The different types of company
This article is based on UK law. It was last updated in
August 2008.
Private limited company
All companies that are not public companies are defined by law
as private. Being a private company is the default position.
Private companies can range from substantial trading entities that
are subsidiaries of public companies in large groups to small
family companies – or just a trading vehicle for one or two
individuals who want the benefit of limited liability. As such, the
private company is a very flexible format that can be adapted to
fit numerous different requirements. But the one thing that a
private company cannot do as a matter of law is offer its shares to
the public. Any private company that wants to issue shares to the
public must first become a plc or public limited company.
Private companies will, therefore, usually have fewer
shareholders than a public company, and there will often be
restrictions on the transfer of their shares. Those with a very
small number of shareholders, including those that are
subsidiaries, might ban all transfers of shares that are not first
approved by the board of directors. This allows the board to
control who becomes a shareholder and, ultimately, who controls the
company.
Companies with a larger shareholder base might have more
sophisticated rules that allow the transfer of shares by a
shareholder but first require that they are offered to existing
shareholders (under 'pre-emption provisions'), thereby giving them
the opportunity to keep ownership within the existing group and to
exclude new shareholders.
Some private companies are, of course, effectively vehicles for
sole traders who may be keen to have the protection of limited
liability, or who may simply enjoy an added kudos from trading as a
company.
Public limited company
If you want to be a public rather than a private company, you
must take a number of steps.
You will need:
- a name that ends with the words 'public limited company' (or
the Welsh equivalent); permitted abbreviations are PLC, plc or
Plc.
- an allotted share capital with a nominal value of at least
£50,000 and paid up share capital of at least £12,500 (or, from
April 2008, the equivalent in euros). You could, for example, allot
50,000 £1 shares, or 250,000 20p shares, each issued and paid at
least to one quarter of its nominal value – 50,000 £1 shares paid
up as to 25p on each share, or 250,000 20p shares paid up as to 5p
on each share. (There is no equivalent minimum for a private
company.)
A public company is subject to more stringent controls than a
private one in a number of areas. Some of them are listed
below.
- The rules on making loans to directors are more restrictive for
all companies in a group where one of the members is a public
company.
- A public company can purchase or redeem its own shares, but it
can only pay for them by using those profits from which dividends
can be paid. A private company, on the other hand, has the option
of using its capital if distributable profits fall short.
- There has for many years been a general prohibition on
companies providing financial assistance for the purchase of their
own shares. A breach is a criminal offence. That has created
problems for private equity transactions and group banking
arrangements in particular. From October 2008, the Companies Act
2006 lifts this ban for private companies – but not for public
ones.
- Many private companies are allowed to prepare abbreviated
accounts each year. Public companies, on the other hand, have to
prepare and file with Companies House a full set of accounts, and
pay the added costs that may involve.
- All public companies are subject to the Takeover Code, whether
their shares are publicly traded or not. The Code regulates the
ways offers to acquire a public company are made, and the Companies
Act 2006 has now put it on a statutory footing.
Listed companies
A public company may have its shares admitted to the Official
List of the UK Listing Authority (that is, the Financial Services
Authority), with its shares traded on the London Stock Exchange: it
will then be said to be a 'listed' or 'quoted' company. One may
also talk about a company’s shares being traded on other markets in
London – including the Alternative Investment Market (AIM) and PLUS
(the former OFEX) – or anywhere else in the world.
Having your shares traded on a public market will inevitably
bring increased obligations for directors – be they statutory or
regulatory. (See the section on Directors'
duties)
Holding companies and subsidiaries
If company A owns more than 50 per cent of the issued shares of
company B, it is clear that A is B’s holding company and B is
therefore a subsidiary of A. But the definition of 'subsidiary' and
'holding company' in the Companies Act goes beyond that simple
example and covers a number of other situations. B will be a
subsidiary of A if:
- A holds a majority of voting rights in B – it is voting
rights, not just shares, that are important;
- A is a shareholder of B and has the right to appoint and remove
a majority of the directors;
- A is a shareholder of B and controls a majority of the voting
rights in B as a result of an agreement it has with other
shareholders.
Other key points include:
- A company that is a subsidiary of B also counts as a subsidiary
of A.
- B will be a 'wholly owned subsidiary' of A if it has no
shareholders other than A and A’s other subsidiaries, or nominees
acting on A’s behalf.
- Shares held in B on behalf of A are treated as being held by
A.
- Shares held in a trust for others do not count: if B holds
shares in A as trustee of, say, A’s pension fund, it will not be
treated as owning shares in A. (Generally, a subsidiary cannot hold
shares in its own holding company.)
A company with more than one trading activity has the choice of
carrying on all its trades under the umbrella of one company or
splitting them between a number of trading subsidiaries. Its
decision will probably depend on the factors below.
- Risk mitigation – having a number of companies
in the group with the benefits of limited liability can be an
advantage. If one subsidiary gets into financial difficulties there
is nothing in law that obliges its parent to continue supporting
it, unless it has guaranteed the subsidiary’s liabilities or
otherwise agreed to help.
- Tax – as a general rule, whatever trading
structure is used, the effect should be tax neutral, but there are
numerous examples where some advantage, or disadvantage, can arise
from putting separate activities into separate subsidiaries and
carrying out transactions between them. Tax relief may depend on
whether there is a 51 per cent or 75 per cent relationship with the
group companies involved.
- Administration – the more companies you have,
the greater the administrative burden, the greater the cost and the
more paper is generated.
In addition to its definitions of subsidiary and holding
company, the Companies Act introduces definitions, for accounting
purposes, of 'subsidiary undertaking' and 'parent undertaking'.
These are wider definitions and encompass not only ordinary
subsidiaries and holding companies but also other situations where
there is effective control and the accounts of two or more
companies should be consolidated. They can also include entities
other than companies – such as partnerships and unincorporated
associations.
Guarantee and unlimited companies and limited liability
partnerships
Companies limited by guarantee are often found in the
not-for-profit, charity or non-trading sectors, though there is no
restriction on the use to which they can be put. Such companies
have guarantors rather than shareholders. These guarantors are
members who agree to make a limited contribution towards the
payment of the company’s debts in the event of a winding up. That
limit is usually fixed at a nominal £1 and is only required if the
company’s assets fall short.
A guarantee company may drop the word 'limited' from its name
if, but only if, it exists for charitable purposes or to promote
other good causes and there is a ban on the payment of any
dividends to its members (and, on a winding up, any surplus goes to
a body with a similar purpose).
Different again are unlimited companies. Here, the liability of
members is truly unlimited and they can be required to pay the
company’s debts without limit if it defaults and is wound up. Of
course, for the shareholders of many small companies the concept of
limited liability is at times notional – banks and landlords will
often require personal guarantees of a company’s liabilities. So an
unlimited company may be no more than an acceptance of a reality,
and it will carry the big advantage of secrecy: there is generally
no obligation to file accounts at Companies House.
Since 2000, there has been an entirely new legal entity – a
limited liability partnership. An LLP is often the vehicle used by
large firms of lawyers and accountants to enjoy both the tax
benefits of a partnership and the limited liability of a company.
In most respects, it is more akin to a company than anything else,
but legally it is a new concept and is governed solely by statute.
The main quid pro quo for limited liability is the obligation to
file annual accounts at Companies House.
