'LIMITED LIABILITY' -VS- 'UNLIMITED LIABILITY'

Limited liability
(Note: this page is currently being re-written in view of recent law changes. Some of the information here may no longer be current. UKcorporator's incorporation process however remains perfectly valid and effectual and complies with current law.)

Limited liability companies are far more common that unlimited liability companies. There are two types of limited liability company, namely, those limited by shares (these are very common) and those limited by guarantee (these are much less common).

A company 'limited by shares' is a company formed on the principle of having the liability of its members (otherwise known as its shareholders or owners) limited to the balance amount (if any) which remains unpaid on the shares held by its members - section 1(2)(a) of the Companies Act 1985. Almost every company formed as a vehicle for a business venture with a view to profit is registered as a company limited by shares.

A company 'limited by guarantee' is a company formed on the principle of having the liability of its members limited to the respective amounts which the members undertake to contribute to the assets of the company if it is wound up - section 1(2)(b) of the Companies Act 1985.

Unlimited liability
This form of company (often referred to as an 'unlimited company') is a quite rare type of company formation. Every member of an unlimited company is, in the event of its winding up, jointly and severally liable for all the obligations of the company (Insolvency Act 1986 sections 74 and 75) and is therefore in this respect in the same position as a partner in a partnership. An unlimited company would usually only be appropriate if the company will merely be used to hold land or other investments and will not trade as such. It may be a useful vehicle where incorporation is necessary or desirable and one or more of the following applies:



1.
it is proposed that the company will operate in a field where limited liability is frowned upon;


2.
it is important to maintain secrecy in relation to the company's financial affairs;


3.
the risk of insolvency is minimal;


4.
it is thought that a reduction in the company's share capital may become desirable (in this regard an unlimited company may reduce its capital at will, provided there is power to do so in its articles of association, without requiring the sanction of the court).

An unlimited company may be suitable, for example, as a service company for a professional firm i.e. in circumstances where limited liability is not vital but perpetual succession is important.

An important privilege enjoyed by an unlimited company is that it is not required to deliver copies of its annual accounts and reports to the Registrar of Companies provided it meets certain conditions directed at ensuring that it is not a subsidiary or parent of an undertaking which is limited - section 254 of the Companies Act 1985.

An unlimited company may or may not have a share capital. (This follows from section 1(1) and section 1(2)(a) and (b) of the Companies Act 1985). If a company has no share capital, a member may resign or terminate his, her or its membership only if the memorandum or articles so provide, and only in the events and in accordance with the conditions set out therein. (The articles of association which UKcorporator will provide for you, will permit termination of membership on seven clear days' notice to the company.)
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