Out-Law / Your Daily Need-To-Know

This article is based on UK law as at 1st February 2010, unless otherwise stated. All companies that are not public companies are defined by law as private. Being a private company is the default...

This article is based on UK law as at 1st February 2010, unless otherwise stated.

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 a small family company to a subsidiary in a large group that is a substantial trading entity in its own right. Sometimes, they will simply be trading vehicles for one or two individuals who want the benefit of limited liability or the added kudos of trading as a company.

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 ‘preemption provisions’), thereby giving them the opportunity to keep ownership within the existing group and to exclude new shareholders.

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 issued share capital with a nominal value of at least £50,000 and paid up share capital of at least £12,500 (or the equivalent in euros). You could, for example, issue 50,000 £1 shares, or 250,000 20p shares, each paid up at least to one quarter of its nominal value – 50,000 £1shares paid up as to 25p on each share, or 250,000 20p shares paid up
    as to 5p on each. (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. (See: Loans to directors, an OUT-LAW guide.)
  • 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.
  • It is a criminal offence for a public company to give financial assistance for the purchase of its own shares, for example by lending money to someone buying a stake in the company. Since October 2008, there has been no equivalent ban for private companies.
  • 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.
  • A public company must have a company secretary and hold an AGM each year; a private company can dispense with both.

Listed companies

A public company may have its shares admitted to the Official List of the UK Listing Authority (part of the Financial Services Authority), with its shares traded on the London Stock Exchange. It will then be said to be a ‘listed’ company. One may also talk about a company’s shares being ‘quoted’ or traded on other markets in London – including the Alternative Investment Market (AIM) and PLUS – 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.

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:

  • If C is a subsidiary of B, it 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.
  • Complexity – there can also be a conflict between the way a court will look at a group of companies and the everyday practicalities of running the group: the court will see a number of distinct legal entities, each with its own legal rights and obligations; the executives running the group may view the lot as one business with reporting
    lines and managerial responsibilities crossing those legal boundaries. Superimposing a different management structure on an existing corporate group structure can cause problems if those boundaries are not respected.

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.

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