Incorporation is the process of creating a company structure – a new legal entity which is distinct from the individuals or shareholders who formed it.
Although most people will be familiar with the terms ‘limited company’ and ‘PLC’, there are actually four main types of limited company in the UK.
1. Private Limited Company (limited by shares)
This is the most popular type of company in the UK, with over one million currently actively trading.
The liability of shareholders is limited to any amount unpaid on the shares they own. This is one of the main attractions for people thinking of setting up a business, compared to going down the sole trader route.
Unlike the sole trader route, company directors are not personally liable for the company’s debt, unless they have been negligent in some way.
Unlike Public Limited Companies, private limited companies cannot sell their shares to the public.
2. Private Limited Company (limited by guarantee)
This type of company does not have shareholders, just guarantors. The liability of guarantors is limited to a pre-agreed amount.
Should the company cease trading, members are typically only liable to pay a nominal sum of £1.
Non-profit organisations such as charities and clubs will typically incorporate in this way. All the profits generated via this type of company are reinvested into the business.
3. Public Limited Company (PLC)
This business structure is typically used by larger companies, who are able to trade on the stockmarket. The liability of its members is limited to the amount unpaid on the company’s shares.
Although in many ways, a PLC’s legal requirements are similar to those of a standard company, there are more onerous reporting requirements, including:
A PLC must have at least 2 directors, and one qualified secretary.
A PLC can only start trading once it has received a trading certificate from Companies House confirming that it has allotted shares to the value of £50,000 or more. At least 25% of the shares have been paid up before the company can start trading.
4. Private Unlimited Company
There is also another much rarer option, where there is no limit to the liability of shareholders. As a result of the unlimited liability of the company owners, the company does not need to disclose as much information for display on the public record.
Secrecy is the main reason for individuals to form a private unlimited company.
Other types of company structure
Limited Liability Company (LLP)
This type of structure provides LLP members with the limited liability afforded to limited companies, but with other features more akin to those of a self-employed partnership.
For example, members of an LLP will be taxed as ‘self employed’ people, but the LLP itself operates as a corporate structure.
Professional firms, such as accountants and solicitors, often operate via the LLP model.
Community Interest Company? (CIC)
In 2005, the Government launched a new type of limited company aimed at enterprises which want to ensure that their assets can only be used to benefit the community.
A CIC must first be approved by the CIC Regulator, and will be monitored on an ongoing basis to ensure that the enterprise continues to service the community as originally intended.
The incorporation process for a CIC is very similar to that of a limited company, albeit with an extra application form.
Last updated - 15th October, 2020