A limited company is a business structure that provides limited liability protection to its owners. In the UK, limited companies are mainly categorized into two types: those limited by shares and those limited by guarantee. Each type has distinct characteristics and serves different purposes. Let’s break down these two types to understand their key differences.
Limited by Shares
A company limited by shares is the most common type of limited company. This structure is used primarily by businesses that aim to make a profit. Here are the main features of a limited-by-shares company:
- Separate Legal Entity: The company is a separate legal entity from the people who own and run it. This allows the company to enter contracts, own property, and face legal action under its own name.
- Shareholders and Shares: The company is owned by shareholders who each hold shares in the business. In smaller companies, the shareholders are often also the directors who manage the business.
- Limited Liability: Shareholders’ responsibility is confined to the amount they’ve invested in their shares. If the company encounters financial difficulties, they are only liable for their investment and nothing beyond that.
- Profits and Taxes: A company limited by shares pays Corporation Tax on its profits. The profits remaining after taxes can be distributed to shareholders as dividends.
This type of company structure is ideal for businesses looking to make a profit while protecting the personal assets of its shareholders.
Limited by Guarantee
A company limited by guarantee is different because it has no shareholders. Instead, it has members who agree to pay a fixed amount (a guarantee) if the company is wound up. This type of company is typically used by non-profit organizations, such as charities, clubs, or community projects. Here are the main features:
- Separate Legal Entity: A company limited by guarantee, like one limited by shares, exists as a separate legal entity from its members. This structure safeguards members’ personal assets from the company’s liabilities.
- Guarantors: Instead of shareholders, the company has guarantors who set a limit on the amount they will contribute if the company faces financial difficulty.
- No Profit Distribution: Any profits made by the company are reinvested back into the company’s activities. Unlike a company limited by shares, profits are not distributed to guarantors.
This type of company is well-suited for non-profit purposes, where the focus is on serving a cause rather than making a profit.
Key Differences Between Companies Limited by Shares and Limited by Guarantee
Feature | Limited by Shares | Limited by Guarantee |
Ownership | Shareholders | Guarantors |
Purpose | Profit-making | Non-profit activities |
Liability | Limited to value of shares | Limited to guaranteed amount |
Profit Distribution | Dividends to shareholders | Reinvested in the company |
Conclusion
Both types of limited companies—limited by shares and limited by guarantee—offer limited liability, which protects the personal assets of their owners but they serve different purposes. Companies limited by shares are designed for profit-making ventures, while companies limited by guarantee are typically used for non-profit activities.
When choosing the right type of limited company, consider whether your primary purpose is to earn profit or support a cause. Each type provides distinct advantages tailored to different business goals. If you’re unsure which structure is best for your business, check out our article on How to Choose Between a Company Limited by Shares or Guarantee for a more detailed guide.
