Unlimited Companies – Why they may be right for your business

The purpose of this article is to shed light on this little-known business vehicle and provide food for thought around whether it may be right for your current or new business.

As a form of business vehicle, unlimited private companies are a close relative of limited private companies but with characteristics that make them useful to the right business. Like their close relative, they must be registered with Companies House and have a Memorandum and Articles of Association. They are separate legal persons and as such provide limited liability to their shareholders while they are trading but, unlike limited companies, lose that protection upon dissolution or liquidation. While limited companies can be private or public and can be re-registered from private to public and vice-versa, unlimited companies have no public company equivalent, for reasons which will become clear later in this article.

The scarcity of unlimited companies may be owing in part to lack of awareness their existence. Still, unlimited companies are on the rise in the UK with over 4000 active registrations as of the date of this article but still far below the more than 5 million registered limited companies.

Notable examples of businesses employing unlimited companies in their structures in the UK, are:
• C&K – international retailer
• Credit Suisse International- banking
• GlaxosmithKline plc – pharmaceutical multinational
• Olleco – a food waste-to-energy conversion business
• The Office of David Cameron – the private company of the current UK Foreign Secretary Lord Cameron
Clearly then for some businesses, this is the way forward, but what exactly do these entities offer over limited companies to make them attractive to high calibre companies and businessmen?

Advantages
The Companies Act does not require an unlimited company to have a qualifying acronym or word beside its name which can be appealing from a branding perspective. Limited companies wishing the same need to go through the additional hurdle of registering a name under the Tradenames Act. Other types of legal entities such as LLPs and LPs have similar restrictions under their governing legislation.

Another advantage of the unlimited company is the privacy offered from public scrutiny and more importantly, against competitors particularly in fragmented markets and profitable industries where growing companies could become takeover targets or be undermined or outmanoeuvred by competitors.

An unlimited company is still required to file annual accounts with Companies House if it is:
• the parent company of a limited company;
• a subsidiary of a limited company; or
• involved in certain activities such as banking and insurance
The meaning of “parent” and “subsidiary” are specifically defined in the Companies Act but broadly require greater than 50% control between one entity and the other to come within the definition. As such there are ways to avoid having to file annual accounts if a company’s capital structure is properly organised. Seeking legal advice here is advisable.

Another big advantage of unlimited companies is that the restrictions on return of capital and distributions of dividends to shareholders contained in the Companies Act do not apply to unlimited companies. This freedom can be of a valuable benefit to group structures needing the flexibility to transfer capital between entities.

Finally, the fact that shareholders are potentially exposed to liability is likely to make them adopt better standards of practice and take greater care when it comes to appointing executive management and a business model that focusses on minimising risk.
In the early stages of the business journey, this can provide a boost of confidence to trade creditors and lenders setting young companies off in the right direction as early as possible

Setting up an unlimited Company
Unlimited companies are registered broadly in the same way as limited companies, that is to say, the initial shareholders subscribe to Companies House for shares through a Memorandum of Association, file Articles of Association and pay a small registration fee. There are no Model Articles for unlimited companies and so modifications will be required to meet the Companies Act requirements. Accordingly, seeking legal advice before registering an unlimited company is advisable.

As mentioned, there is more flexibility in naming an unlimited company as compared to other entities (such as LLPs, LPs and limited companies) whose names must be qualified.

Re-registration of Unlimited as Limited and Vice Versa
A company which has initially been registered as an unlimited company can later be re-registered as a limited company, subject to:
• The shareholders passing a special t0 that effect;
• The relevant changes to its name and articles being made;
• The company not having previously been re-registered, i.e., gone from being a limited company to an unlimited company; and
• Re-lodging a re-registration application at Companies House in accordance with section 106 of the Companies Act.
The benefit of this flexibility is that businesses with a low risk of insolvency that are willing to grow without taking on excessive debt in their initial stages, can keep their affairs private and competitors from undercutting them until they have grown their market share sufficiently to where they can convert themselves to limited companies and then grow even faster by taking on more financial risk.

It is similarly possible to re-register a limited company as an unlimited company subject to similar conditions as above. Sections 102 – 104 of the Companies Act deal with this type of re-registration.

Overcoming the Disadvantages of the Unlimited Liability Company
The unlimited company structure would normally be suitable for businesses that for competitive or other reasons wish to keep their affairs private and have a very low (or ideally no) risk of insolvency.

The main disadvantage of exposure of shareholders to liability in the event of insolvency or liquidation can be overcome by shareholders holding their shares through other entities, such as limited companies or LLPs or other shell structures to mitigate against liquidation/insolvency risk.

If you would like more information or advice around creatively structuring your business to your advantage, please contact us for no-obligation introduction.

George Marques   gmarques@redfernlegal.com

Selin Gok                sgok@redfernlegal.com