Private limited companies in the UK are limited either by shares or by guarantee. Both types result in an entity that is legally separate from its members, separating the company and its owners. Similarly, both types of company are capable of entering into contracts as a legal entity in their own right.
The choice between these two structures fundamentally affects how the company operates, who controls it, and what happens to any profits it makes. Both offer the key advantage of limited liability protection for their members, but they achieve this in different ways and are suited to very different purposes.
Understanding the distinction is crucial because it determines not only your legal obligations and potential liabilities, but also your tax position, regulatory requirements, and the flexibility you have in running your business.
If looking to dissolve or liquidate your private limited company, we have written about that here.
How do they work?
When you set up your company, you will need to decide whether to set it up as limited by shares or guarantee. This decision should align with your business objectives and the nature of your organisation.
Limited by Shares – Usually chosen by businesses that are established with an intention to make a profit. A company limited by shares has a designated share capital and shareholders, who own the company in proportion to their shareholding. The company may retain profit it makes after paying tax or distribute it to shareholders as dividends.
In this scenario, the shareholder’s liability is limited to the unpaid value of their shares. In most cases, their own personal assets would not usually be at risk, though there are circumstances where they could be, such as when directors (who are also shareholders) have given personal guarantees or in cases of wrongful trading.
In return for their investment, shareholders will typically have voting rights proportional to their shareholding and can influence major decisions about the company’s direction. The share structure also makes it easier to bring in investors, transfer ownership, or sell the business.
Limited by Guarantee – Usually chosen by companies that are established with the intention of running as a charity, community project, sports society, or other non-profit organisation. Companies of this nature usually retain profit within the company to re-invest in their objectives rather than distributing it to members.
There are no shares or shareholders, but rather guarantors whose liability is limited to the guaranteed amount, which is usually specified in the company’s Articles of Association. This amount can be as little or as large as necessary, but it is common to see amounts as little as £10-£100 per guarantor.
Guarantors don’t own the company in the traditional sense and cannot receive dividends. Instead, they typically have equal voting rights regardless of their financial contribution, making this structure more democratic and suitable for organisations with social or charitable purposes.
What should I do next?
The first thing to do would be to decide what the main incentive for your business is. If the intention is to make profit to distribute to owners, then the best choice would be a company limited by shares. If your intention is to run as a charity, community interest company, or organisation focused on social benefit rather than profit distribution, a company limited by guarantee is likely a better option.
Consider also whether you’ll need to attract external investment. Companies limited by shares are generally more attractive to investors because they can acquire ownership stakes and receive returns through dividends or capital growth. Companies limited by guarantee cannot offer this, making fundraising more challenging.
If, after consideration, you have chosen to limit your company by shares, then the next stage is to decide what classes, denomination and number of shares you would like. If you have decided to incorporate a company limited by guarantee, your next step is to decide what guarantee amount you would like to set and consider whether you’ll need to register with the Charity Commission if pursuing charitable status.
