How Shelf Companies Lost Their Appeal and What to Do Now
Also known as a ready-made company or an off-the-shelf company, a shelf company is a pre-registered business you can buy and customise.
Key Takeaways
- A limited company is any business whose legal structure limits the risk exposure of the owners and investors to the money invested in the business.
- There are three main types of limited companies in the UK: company limited by shares, guarantee, and limited liability partnerships.
- All the members of the entity must have limited liability protection for the structure to qualify as a limited company.
- Limited companies must adhere to the stipulations outlined in the 2006 Companies Act alongside the provisions outlined in their articles of association.
In this article, you will find everything you need to know about limited companies and the advantages and disadvantages of forming one. We show how limited companies are subject to stricter compliance requirements but still offer safety and security to company owners who want minimal risk exposure while doing business in the UK.
What Is a Limited Company?
A limited company, as per UK company law, is characterised by three key features —
- Legal incorporation — It’s a business entity formally registered as a legal person.
- Separate legal identity — The business stands apart from its owners, allowing it to engage in contracts under its name.
- Responsibility and protection — The company assumes accountability for its actions, debts, and financial obligations.
Owners of limited liability companies are protected from personal responsibility for business debt, which is restricted to the value of shares or guarantee given in the business. For example, If a company has 1 shareholder and subsequently issues 1 share at a nominal value of £1, then the liability of the shareholder is £1.
What is a Limited Liability Company?
One of the main principles of the limited company is called ‘limited liability.’
In the eyes of the law, since an incorporated business carries a separate legal identity the owners cannot be held responsible for the actions of the business.
Therefore, if the company becomes insolvent, or is sued by a third party, its directors and investors cannot be held personally liable. Their personal assets cannot be used to settle any of the company’s obligations.
Warning
Situations where investors and owners of a limited company can be held personally liable. If the business —
- Continues trading and incurring obligations after it becomes insolvent.
- Takes payments from clients, knowing that they do not have the capacity to fulfil orders.
- Sells assets to themselves or a third party at a rate below the market price.
- Engages in fraudulent practices and provides misleading information to partners or financial institutions.
- There is negligence in operations such as overlooking violations in employee contracts or health & safety standards.
How many types of limited companies are there in the UK?
There are three main types of limited companies in the UK. In all types, the common feature is that the liability of the owners is typically limited to the amount paid (or due to be paid) for company shares, the guarantee provided, or their investment in the business.
Insight
The three types of limited liability companies are —
- Limited liability company — There are two types of companies limited by shares: private company limited and public limited. A public limited company (PLC) avails its shares to the public through the London Stock Exchange while a private limited company (LTD) usually sells shares to individuals or entities in their network and is not listed on the exchange.
- Company Limited by Guarantee — The company is owned by guarantors and the liability is limited to the value of the guarantee.
- Limited Liability Partnership (LLP) — The company is owned by the partners who manage the business’s operations, and their liability is limited to their investment.
Read also: Sole Trader (or Sole Proprietorship) Explained
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What are the main features of a Limited Liability Company (PLCs and LTDs)?
A public or private company limited by shares is the most popular type of limited company in the UK. The idea is that you set up a company that is a profit-making business and you can keep surplus income for yourself. With a company limited by shares, you can set it up as an individual or with multiple other people/companies with whom you share a common vision. Each shareholder has financial protection due to limited liability.
| Features of Limited Liability Companies | ||
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| Feature | LTD | PLC |
| Ownership |
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| Supervision |
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| Share capital |
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| Shares |
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| Directors |
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| Profit distribution |
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| Annual General Meeting (AGM) |
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| Company Secretary |
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Key facts about limited liability companies
- The company is a separate entity responsible for its income, assets, liabilities, and debts.
- A private limited liability is the most common company structure for medium and small businesses in the UK.
- The company is owned by shareholders who buy shares, to invest their money in it. Each shareholder’s percentage of ownership depends on the number and value of the shares.
- Financial liability for shareholders is limited to the value of those shares so if the company cannot pay its bills, shareholders are only asked to pay the nominal value of those shares.
