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Companies limited by guarantee

Companies limited by guarantee

Types of Trading Vehicles – Companies Limited by Shares

There are several different types of trading vehicle that a business may take including partnerships, limited liability partnerships (LLPs) and public listed companies (PLCs).

This is the first article in a series, looking at the different types of trading vehicles available. This article focuses on companies limited by shares which is the most common trading vehicle for small and medium sized enterprises (SMEs).

Key Characteristics of Companies Limited by Shares

Legal Personality

A company limited by shares has a “separate legal personality” which means that the company can enter into contracts and the company, rather than the company’s owners, is responsible for its own debts and liabilities.

The name of a company limited by shares must include the word “limited” or “ltd”.

Shares and Shareholders

Companies limited by shares, issue shares to shareholders. The shareholders of the company are the company’s owners. Sometimes the shareholders are also referred to as “members” of the company. The shareholders do not usually have day to day control of the company, this is left to the directors (further explained below).

The liability of each shareholder for the company's debt and other liabilities is generally limited to their shareholding, for example if a shareholder has £100 of shares in the company that is (usually) the total amount that the shareholder can be liable for if, for example, the company has debts or is being sued.

A company must always have a minimum of one share and one shareholder, but there is no maximum limit on the number of shareholders. Where one company (A) holds all the shares of another company (B), B is called a subsidiary of A, and A is known as the parent company of B.

Shares can be freely transferred and sold between different parties. If you want to restrict shares from being freely transferred, you should consider having all the shareholders enter into a shareholders’ agreement.

Directors

Whilst the shareholders are the owners of the company, the directors are the people responsible for running the company.

Usually directors wield the powers of the company, the directors can, for example, enter the company into contracts with third parties. To the protect the company, directors have a number of legal duties that they owe to the company. The directors’ duties are set out in the Companies Act 2006 and these are:

  • To not doing anything that they do not have the power to do;
  • To promote the success of the company
  • To exercise independent judgment
  • To exercise reasonable care, skill and diligence
  • To avoid conflicts of interest
  • Not to accept benefits from third parties
  • To declare an interest in a proposed transaction or arrangement

The duties give some protection to the company and its shareholders from being exploited by a director’s personal interests.

It is possible to be a director and a shareholder at the same time.

Articles of Association

Companies limited by shares, and indeed all companies, must have articles of association that set out how the company should be run. The articles of association are filed at Companies House and are a public document.

The articles of association can have provisions relating to board meetings; appointing and terminating directors and the procedure for declaring dividends.

This is a brief summary of the detail that should be considered whether you are thinking of incorporating a new company or you are dealing with a company limited by shares that has been trading for several years. If you would like to discuss this article in more detail, please contact Krishen Patel.

 Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.

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