Forming an Unlimited Company – Advantages & Disadvantages

Forming an Unlimited Liability Company

When registered without any iota of limited liability, a company turns into an unlimited company. This is why many entrepreneurs in UK prefer to form an unlimited company. Quite naturally, it is amongst the most commonly found & prevalent types of incorporated businesses. Shareholders under this setup are protected and such companies are very similar to sole trader and partnership businesses which have unlimited liability. As the case being, in such type of companies the owner’s own wealth is on the line in case the organisation is unable to repay the debts.But due to its structure a private unlimited company isn't something one comes across very often.

Unlimited company can be formed in almost the same manner like a limited company. But then there are also some marked differences. The most prominent one being getting the registration doneonly by by using the paper form IN01 contrary to being able to register online. For completing the form IN01 and for registering an unlimited company the following details would need to be furnished:

• Company name to be proposed – This name requires to meet most of the rules drafted for a company name.
• Customised Memorandum & articles of association – With no ideal articles of association for an unlimited company around one would need to make do with the best alternatives around
• The company’s registered office should be in the UK
• One individual director’s details would need to be submitted
• Shareholders and member details need to be submitted
• Proposed people who wield significant control (PSC's) need to be furnished

As and when all such information has been provided, the Companies House will do an enquiry. Only after is it satisfied that everything is in place it would issue a certificate of incorporation for the unlimited company.

What defines an Unlimited Company?

A regular private company limited by shares and anunlimited company ae not really all that different. But to be in tune with the requirements of the law an unlimited company should be registered with the Companies House and should also have a memorandum and articles of association. Once done, a director would be assigned who will manage the day-to-day operation of the company on behalf of the shareholders. Companies House should also be made aware about who all are the persons of significant control are and it should also have regular access to annual confirmation statement.

Difference between an Unlimited and Limited Company

Glaring difference between the two is when insolvency arises one tends to lose all that was invested. This happens when the formal liquidation takes place and the company is in no position to pay off its debts. Here the creditors end up using the personal assets of the directors as well as shareholders to pay the liability off. So irrespective of the shares held one could end up losing everything. To think of it an unlimited company might be registered with Companies House but in terms of operational abilities it is just like a sole trader. Further, with an unlimited company most of the paperwork has to be submitted in the way a limited company submits to the Companies House. At times they may not always have to submit accounts. Another big point is a limited company can always re-register itself as an unlimited company & vice versa.

Benefits of being an Unlimited Company

There are benefits galore of being an unlimited company. From a separate legal identity to benefit of allowing companies to take contracts in their own name, rather than taking them in name of shareholders and directors.

• Secrecy

When drawing comparisonswith limited companies, unlimited companies are excused from registering annual accounts with Companies House. But directors still need to do the company's financial statements. However, there are certain rules to this exemption. Those being:

• Parent entity of a limited organisation
• Subsidiary entity of a limited organisation
• Part of sectors like insurance and banking

In case accounts are not required to be filed with Companies House, the financial information isunavailable for the public.This means affairs of company are not there for competitors to see. So effectively, an unlimited company is at liberty to see financial information of competitors while keeping its own information concealed. Yet, at same time shareholder dividends aren't made public which couldprove to be attractive for shareholders.

• Effective Management

Directors and shareholders of an unlimited company need to tread cautiously via careful risk management or else they would lose everything if in case the company liquidates. On the other hand, if the shareholders do not run the company there keen interest in the decisions taken is highly warranted.

• Creditor Confidence

Creditors have the faith that Shareholders and directors have a ‘what if’ liquidation scenario at the back of their minds so they know that company would not borrow more than what it can afford to pay. Coupled with higher risk control, creditors tend to have greater confidence in the company and its abilities.

• Flexibility

Unlimited companies as compared to limited companies find it easier to return capital to shareholders. Solely because there are restrictions imposed on limited companies by the Companies Act 2006. But then flexibility is required in a group structure as it provides more options of moving capital between the group entities.

Drawbacks of an unlimited company

As it is with everything there are also many drawbacks involved when a company is unlimited

• Liability Concerns

Shareholders have no protection in case a company liquidates. Add to it, essentially shareholders can lose big when creditors are paid up. One of the biggest drawback of being an unlimited company and thus quite naturally many companies therefore opt to be limited companies. This is a thing to be considered before opting to form an unlimited company.

• Missed Opportunities

Due to unlimited liability, directors as well as shareholders might avoid taking high risk opportunities. Low risk would mean they would never look beyond landing up a regular amount of small jobs. This would also mean they would bypass opportunities leading to bigger and higher profit fetching jobs. The case being a steady and cautious approach would not only slow down the development of company but alsopotentially scare shareholders seeking favorable returns on their initial investment.

• Beyond Understanding

As many business owners wouldn’t have heard about such a company it might not be worthwhile to get it registered as a company. What’s more, directors of an unlimited company will find it tough researching the associated roles & responsibilities. Only consultants or advisors may not know what it is, but finding an accountant knowing the ins and outs with regards to reporting might be an uphill task.

• Overhyped Benefits

One may think enhanced privacy is good but then does it compare to having a liability beyond means. Hiding the finances also means hiding of dismal management. In situations where an unlimited company requires borrowing money, lenders would decide whether money borrowed will be repaid – this is inclusive of personal assets kept as a security. Another aspect to be looked upon would be without borrowing if the company could sustain itself. Essentially, it means lending would become harder as circumstances would change with liabilities becoming a part of the scenario.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.