- Profits are distributed based on how much the company shareholders own and are issued as dividend payments although it is common to reinvest a percentage of profits into the company.
- Shareholders appoint directors who manage the daily operation of the company for them and sometimes they (shareholders) are the directors.
Why form a company limited by shares?
A company limited by shares is a type of business that may suit you if you’re —
- Interested in starting a money-making business for yourself and/or your partners.
- Seeking to set up a private limited company structure that allows you to sell a percentage of it to investors as a means of raising additional capital.
- Not interested in being held personally liable for the debts of the company or any other legal obligation arising from company activities.
- Prefer presenting yourself as a brand to enhance the professional image of your business and credibility in the eyes of clients, investors, banks, and other stakeholders.
What is a company limited by guarantee?
It is a company used by non-profit organisations or charities where surplus income is reinvested in the business rather than owners taking it for themselves.
Key facts about companies limited by guarantee
- The company is a separate legal entity responsible for its income, assets, liabilities, and debts.
- The business does not issue shares and there are therefore no shareholders, instead, the company has guarantors who financially back the business with a predetermined sum of money in the event of the company being wound up.
- The personal liability of a guarantor is fixed and is called a guarantee, which is what they would have to pay if the company cannot afford to pay its debts or meet any other legal obligation.
- Guarantors appoint directors to handle the company’s daily operations, and they commonly take on the role themselves.
Why form a company limited by guarantee?
You can opt for a company limited by guarantee if you are —
- Interested in forming a non-profit entity such as a social enterprise, sports club, or cooperative.
- Seeking to have a business where profits are used to advance its goals and promote its aims, but not for the financial gain of the guarantors.
- Personal liability is limited by the guarantee, and this is the total amount the company would need to pay if it couldn’t afford its debts.
- The structure creates a professional image and improves credibility as there is often a preference for dealing with limited companies rather than sole traders.
What is an LLP?
An LLP is a business structure commonly chosen by professional services firms, such as law firms, accounting practices, or consultancy agencies. Unlike traditional partnerships, where partners may be personally liable for debts incurred by the business, an LLP provides limited liability protection to its members.
Basic features of an LLP
- An LLP operates as a separate legal entity, protecting its members from personal liability for the partnership’s debts and obligations.
- The liability of each member is limited to the extent of their investment in the LLP and any personal guarantees they may have provided.
- LLPs are managed and controlled by their members, who typically contribute to decision-making processes and the business’s day-to-day operations.
- Profits and losses are shared among the members according to the terms outlined in an LLP agreement.
Why form an LLP
- Suitable for professional service providers seeking to mitigate personal liability risks.
- Offers flexibility in management structure and decision-making processes.
- Provides a transparent framework for profit-sharing and governance.
- Enhances credibility and professionalism, particularly in industries where clients prioritize limited liability protection.
Limited Company Vs Unlimited Company
With unlimited liability structures, such as sole proprietorships and partnerships, no technical line exists between the individual and the business. Consequently, all business debts are borne by the owner or partners personally. In the event of legal action or insolvency, personal assets like homes and cars are vulnerable. On the other hand, limited liability companies shield owners from such risks by legally separating the entity from its owners and safeguarding personal finances and assets.
| Limited Company vs Unlimited Company | ||
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| Feature | Limited | Unlimited |
| Registration |
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| Legal status |
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| Liability |
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| Tax advantages |
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| National insurance contributions (NICs) |
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| Accounting and audit |
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Table notes:
* Only companies that have a turnover above £10.2 million, assets in excess of £5.1 million and employ more than 50 people need to be audited.
See also: How to Register for Self Assessment Tax Return Using HMRC SA1 Form
Insight
A note about Limited Partnerships
Limited partnerships combine the features of a general partnership and an LLP. Therefore, in view of the above, here is what you need to know about LPs —
| Feature | Limited Partner | Unlimited Partner |
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| Management |
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| Authority to enter into contracts |
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| Income |
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In the LP, the partners are themselves (not the entity) considered as a separate legal entity. Remember, the partners must work with a partnership agreement, otherwise, they’ll by default be a general partnership.
