What is a Private Company Limited by Shares?

A private company limited by shares is a type of business that is a legal entity in its own right, distinct from its owners (i.e. shareholders), and the financial responsibility of each shareholder is no more than the value of their shares. In this article, we will set out all you need to know about running a private company limited by shares in the UK.

What is a private company limited by shares?

A private company limited by shares is a type of company structure in which shareholders are personally liable only up to the value of their shareholding. It is a specific form of limited company, meaning that the liability of its members is limited — in this case, by shares.

This means that, as a shareholder in a private company limited by shares, you are responsible for the company’s debts only up to the amount that you originally invested, which is the nominal value of your shares.

Section 3 (1) of the Companies Act 2006 states:

A company is a ‘limited company’ if the liability of its members is limited by its constitution.

It may be limited by shares or limited by guarantee.

(2) If their liability is limited to the amount, if any, unpaid on the shares held by them, the company is ‘limited by shares’. 

Private companies limited by shares represent the most common and popular type of company structure in the United Kingdom — accounting for over 92% of all entities on the Companies House register, according to our analysis of UK company registration statistics. When deciding on the best company structure for your needs, it is important to weigh up the differences between a private vs public limited company. 

What is a company shareholder?

A company shareholder is anyone who owns a stake in a company, referred to as ‘shares’. In a private company limited by shares, shareholders provide capital and, in return, receive ownership rights. These rights usually include the ability to vote on important company matters, the right to receive dividends if profits are distributed, and a claim on company assets if the business is wound up.

Shareholders are not limited to individuals, however. Other companies, partnerships, or even trusts can hold shares. Shares are generally issued when a company is formed, but they can also be created and issued at a later date as a way of raising funds or bringing in new owners.

What are the rules on company shareholders?

The Companies House rules on company shareholders state that a company limited by shares must have at least one shareholder who can be a director. If you are the sole shareholder, you effectively own 100% of the company. There is no upper limit on the number of shareholders. 

Shareholders:

• Control the company and make important decisions
• Receive a share of the company’s profits through the payment of dividends, and
• Can use their votes to agree on changes to the company

When you register your company with Companies House, you will be asked to provide details of the shareholding and shareholders.

Other rules to consider include:

• A share can be of any value
• Shareholders will need to pay for their shares in full if the company is closed down
• You can choose a nominal amount (i.e. a low share value) such as £1 to limit the shareholders’ liability to a reasonable amount.
• Your company can issue different types (or ‘classes’) of shares to shareholders, giving them different rights depending on the class of the share. Most companies just use one class of share called an ‘ordinary’ share
• Shareholders with ordinary shares typically have one vote on company decisions per share, and can be paid dividends.
• Shareholders with more than 25% of shares or voting rights in a company are classed as a ‘person with significant control’ (PSC).

What does ‘limited by shares’ mean?

The term ‘limited by shares’ means that the personal liability of shareholders is limited to the nominal amount they paid for their shares. This is known as the principle of limited liability and is one of the main reasons business people adopt this business model. 

Limited liability ensures that shareholders’ own assets are protected if the business runs into financial trouble. In practice, this means the maximum a shareholder can lose is the amount they have invested in shares. For example, if a company collapses owing £100,000 and a shareholder has only invested £500 in shares, their personal exposure is capped at £500. This protection encourages investment by limiting the risks attached to ownership.

Do company directors have limited liability?

While directors may be protected from liability as shareholders, they still have legal duties under the Companies Act 2006. But if they breach their statutory duties, continue trading while insolvent, or act dishonestly, the courts can make them personally responsible, disqualify them from acting as directors, or even impose criminal penalties. 

As long as directors act properly, follow their duties under the Companies Act 2006, and avoid wrongful or fraudulent trading, they will not be held personally liable for company debts. 

What are the key features of a private company limited by shares?

The key features of a private company limited by shares are as follows:

Feature	Explanation
Separate legal entity	The company exists in law independently of its owners
Ownership through shares	Individuals own part of the company by holding shares. This provides ownership and control, and can be sold or transferred
Limited liability	Shareholders are only liable for debts up to the nominal value of their shareholding
No public share offering	Shares cannot be traded on a stock exchange, unlike a PLC
Flexible structure	One person can act as both sole director and sole shareholder
Continuity	The company continues even if directors or shareholders change
Ease of formation	Incorporation is quick and affordable through a company formation agent such as Uniwide Formations or Companies House.

If you are about to set up a new business in the UK, it is useful to understand the pros and cons of a private company limited by shares, as follows:

Advantages

Disadvantages

The personal protection of limited liability up to the nominal value of your shareholding The existence of the company as a separate legal identity Greater credibility with banks, suppliers, and customers Continuity – they survive changes in ownership Beneficial tax arrangements compared to other business structures, such as a sole trader.

More administration compared to simpler business models, such as sole traders and partnerships – for example, annual accounts and confirmation statements must be prepared and filed each year. Your accountant will normally prepare these for you Certain details, such as directors’ names and company accounts, must be placed on the public record Company directors in the UK face strict legal compliance requirements (i.e. directors’ duties).

How can I set up a private company limited by shares in the UK?

The process of forming a private company limited by shares is straightforward but involves several formal steps. You can either use the services of a company formation agent, such as Uniwide Formation, who can streamline the process for you at a reasonable cost, or apply through Companies House.

The key steps you will need to follow are as follows:

1. Choose a company name that complies with Companies House rules
2. Appoint at least one director and one shareholder. In many small companies, the same person acts in both roles
3. Decide on your share capital – usually starting with one or more £1 shares
4. Draft your memorandum of association and the articles of association – or use standard (model) ones provided by Companies House. These are the key constitutional documents that set out how the company will be run 
5. Select a Standard Industrial Classification (SIC) code to identify your business activity
6. Complete the application process and pay the required fee. We offer a range of company formation packages to suit all needs, all for a reasonable set fee.

If you use our company formation service, we can ensure that your company is formed on the same day.

Legal and regulatory requirements of private companies limited by shares

Private companies limited by shares are regulated by the Companies Act 2006. Once formed, they must comply with a range of obligations. Every year, companies must file a confirmation statement and submit annual accounts, even if the business is dormant. They must also maintain statutory registers recording directors, shareholders, and charges over company assets.

Directors carry legal duties under the Act, including the duty to act in good faith, to promote the success of the company, and to avoid conflicts of interest. Failure to meet these obligations can lead to penalties, fines, or even disqualification.

Ongoing management and growth of a private company limited by shares

Once your company has been set up and is actively running, it is vital that you keep accurate accounts, file tax returns, and ensure corporation tax is paid. Businesses may also need to register for VAT and operate PAYE if employing staff.

In order to fund growth, private companies can issue new shares to raise money, attract outside investment, or restructure ownership. They may also franchise their model, license intellectual property, or expand into new markets. In some cases, a successful private company may later convert into a public limited company to raise larger sums from capital markets.

Final words

Whether you are starting a small family business or building a company with growth ambitions, a private company limited by shares is a great place to start. It provides a number of key advantages, not least limited liability, and can be easily set up using our simple online company formation process.