separate entity from its shareholders or owners.
• The company’s assets are the only fair game in case of insolvency and not the personal properties of the shareholders.
• It is easier to raise capital than a sole proprietorship or business partnership.
• The company has more credibility with financial institutions and angel investors.
• The only money the shareholders are liable to lose is the initial shares they put down during company formation and nothing more.

Disadvantages of a private limited company

Everything that has advantages must have some disadvantages. The following are the disadvantages of the private company limited by shares structure of company formation:

• The death or quitting of a major shareholder may mean the end of the company.
• Raising capital is limited to the initial shareholders.
• No single person can be the sole decision-maker. All decisions are subject to a vote and the majority, usually a two-thirds or as stated in the article or memorandum of association, always carry the vote.
• It is not easily scaled down to a business partnership or sole proprietorship if things suddenly become tough for the business.

Conclusion

The legal structure of the private company limited by shares gives the advantage of making the company a separate legal entity from its owner. Thus, limiting the liability of the owners to their initial shares. This is a great way of starting a company.