Should I Be Using An Unlimited Company?
It was recently reported that a company which received a government contract to procure PPE (personal protective equipment) for the NHS had changed its status from being a limited company to become an unlimited company. According to recently released statistics, in December 2020 there were around 4.67 million companies registered at Companies House of which only approximately 7,500 were unlimited companies.
But what is an “Unlimited Company”? Let’s explore whether it is beneficial to have one and why the company who secured the PPE contract uses this vehicle.
Many of you will be familiar with the legal form of a standard private limited company. Companies are controlled by their shareholders but are considered a separate legal entity from their shareholders. Importantly, each shareholder is generally only liable to cover any financial losses of the company up to the par value of their shares.
In many ways, an unlimited company (not to be confused with a company limited by guarantee such as a charitable company) is like a standard private company limited by shares. It must be registered at Companies House under the provisions of the Companies Act 2006, with a Memorandum and Articles of Association. Directors manage the company on a day to day basis on behalf of its members who may or may not be the same people. Various information is reportable to Companies House, including details of the company’s people with significant control and an annual confirmation statement.
The difference is that unlimited companies can be formed with or without share capital and therefore the members of an unlimited company do not need to hold shares. Thus, the members are personally liable for the debts of the company. It also means that the company is not legally required to file accounts at Companies House.
The primary advantages of an unlimited company are the reduced reporting burden, and by extension, the ability to keep the company’s results confidential and the flexibility of not having to have ownership dependent on shareholdings. Other advantages are that because they are personally liable, those running the business may have a better quality of management and be more prudent which could result in better investor confidence.
Why are there so few unlimited companies?
Because there are so few unlimited companies and they are not well understood, lenders and other stakeholders are reluctant to deal with them. But the risk of having personal assets liable to cover the debts of the company in a liquidation is the deciding factor. If the company lacks resources to pay off its debts, all the shareholders bear joint, several, and unlimited liability for the company’s liabilities. That means that regardless of your level of shareholding, if other shareholders are unable to pay, you could have to contribute more and more and you could lose everything.
The director of the PPE company mentioned above explained that the reason that he changed his company to an unlimited company was to avoid disclosing his family’s earnings to the public. His was a family business and he felt that publishing accounts at Companies House “had the effect of placing our family P60 in the public domain, which like the majority of people we have chosen not to do, as we value our privacy”. What about the potential to be personally liable if the company was unable to meet its creditors? He explained that the business provides advisory and introductory services to its clients and therefore, having limited status “had little benefit.” “In any case”, he added, “our new accountants recommended unlimiting the company to simplify reporting requirements.”
There are many different vehicles through which businesses can be run, each with benefits and pitfalls and it is worth thinking carefully about the options available before choosing the best fit.
Yedidya was recently promoted to Partner at Raffingers, a top 100 accountancy practice that specialises in strategic business, tax planning and commercial solutions.
If you would like to discuss any aspect of this article or for any other tax, business or accounting advice, don't hesitate to get in touch or email Yedidya Zaiden directly at yedidya.zaiden@raffingers.co.uk