Advantages and Disadvantages a limited company
In this section, we are going to look at the comparative advantages of setting up your business as a limited company.
| Advantages | LLP | LTD | PLC | CLG |
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| Status and liability |
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| Tax planning opportunities |
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| Capital raising opportunities |
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| Opportunities to offer quality employee incentives. |
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Other advantages of forming companies that are limited include —
- Once the business is registered, no other company can use your company name, unlike in an unlimited company structure, which does not enjoy company name protection.
- The business has perpetual succession, meaning it can outlive its owners, partners, shareholders or guarantors.
- A limited company structure signals tax planning flexibiity, and internal systems, enhancing the credibility of the business, and making it attractive to investors, and customers.
Disadvantages of a limited company
| Disadvantage | LLP | LTD | PLC | CLG |
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| Tax planning |
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| Capital raising challenges |
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| Limited liability exceptions |
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| Regulatory compliance burden |
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Other disadvantages of registering a limited company include —
- Company information, including the details of persons who have significant control over the company, will be available through the Companies House public register.
- Accounting, taxation and filing requirements are more complex and time-consuming
Have a question? Get in touch today.
We can provide free qualified guidance to help get you started with your business needs.
Call us at +44 (0) 207 689 7888 or Email us at info@yourcompanyformations.co.uk
We can provide free qualified guidance to help get you started with your business needs.
Call us at +44 (0) 207 689 7888 or Email us at info@yourcompanyformations.co.uk
Distinguishing between LLCs (U.S.) and LTDs (UK) business structures
LLCs and LTDs refer to types of business structures where the liability of the owners and shareholders is limited to the value of their investments. The phrase, “limited liability company” (LLC) is mostly used in the United States, while “limited company” (LTD) is mostly used in the UK and Ireland.
An LLC can either be a C corp, a company whose shareholders are taxed separately from the business or an S corp, which is tax transparent, with profits and losses passing through and taxed at the shareholder level. LLCs have more flexibility in terms of tax planning than ltds.
Other countries may have different designations for limited companies. For example, in Germany, the Aktiengesellschaft (AG) designation is for public limited companies that can sell shares to the public while GmbH is for private limited companies that cannot issue shares.
How to set up a limited company
Your Company Formations offers a range of online company formation packages for limited companies. These include packages for companies limited by shares and by guarantee and have a simple process to follow.
Here is how to register your UK limited company online.
- Utilize our company name check tool to verify the availability of your desired company name with Companies House.
- Choose and purchase a company formations package.
- Submit your application.
We can handle everything for you and will register your new company with Companies House on your behalf. Leverage our expertise to get everything right and take the pressure off your shoulders.
Our formation procedures are swift and we get your new company off the ground within 24 working hours, after which you’ll receive your incorporation certificate and company utr number to start trading as soon as possible.
If you want to register as a strategic move but are still not ready to start trading, you must tell HMRC that your company is dormant for corporation tax.
Read also: Business Bank Accounts for Limited Companies
How to Close a Limited Company
You can close your limited company through a voluntary strike-off or a member’s voluntary liquidation. Both of these processes remove your company from the Companies House public register. Here are details about each process —
- Voluntary strike off — Use form DS01, signed by a majority of the company directors, to make your application for strike off to Companies House. You must also inform all stakeholders, including members, employees, creditors, and HMRC, that you intend to close the company. Further, you must ensure that you have —
- Transferred all assets from the company;
- Not been trading for at least three months;
- No pending liabilities; and
- No recent name change.
Once you make the application, Companies House will publish a notice of strike-off in the gazette and give two months for any stakeholder to file an objection. If there is no objection, you’ll get a confirmation that your company has been struck off the register.
- Members’ Voluntary Liquidation (MVL) is an option available for solvent companies (this means the company has more assets than debts). The process starts by appointing an Insolvency practitioner (IP), who first settles the company debts, outstanding legal disputes, and any other pending issues and distributes the remaining resources to the members.
