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Limited Liability Companies (UK)

This information page*, brought to you by UKcorporator , discusses: UK limited liability companies (mainly private limited companies, sometimes simply referred to as ‘Limited Companies’ or ‘Ltd Companies’), what is meant in the UK by the term ‘Ltd company’, how a UK Ltd company’s ‘liability is limited’, how and to what extent the liability of shareholders of a UK limited liability company is limited, the extent of limited liability of limited companies in the UK, some circumstances in which the limited liability of a Ltd Company can be ‘got around’ in the UK. It also refers to UK limited company formation generally, and the different ways of going about forming a limited liability company in the UK.

What does ‘limited liability’ mean when used in relation to a UK limited liability company (limited by shares)?

Here’s a somewhat legalistic answer (we’ll look at some practical examples further below) - limited liability, in relation to a UK limited liability company limited by shares, means that the limited company’s potential liability to ‘outsiders’ with whom it deals is limited to its own assets (irrespective of, and distinct from, its shareholders’ assets) PLUS, in the event the limited liability company is wound up, any moneys owing to the limited company by its shareholders representing unpaid moneys by shareholders for subscribing to (i.e. purchasing from the limited company) its shares (usually nil because most limited liability companies in the UK issue shares which are fully paid for at the time of issue, and for a mere nominal amount such as £1.00).

What does ‘limited liability’ mean when used in relation to the shareholders of a UK limited liability company, as far as the liability of the shareholders to the company is concerned?

Another somewhat legalistic answer - ‘limited liability’, in relation to a shareholder of a limited liability UK company limited by shares, as far as the liability of shareholders to the LTD company is concerned, means that the liability of the shareholder to the limited company, in normal circumstances, can never be more than what the shareholder has agreed to pay the limited company for the shares in the company.

What does ‘limited liability’ mean when used in relation to the shareholders of a UK limited liability company, as far as the liability of the shareholders to persons or organizations outside the company is concerned?

Because the shareholders of a company limited by shares are distinct ‘legal persons’ quite separate from the limited company itself, the DIRECT liability of such shareholders to outsiders with whom the company has dealt (and with whom the shareholders have not directly dealt) is nil. So in that sense ‘limited liability’ means ‘zero liability’.).

However, such shareholders may INDIRECTLY be liable (that is, via their potential liability to the limited company) up to a point (or ‘limit’), namely, the amount which they have agreed to pay the limited company for their shares and which remains unpaid.

Now lets try to ‘unpack’ the above a little by considering some practical examples.

Example 1

Mr Smith forms a UK limited company (limited by shares that is), with himself as the sole shareholder and sole director of the limited company (and with his wife, Mrs Smith, as the limited company’s sole company secretary). Mr Smith agrees to ‘take up’ (or ‘subscribe to’ or ‘purchase’) one share in the company (with a ‘par value’ or ‘nominal value’ of one pound - although the par/nominal value of the share is irrelevant for the purposes of this example) and agrees to pay, and does so pay, one pound for the share (hence his share is ‘fully paid’).

During the course of its business life, the limited company purchases, from time to time, trading stock on account (say on 30 days credit) from a supplier. For the first couple of years following its formation, the limited company trades quite profitably and manages to pay the supplier in full each month and within the 30 day account period. However, very suddenly, the demand for the limited company’s product plummets with a resulting plummet in the limited company’s sales, revenue, cash balances and the ltd. company suddenly starts making severe losses. The limited company then ceases business and goes into liquidation having failed to pay the supplier what it owes the supplier.

In these circumstances, and barring exceptional circumstances (e.g. relevant dishonesty on the part of Mr Smith or the granting by Mr Smith to the supplier of a personal guarantee of the limited company’s debts to the supplier), Mr Smith will not be under any obligation to pay any further monies to anyone - he will not be obliged to ‘put any further money into’ the limited company because his shares are fully paid (and he thus he has already paid the company everything he promised to pay the company). And Mr Smith will not be liable to pay the supplier (and thus Mr Smith will not be obliged to dig into his personal/non-company assets to pay the supplier) because Mr Smith did not have any direct dealings with the supplier and did not enter into any direct contractual relationship with the supplier (instead, his limited company had such direct dealings and entered into such a direct contractual relationship with the supplier). Further, if the limited company doesn’t have enough assets of its own to pay the supplier in full, or even at all, the supplier will simply not be paid such monies or at all - the supplier ‘loses out’ and Mr Smith manages to protect his own/non-company assets (unless of course he has previously mortgaged them, say, in order to get a loan for the limited liability company).

