An unlimited company is a type of private company. It has some features similar to a limited company. It is registered at Companies House and it has members (usually shareholders) and directors, among other standard features of limited companies.
However, the shareholders (or members) of this type of company have unlimited liability. This means each member is jointly and severally liable for the debts of the company in the event of its insolvent winding-up. If the company needs more money to pay its debts or liabilities on winding up, it can call on the shareholders to contribute whatever amount is necessary to make up the shortfall.
An unlimited company is most commonly chosen when the owners do not wish to publicly file financial information with the registrar. This advantage of this company is that it’s exempt from filing its annual accounts with Companies House (unless the company has been either a subsidiary undertaking or a parent company of an undertaking which is limited during the relevant accounting period).
It’s also a bit less complex to return capital to shareholders of an unlimited company, as the restrictions on return of capital contained in the Companies Act 2006 only apply to limited companies. For this reason, they may be very useful within a corporate group structure if the ability to more freely move capital is desired.
Under the Companies Act 2006, an individual can act as both director and first member from the outset. These types of companies are formed by paper application only and the IN01 needs to be delivered to the registry along with the Memorandum of Association and Articles of Association which will include an unlimited liability clause.
There are usually very few unlimited companies, but this may very well be because their existence and value are not widely understood.
Unlimited liability can have the effect of encouraging careful risk management, since the owners of the business potentially have a lot to lose if things go wrong. Even if the shareholders don’t manage the business themselves, they’ll have a keen interest in ensuring the decisions of the directors that are appointed are subject to sufficient scrutiny. More often than not, keener risk management will result in lower risk endeavours being pursued by the business than might otherwise be the case.
With such an incentive to manage the company prudently and good risk management practices therefore put in place, creditors (and potential creditors) may have more confidence in an unlimited company. With their own assets at risk, those behind the company are in theory unlikely to borrow if they don’t have confidence they can repay. Because the shareholders bear full liability for any debts that need to be paid in the event of insolvency, so the argument goes, creditors may be more confident to lend money to an unlimited company.
Compared to its limited counterpart, it’s easier in an unlimited company to return capital to shareholders (and reduce share capital). That’s because the restrictions in this area, defined in the Companies Act 2006, only apply to limited companies. This flexibility can be especially useful when you’re employing a group structure, as it gives more options to move capital between the entities in the group.