Alternative Structures and Implications
Company Limited by Shares versus Company Limited by Guarantee
Company limited by shares
A company limited by shares is the most common vehicle for an entity intending to make a profit and wishing to enjoy the benefits of limited liability (see paragraph 1.2 above). The liability of shareholders of a company limited by shares is restricted to the amount which they have paid or agreed to pay on their shares.
Company limited by guarantee
Companies limited by guarantee are usually formed for the purpose of carrying on business in which it is not intended to make a profit. The liability of shareholders is limited to the amount of the guarantee stated in the company’s Memorandum of Association (the “Memorandum”). The figure can be as small or large as the founders of the company may wish, but commonly it is £1. Such company has no share capital.
A guarantee company will normally be used for the following purposes:
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a club or association or for some social, sporting, recreational or other purpose;
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trade and professional associations; and
- charitable bodies.
The word “limited” can be deleted from the company provided that the Memorandum and Articles require that the company’s profits, if any, or other income be applied in promoting its objects (see section 4.1 below) and prohibit the payment of dividends to shareholders.
Other differences between companies limited by guarantee and those limited by shares
A guarantee company differs from a company limited by shares as follows:
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each shareholder guarantees to contribute a certain sum to the company in the event of winding up. No monies are invested in or contributed to the company during its active life;
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a guarantee company may only be formed as a private company;
- the Articles and Memorandum must be in the correct form;
Single Shareholder Companies
Introduction
A single shareholder company is a private company, limited by shares or by guarantee, which is incorporated with one shareholder, or whose membership is reduced to one person.
A single shareholder running the company
A single shareholder alone cannot run a company. The company must still have at least one director and one secretary who cannot be the sole director. A secretarial services company can be employed and registered to fulfil the role of company secretary. This may be a favourable option for single shareholder companies as an experienced company secretary will be able to advise and implement many of the company procedural tasks which are a legal requirement under the Companies Act 1985 (as amended).
Register of Members
A company’s Register of Members must accurately record its shareholders. If a company is incorporated with one shareholder, then the register must reflect this. If the company originally had more than one shareholder and the membership reduces, then the register must show when this happened. Similarly, the appropriate entries must be made in the Register of Members if the number of shareholders later increases.
General meetings
Regardless of any provision in the company’s Articles, a single shareholder present in person or by proxy constitutes a quorum at any general meeting. If such a meeting is held, it must be recorded in the minutes.
Recording decisions taken by a single shareholder
When a single shareholder takes a decision, he must (unless the decision is made by written resolution) provide a written record of that decision. Failure to do so means the single shareholder is liable to a fine but does affect the validity of the decision.
Contracts with a single shareholder who is also a director
When a limited company enters into a contract with a single shareholder of the company who is also a director, the company must (unless the contract is in writing) ensure that the terms of the contracts are set out in a written memorandum or recorded in the first meeting of the directors after the contract was made. This does not apply to contracts entered in the ordinary course of business.
Limited Liability Partnerships
As from 6 April 2000, a new legal entity, a limited liability partnership (an “LLP”), has been available. Although the name contains the word partnership, it is in fact a body corporate which has a separate legal entity from that of its shareholders (like a limited company but unlike a partnership). An LLP has unlimited capacity and can undertake the full range of partnership business activities which a partnership can undertake. As an LLP is a body corporate, partnership law does not in general apply to an LLP. This note will not deal any further on LLP’s. If you need specific advice, please contact the company commercial department of Davenport Lyons.