An unlimited company – or private unlimited company, since an unlimited company must be set up as a private company – is a type of business available both in the UK and elsewhere. In this article, we look at the features, advantages and disadvantages of an unlimited company.
You don’t come across unlimited companies very often – although they may not always be obvious because they don’t have to use “unlimited” in their name. Still, there are currently only 4,668 unlimited companies on the official register at Companies House. Although this low number might in part relate to people not appreciating the benefits of an unlimited company, it’s largely due to their very serious drawbacks.
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An unlimited company is in many ways similar to 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 (typically shareholders), 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. Inform Direct allows you to complete these Companies House filings for unlimited companies with share capital.
In normal trading circumstances, even the finances of the company operate in pretty much the same way as a limited company, with the shareholders having no direct liability to the business’s creditors. It’s only when a formal insolvency event occurs that the key differences arise.
You could lose everything
If there is a formal liquidation, with the company lacking resources to pay off its debts, creditors have access to the personal assets of the unlimited company’s shareholders or members. In this event, 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. You could lose everything.
Despite being incorporated at Companies House, the unlimited company therefore shares important characteristics with a sole trader and general partnership, in that those behind the business accept complete liability for the company’s debts. While it’s still subject to most of the requirements of incorporated companies, because of the nature of the members’ liability, an unlimited company isn’t usually required to submit accounts to Companies House.
In the UK, notable examples of unlimited companies include:
- C. Hoare & Co (company number 00240822), England’s oldest private bank, originally founded in 1672
- Equitable Life Assurance Society (00037038), the world’s oldest mutual insurer
- GlaxoSmithKline Services Unlimited (01047315), a subsidiary of FTSE100 quoted pharmaceuticals giant GlaxoSmithKline plc
- Credit Suisse International (02500199), UK investment banking wing of multinational financial services specialist Credit Suisse
It’s possible for a private company limited by shares to re-register as an unlimited company and vice versa.
Advantages of an unlimited company
Unlimited companies share many of the advantages of limited companies. For example, separate legal personality means the company can enter into contracts in its own right and gives the business the ability to outlive particular shareholders or directors.
An unlimited company also has some specific advantages:
Unlike its limited company counterpart, a UK unlimited company is generally not required to file annual accounts at Companies House, although the directors still retain the duty to prepare the company’s financial statements. To remain eligible for this exemption, during the relevant accounting period, the company must not have been:
- A parent company of a limited company
- A subsidiary undertaking of a limited company
- Involved in a Scottish partnership where other parties included limited companies
- Involved in certain sectors, like banking or insurance
If no accounts need to be filed at Companies House, financial information about the company is not available on the public record. The affairs of the business are largely kept hidden from competitors who might gain some advantage from that information, while the unlimited company can still inspect and gain a competitive advantage from competitor financial data. With that information kept secret, there is also less of a risk of hostile media analysis of financial data.
An unlimited company is sometimes used where a corporate vehicle is required for a specific transaction but not a longer term enterprise. The fact that accounts do not have to be submitted for an unlimited company is a major part of the attraction in many cases.
In the same way, dividends paid to shareholders aren’t made public, which might prove attractive to some shareholders.
2 Management quality
Unlimited liability can have the effect of encouraging careful risk management, since the owners of the business potentially have a lot to lose if things go wrong. Even if the shareholders don’t manage the business themselves, they’ll have a keen interest in ensuring the decisions of the directors that are appointed are subject to sufficient scrutiny.
More often than not, keener risk management will result in lower risk endeavours being pursued by the business than might otherwise be the case.
3 Creditor confidence
With such an incentive to manage the company prudently and good risk management practices therefore put in place, creditors (and potential creditors) may have more confidence in an unlimited company. With their own assets at risk, those behind the company are in theory unlikely to borrow if they don’t have confidence they can repay. Because the shareholders bear full liability for any debts that need to be paid in the event of insolvency, so the argument goes, creditors may be more confident to lend money to an unlimited company.
