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What is an unlimited company?

Cartoon magnifying glass next to paper files

Not many people know of the existence of private unlimited companies. Although similar to limited companies, they dont have to have the word limited in their company name, making them harder to spot.

Because of their difference from limited companies, this article aims to shed some light on what they are and their advantages and disadvantages.

What is an unlimited company?

Although similar to companies limited by shares, there is one main difference - the shares do not provide a limit on the liability as they do with a limited company.

Apart from that, it has many of the same regulations and restrictions as a limited company. It must be registered with Companies House and have a memorandum and articles of association. There's a director who manages the day-to-day running of the company on behalf of the shareholders, persons of significant control and an annual confirmation statement must still be submitted to Companies House.

What does it mean that shares don't limit liability?

Scrabble tiles that spell out the word share

The main difference arises when insolvency occurs - You could lose everything.

In limited companies, when formal liquidation happens, the creditors can only use the companys assets and the amount of liability thats held in the shares (typically a nominal amount).

However, in an unlimited company, the directors are not protected by the liability held in the shares. This means that creditors will be able to use the personal assets of the directors and shareholders to pay off the liability.

This means that you are responsible regardless of how many shares you own. You could lose everything.

Think of it this way, an unlimited company is registered with Companies House but has the responsibility of a sole trader. Also, while an unlimited company has to submit most of the paperwork as a limited company to Companies House, they may not always have to submit accounts.

Are there advantages?

While not having limited liability can be a disadvantage, it can be a good reason why some company owners decide to use an unlimited company. These advantages can include having a separate legal identity, allowing the company to take out contracts in its own name, rather than the names of the directors and shareholders.

Advantage 1 - Confidentiality

Unlike limited companies, an unlimited company is not required to file annual accounts with Companies House, although the directors still need to prepare the company's financial statements. There are certain rules to this exemption so that during the relevant accounting period, the company must not have been:

  • A parent company of a limited company
  • A subsidiary of a limited company
  • Involved in a Scottish partnership where other parties are limited companies
  • Involved in certain sectors, such as banking or insurance.

Be prepared with reports

If accounts do not need to be filed with Companies House, financial information is not available for public record, meaning the company's affairs are largely hidden from competitors. This means that unlimited companies can look through the financial information of their competitors while keeping their own hidden.

In the same way, shareholders' dividends aren't made public, which could be attractive for some shareholders.

Advantage 2 - Improved Management

Seems shareholders and directors of unlimited companies could stand to lose everything if the company liquidates, which can encourage careful risk management. Even if the shareholders aren't actively involved in the running of the company, they still have a keen interest in the decisions made.

However, this can have the effect of lower risk decisions being made than otherwise would have been taken.

Advantage 3 - Creditor Confidence

Seems shareholders and directors are responsible if the company is liquidated, then creditors can have increased trust that the company will not borrow more than they can afford to pay back. This, with increased risk control, can give creditors greater confidence in the company.

Advantage 4 - Flexible share capital options

Compared to limited companies, with unlimited companies, it is easier to return capital to shareholders. This is because of restrictions imposed on limited companies, as defined by the Companies Act 2006. This flexibility is useful when you're in a group structure, as it gives more options to move capital between entities in the group.

The Disadvantages of an unlimited company

Of course, as with everything, there are also some disadvantages to your company being unlimited.

Disadvantage 1 - Unlimited Liability

If the company has to liquidate, there is no protection for the shareholders, and there is essentially no limit on what they can lose to pay back creditors.

This is by far the biggest drawback to being an unlimited company, and is, in fact, the reason that many companies are limited companies. This is one thing you have to carefully consider before deciding whether it is right for you.

Disadvantage 2 - Missed Opportunities

Because of the unlimited liability if things go wrong, the directors and shareholders may not be inclined to take high-risk opportunities. While this low-risk approach could mean they get a steady amount of smaller jobs, they could miss out on opportunities that could lead to bigger, more profitable jobs.

This careful approach could slow the development of the company and could potentially scare off potential shareholders who will want to see a return on their initial investment.

Disadvantage 3 - Not many people understand it

Because not many business owners have heard of it, it may not be thought of when registering as a company.

Also, any directors who have registered as an unlimited company may find that they have a harder time researching their roles and responsibilities than if they had registered as a limited company. You could also find that some external advisers may not know what it is, so you may have difficulty finding an accountant who knows the ins and outs regarding reporting.

Disadvantage 4 - The advantages don't weigh up

Unless you know exactly what advantages you will get and you know that they will outweigh the disadvantages, then you may find that it's just not worth it.

You may think that having added privacy would be beneficial, but does it compare to having unlimited liability? Some stakeholders may believe that, by hiding your finances, you are trying to hide poor management.

If your unlimited company needs to borrow money, lenders will base their decision partly on whether they believe the money will be repaid, including the security of personal assets. They will also look at whether the company can sustain itself without borrowing. This can mean that lending is harder because personal circumstances can change, and other liabilities can come into play.

How do I form an unlimited company?

An unlimited company is formed in much the same way as a limited one. However, there are a few marked differences, such as only being able to register by using the paper form IN01, rather than being able to register online. To complete the form IN01 to register an unlimited company, you will need the following:

  • The proposed company name, which still needs to meet most of the rules for company names.
  • A memorandum and articles of association - Beware, there are no model articles of association for an unlimited company, meaning you will have to adopt bespoke articles containing an unlimited liability clause.
  • A registered office in the UK
  • Details of at least one individual director.
  • Details of members or shareholders
  • Details of proposed People with Significant Control (PSC's)

Once all of this information has been provided, checked and approved, Companies House will issue a certificate of incorporation for the new unlimited company.

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