Example 2

Now assume that everything is the same as in example 1 above except for one thing - instead of forming a limited company with one fully paid (to one pound) one pound share, Mr Smith agrees to take up (purchase/subscribe for) 100,000 shares in the limited company and agrees to pay one pound per share, 50 pence per share of which he agrees to pay immediately on the formation of the limited company, and 50 pence per share of which remains unpaid. He thus pays to the limited company 50,000 pounds on the company formation, with 50,000 pounds remaining unpaid.

In these circumstances, when the limited company goes into liquidation, one of the ltd company’s assets which it can use to attempt to pay off its creditors, will be the debt of 50,000 pounds which Mr Smith owes to the limited company for his shares in the limited company. So the liquidator of the limited company will request Mr Smith to pay to the limited company the remaining 50,000 pounds. And if Mr Smith doesn’t comply with the liquidator’s request, the liquidator (who now controls the limited company) may sue Mr Smith (actually, get the limited company to sue Mr Smith) for the 50,000 pounds. So all up, Mr Smith may lose 100,000 pounds (the 50,000 pounds he originally put into the limited company, plus the additional 50,000 pounds he may be forced to pay the liquidator).

When might a shareholder of a UK limited company become liable to pay money to the limited company, or to the limited company’s creditors, in excess of the amount which the shareholder paid, or agreed to pay, to the limited company for its shares?

This could occur in various situations. For example, if the company formation was done with the shareholder also being a director of the limited liability company and if the shareholder had subsequently given a personal guarantee of the limited company’s debts or obligations, and if the limited company subsequently defaulted on such debts or obligations, the shareholder could become personally and directly liable to the company’s creditors for such debts or obligations of the limited company (in excess of, and quite irrespective of, and unlimited by, the amount which the shareholder agreed to pay the limited company for the shareholder’s shares in the limited company).

Another example would be where the shareholder was also one of the Ltd company’s directors, and in his or her capacity as one of the Ltd. companies directors, allowed the limited liability company to incur debts knowing that the limited company would not be able to pay back its debts as and when they fell due (a short reference for this type of thing is ‘trading while insolvent’).

In the context of limited companies, are there any (legally effective) differences between the terms ‘Limited’, ‘Ltd’ or ‘Ltd.’?

No. For example, there would be no ‘legal difference’, between incorporating a company called ‘Smith Ltd’ or ‘Smith Limited’.

Also, all of the following terms mean the same thing (ignoring the differences between plural and singular versions) - note, for example, that capitalization or otherwise makes no difference and that a full stop or otherwise, to indicate an abbreviation makes no difference): ‘limited liability companies’, ‘limited companies’, ‘LTD companies’, ‘LTD. companies’ , ‘Ltd companies’, ‘Limited company’ or ‘Ltd company’ etc.

What are the various different types of UK limited companies?

In the UK, there are three limited company types -

  1. Private limited companies limited by shares - e.g. ‘Smith Ltd’ or ‘Smith Limited’.
  2. Public limited companies limited by shares - e.g. ‘Boots plc’ (‘plc’ stands for ‘public limited company’)
  3. Private limited companies limited by guarantee - these are a rarer type of company which are often incorporated as charitable / non-profit companies - e.g. ‘Blind Society LTD’ or simply ‘The Blind Society’ (these type of companies have the privilege of not including, as part of their name, their limited liability designation of ‘Limited’ or ‘Ltd’ etc., so long as they meet certain pre-conditions).

How do I go about forming a limited liability company?

One way of forming a UK limited company (any type) is to use UKcorporator (the provider of this information). However there are various other ways of forming a limited liability company in the UK (e.g. use a solicitor, accountant or company formation agent etc.). In this regard you can read our information page comparing various non DIY company formation methods. Also, for more information on the various different DIY ways of incorporating a limited liability company click here.). And for information on aspects of company structure or company structures click here: company structures.

* The information presented on this page is not legal, accounting or professional advice and is not in any way meant to be exhaustive. It is simply some information, which may give you a degree of understanding as regards limited companies in England, Scotland and Wales. Further, this information is provided by UKcorporator. UKcorporator is not a legal firm, nor an accounting firm, nor a professional adviser. UKcorporator is simply an automated 'do it yourself' website primarily for the formation of any type of company (and thus for the formation of a newly incorporated - English, Scottish or Welsh - separate legal entity). Further, the information above is not, and should not be taken to be, a complete or authoritative statement of the law regarding limited liability companies in the UK.