When talking about setting up a company, it’s important that you understand the business structures that you’re considering. There are different kinds of companies, each with their own legal requirements, which allow you leeway in some aspects and restrict you in others. It’s key that you understand these structures and what they enable you to do so that you can best utilize this knowledge to reach your business goals. Here are the four main types of companies and their most notable characteristics.
Public Limited Company (PLC)
This one is often shortened to just “public company” or PLC. A public limited company is a company that sells shares to the general public, as the same suggests. Basically, anyone can buy shares in this company’s stocks. The “limited” part comes from a person’s financial liability being restricted to the extent of their investment.
A public limited company marries these two concepts. This means that anyone from the public can be a shareholder, and they’re financially liable only to the extent of their investment. Here are some of the main advantages and drawbacks of a PLC.
The Main Advantages of a PLC:
- They're able to raise shares much faster than a private company.
- Shareholders have limited liability, as they’re only responsible for what they’ve invested into it.
- The company is seen as more transparent and trustworthy, as PLCs are legally obligated to reveal their financial reports and information.
- Shares can be freely transferred between members.
- They're able to attract more investors with less effort.
- The company is more likely to obtain loan repayment arrangements, as banks tend to trust PLCs more and are therefore more willing to financially back them.
The Main Disadvantages of a PLC:
- Registering a company as a public limited company is very expensive, requiring a lot of time, effort, and money. A business must have a share capital of £50,000 or more to become a PLC.
- The company may be transparent, but that means that there is little to no confidentiality within the organization.
Private Company Limited By Shares
Private companies limited by shares are the most popular type of company in the UK, making up over 93% of all corporate bodies. These are also commonly called private limited companies, and there is a good reason why they’re so popular. Similar to PLCs, shareholders are only liable for what they put into the company.
Unlike PLCs however, there is no minimum capital requirement to start a private company limited by shares. Most small to medium-sized businesses take advantage of this fact, which is why they’re so popular.
The Advantages of Private Limited Companies:
- There is no minimum capital requirement to form a private limited company.
- The shareholders' liability is limited to what they’ve invested in the company.
- The owner (s) are able to retain control more often than not.
- It enjoys a restricted trade of shares, eliminating the possibility of a takeover. Shares can be freely transferred between members, though not outsiders.
Drawbacks of Private Limited Companies:
- It’s more difficult to motivate regular employees, as profits are only shared with the shareholders.
- There are costs related to filing accounts at Companies House, which private limited companies must do.
- Limited companies must appoint a secretary within one month of starting operations. This must be a qualified professional.
Private Company Limited By Guarantee
Many charities are classified as private companies limited by guarantee. They’re usually non-profits, meaning that if they do make a profit, it goes towards the company’s operations and it is not paid out to the employees.
These companies set a low limit to what the members must pay if the company is wound up. Here, there are no shareholders because there is no share capital. Rather, the members are called guarantors, and they’re oftentimes liable for very small sums of money.
Its Main Advantages:
- If something goes wrong, the members aren’t liable for the company’s debts.
- The company will be seen as credible due to its limited status.
Some of the Drawbacks:
- There are initial costs related to setting the company up.
- Companies House requires ongoing reports.
Private Unlimited Company
Private unlimited companies have some similarities to a private company limited, but with a few key differences. Private unlimited companies don’t have to file their accounts at Companies House.
Unfortunately, their shareholders are not very well-protected from risk, as they’re personally liable if the company is wound up. For this reason, this business structure is typically chosen by companies that don't consider insolvency the main concern. They tend to be very careful when handling their finances because of this.
They are not very common in the UK. They are usually formed because the owners want to keep special information out of the public eye and away from their competitors.
The Main Benefits of Private Unlimited Companies:
- Private unlimited companies can keep their finances a private affair. They don’t have to file accounts at Companies House. This means they can keep any trading information secret.
- They tend to be extremely careful when managing risk, making insolvency very unlikely to happen.
The Disadvantages of a Private Unlimited Company:
- Shareholders are personally liable to repay creditors if the company goes down. This is often a deal breaker for many shareholders.
- Private unlimited companies are quite uncommon, so it’s more difficult to find shareholders that are willing to do business with you. This is compounded by the personal responsibility they will have to take on if the company goes into liquidation, or become insolvent.
- Due to their cautious approach, these companies may not grow as fast as other types of companies that would be more willing to take risks.
Understanding the types of companies and their characteristics is essential in deciding what type of company is going to get you to hit your business goals. It all depends on how much risk you can afford to take, how fast you’d like to grow, how confidential you want your financial reports to be, and a myriad of other factors. As you can see, different company structures carry different legal requirements. Where you’re willing to compromise and where you’ll stand firm is entirely up to you.