4 More flexible share capital options
Compared to its limited counterpart, it’s easier in an unlimited company to return capital to shareholders (and reduce share capital). That’s because the restrictions in this area, defined in the Companies Act 2006, only apply to limited companies. This flexibility can be especially useful when you’re employing a group structure, as it gives more options to move capital between the entities in the group.
Disadvantages of an unlimited company
Again, some of the disadvantages of an unlimited company reflect those of companies more generally. Often seen as more formal than operating as a sole trader or partnership, an unlimited company is subject to most of the registration and filing requirements of the Companies Act 2006.
However, there are also some disadvantages which are unique to an unlimited company:
1 Unlimited liability
In a liquidation situation, there is no protection for members and shareholders. There is essentially no limit to what shareholders can lose, since they’ll be jointly and severally liable for all the debts of the business. Creditors can lay claim on any and all personal assets and the shareholders may face personal bankruptcy if debts then still cannot be settled in full.
This is an enormous drawback, the main reason why 99.99% of companies in the UK are limited companies. Any reasons in favour of the unlimited company will usually be dwarfed by this consideration, which puts the business owners on a par with sole traders and the partners in a general partnership in terms of personal exposure to business liabilities.
2 Missed opportunities
Careful risk management can help to avoid or minimise potential liabilities, but it’s a lacklustre business end in and of itself. Taking a low risk approach isn’t likely to lead to impressive growth of the business, as many potential opportunities will be ignored.
This brake on the business can seriously slow the development of an unlimited company compared to its limited counterpart. Aside from the potential issues with unlimited liability, this will often mean it’s harder to attract shareholders – who commit their capital in the hope or expectation of receiving some later reward – to invest in the company.
3 Not well understood
Because it’s so little used, the unlimited company is also little known and little understood.
Within the company, one or more of the directors will need to build up specialist knowledge of the requirements of an unlimited company. A lot of time and effort may be spent investigating whether, for any particular business decision or transaction, different rules or requirements apply to those for standard limited companies. There are few good resources available on the subject.
Many external advisers, like accountants, will be unfamiliar with the detailed requirements for an unlimited company. That may make it harder to find suitable advisers or mean it’s more costly to seek advice.
4 The advantages don’t stand scrutiny
Except in very specific circumstances, the arguments in favour of an unlimited company don’t add up.
The privacy may be beneficial, but it’ll be unusual for it to offer a huge competitive advantage, especially one that’s worth the heavy price tag of unlimited liability. Putting such importance on being able to hide the figures from public scrutiny could itself be seen as an attempt to disguise poor management. Quality management more generally – often heralded as synonymous with unlimited companies – should be something shareholders of all companies can expect, not only where the threat of unlimited liability applies.
If lenders choose to advance capital to the business, it will be based on cold and careful analysis of the chance of repayment – including the security available in the form of the company’s and shareholders’ personal assets – rather than based on some vague sense in which an unlimited company is “better run”. And if the company can comfortably sustain itself without borrowing, that’s not in itself a good reason for abandoning the protection of limited liability, especially since circumstances may change in the future or some liabilities might exist but remain unknown.
You’ll often read that the unlimited company model is necessary to trade in a country where limited companies are not accepted. You’ll less often find examples of such countries.
Forming an unlimited company
An unlimited company is formed in much the same way as any other, by registration with Companies House under the provisions of the Companies Act 2006.
While most companies can be formed electronically, an unlimited company can only be registered by completing the relevant sections of paper form IN01.
To complete form IN01 for an unlimited company, you’ll need to include:
- The proposed company name – which must still meet most of the rules around business names
- A memorandum and articles of association – note that there are no model articles of association for an unlimited company, so you’d need to adopt bespoke articles containing an unlimited liability clause
- A registered office address situated in the UK
- Details of at least one individual director
- Details of members or shareholders (as appropriate). There is no minimum capital requirement to register a private unlimited company.
- Details of the proposed company’s people with significant control
Once all the required information has been provided and checked by Companies House, they will issue a certificate of incorporation for the new unlimited company.