What is an unlimited company?
A private unlimited company isn't something that you come across very often (although they may not be obvious as they don't have to use unlimited in their company name). This article aims to shed some light on what they are, and the advantages and disadvantages of them.
So what is an unlimited company?
An unlimited company is very much like a regular private company limited by shares. It must be registered with Companies House and have a memorandum and articles of association. There's a director that 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.
So what's the point of being unlimited if it's the same as limited?
The main difference arises when insolvency occurs - You could lose everything.
When formal liquidation happens and the company is unable to pay off its debts, the creditors will be able to use the personal assets of the directors and shareholders in order to pay off the liability.
This means that regardless of how many shares you own, you are responsible. 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.
It is possible for a limited company to re-register as an unlimited company and vice versa.
What are the advantages?
There are some advantages of becoming an unlimited company, such as 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.
If accounts do not need to be filed with Companies House, then financial information is not available for public record, meaning the affairs of the company are largely kept hidden from competitors. This can mean that the unlimited company could 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 prove to 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 this can have the effect of encouraging 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 a 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 option 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 in order 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 consider carefully 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 it could mean that this 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 limited. You could also find that some external advisers may not know what it is, so you may have a difficulty finding an accountant who knows the ins and outs in regards to 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? It could be seen that, by hiding your finances, you are in fact 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 would be harder due to the fact that circumstances can change and other liabilities can come into play.
So, 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.