Private Company Limited by Shares

What is a Private Company Limited by Shares?

A private company limited by shares, often referred to as a “private limited company” is one of the most prevalent forms of business structure for small to medium-sized enterprises. This structure offers a blend of operational flexibility, legal protection for owners, and an organised framework for raising capital. Shares cannot be offered to the general public on the open market or stock exchange. Instead, ownership is restricted to a defined group of people, often friends, family, business partners, or investors who are known to the company’s founders.

 

Limited Liability

A private company limited by shares is a type of incorporated business entity where the liability of its shareholders is strictly limited to the amount of capital they have invested in the company’s shares. This means if the company encounters financial difficulties or becomes insolvent, the shareholders’ personal assets are not at risk—only the unpaid value of their shares can be called upon to pay creditors.

 

Key Characteristics of a Private Company

• Limited Liability: Shareholders are only responsible for company debts up to the amount unpaid on their shares.
• Separate Legal Entity: The company exists independently from its owners and can enter into contracts, sue, or be sued in its own name.
• Restricted Share Transfer: The company’s articles of association typically restrict the sale or transfer of shares, protecting the ownership structure from outside influence.
• No Public Share Offerings: Unlike public limited companies (PLCs), private limited companies cannot sell shares to the public.
• Perpetual Succession: The company continues to exist even if shareholders or directors change or pass away, ensuring business continuity.
• Minimum and Maximum Shareholders: In the UK, a private limited company can be formed with just one shareholder and one director. The Companies Act 2006 does not specify a maximum number of shareholders, but the company remains “private” as long as it does not offer shares to the public.
• Regulated by Articles of Association: The company operates according to its articles of association, which set out the rules for running the company and the rights of its members.

 

Structure of a Private Company Limited by Shares

A typical private limited company consists of:

• Shareholders: The owners of the company, who invest capital and receive shares in proportion to their investment. Shareholders are entitled to receive dividends (a portion of company profits) and vote on key company decisions at general meetings.
• Directors: Appointed by the shareholders to manage day-to-day operations and ensure legal compliance. In small companies, directors and shareholders are often the same people.
• Company Secretary (optional): Responsible for certain administrative tasks, record-keeping, and compliance. In the UK, appointing a company secretary is optional for private companies.
• Articles of Association: The company’s written rules, governing internal management, decision-making processes, and the rights of shareholders.

 

Share Capital and Classes of Shares

A private limited company raises capital by issuing shares to its shareholders. The company can issue different classes of shares (e.g., ordinary, preference, non-voting) with varying rights on dividends, voting, and return of capital. The value of shares can be nominal (par value) and does not always reflect the market value.

 

Legal and Financial Obligations

Private limited companies are subject to several legal and financial obligations, including:

• Filing Annual Accounts: Preparing and filing annual financial statements with the relevant authority.
• Annual Confirmation Statement: Confirming the accuracy of company information held by the registrar.
• Corporation Tax: Paying tax on company profits at the applicable rate.
• Maintaining Statutory Registers: Keeping up-to-date records of shareholders, directors, and other statutory details.
• Holding Meetings: Conducting regular general meetings and recording minutes for key decisions.
• Compliance with Company Law: Adhering to the Companies Act and other relevant legislation, including rules regarding directors’ duties, financial reporting, and record-keeping.

 

Advantages of a Private Company Limited by Shares

• Limited Liability Protection: Shareholders’ personal assets are protected from company debts.
• Professional Image: Incorporation enhances credibility with customers, suppliers, and partners.
• Flexibility in Ownership: Private companies can have a small, closely-knit group of owners, allowing for efficient decision-making and protection from hostile takeovers.
• Continuity: The company continues as a legal entity despite changes in ownership.
• Tax Planning Opportunities: Various allowances and reliefs may be available, depending on jurisdiction.

 

Disadvantages and Limitations

• Restrictions on Share Transfers: Shareholders may find it difficult to sell or transfer shares due to restrictions designed to keep ownership within a select group.
• Regulatory and Administrative Burdens: Private limited companies must comply with more regulations and filing requirements than sole traders or partnerships.
• Cost of Incorporation and Maintenance: There are costs associated with incorporation, annual filings, and professional fees for accountants or legal advisors.
• No Public Fundraising: Cannot raise capital by offering shares to the public or listing on a stock exchange.

 

Conclusion

A private company limited by shares is a popular corporate vehicle for entrepreneurs who want to protect their personal assets, maintain control over business decisions, and operate within a clearly defined legal framework. While it brings certain obligations and administrative responsibilities, its advantages often outweigh the drawbacks for those seeking a balance of flexibility and security. Anyone considering this structure should seek professional advice to ensure compliance with local laws and to choose the best framework for their business goals.