Types of Company
This post is part of Investigating Companies: A Do-It-Yourself Handbook. Read, download or purchase the whole book here.
The majority of limited companies in the UK are private companies limited by shares – indicated by the abbreviation ‘Ltd’.
A public limited company – or plc – has the legal characteristics described in section 2.1, but its shares can be sold to the general public through stock exchanges such as the London Stock Exchange.
This increases the amount of investment it can attract (see section 2.5) but plcs are subject to more regulations, and have to disclose more information than private limited companies (see section 3.1).
Most big, multinational companies are plcs. Note that the ‘public’ in their name doesn’t mean they’re owned by the government or the state.
Plcs are also called publicly-traded, listed or quoted companies. Note that a company must have the legal form of a plc if it wants to have its shares listed on an exchange but not every plc chooses to list its shares.
Some companies do not have shares but are limited by guarantee. Private companies limited by guarantee are usually set up to be not-for-profit and do not have shareholders but ‘members’. They also have a separate legal personality and their members are protected by limited liability, but instead of liability being limited to the value of the shares, they guarantee to pay a – usually very small – nominal amount. They also use the Ltd abbreviation. Unless stated otherwise, ‘company’ or ‘companies’ in this guide refers to profit-making limited companies.
Other types of business or trading organisation in the UK include:
Individuals running a business in a personal capacity, rather than incorporating a company and running it through that.
In a partnership, two or more people run a business in common and all the partners share responsibility for it. Profits and losses can be shared between.the partners and each partner pays tax on their share of the profits.
In England, Wales and Northern Ireland a partnership is not a separate legal entity distinct from the partners in the way that a company is from its shareholders (and the partners are not protected by limited liability). In Scotland however, partnerships are distinct legal entities.
LIMITED PARTNERSHIP (LP)
An LP typically has limited partners who, provided that they do not become involved in the management of the business, will not have liability for the debts and obligations of the firm. The limited partnership must also have at least one general partner who manages the business and bears unlimited liability to creditors. The general partner may, and generally will, be an entity such as a company which itself has limited liability.
Because of the limited liability and various tax benefits, LPs are a popular way to organise private equity investment. The investors – mostly pension funds and other big institutional investors – are limited partners, while the private equity firm managing the money is the general partner.
LIMITED LIABILITY PARTNERSHIP (LLP)
Created by the Limited Liability Partnerships Act 2000, LLPs are a combination of partnerships and limited liability companies.
Like limited liability companies, LLPs have a separate legal personality from their members but they are ‘tax transparent’, like partnerships. This means that the LLPs do not pay corporation tax. Income or gains are distributed to their partners, who then pay tax on it. LLPs are commonly used by accountants and lawyers.
The majority of LLPs are set up as normal business operations but a 2013 investigation by Private Eye magazine argued that the LLP structure and the lack of regulation around it has helped make Britain “the capital of corporate crime” by making it easier to hide illicit activities such as money-laundering.
COMMUNITY INTEREST COMPANY (CIC)
Created by the Companies (Audit, Investigations and Community Enterprise) Act 2004, a CIC is a special type of limited company which is meant to exist to benefit the community rather than private shareholders.
They can be limited by shares or guarantee. A company proposing to set up as a CIC must pass a ‘community interest test’. To enable the regulator to decide if a company passes the test, the proposed CIC must provide a ‘community interest statement’. A mandatory requirement in the articles of association of a CIC is the ‘asset lock’ which prevents the CIC selling its assets at undervalue and ensures that the CIC’s assets are retained by the CIC and are used for the benefit of the community it was set up to serve.
INDUSTRIAL AND PROVIDENT SOCIETY (IPS)
An IPS is an incorporated organisation conducting an industry, business or trade, either as a co-operative run for the mutual benefit of its members, or for the benefit of the community. They are registered with the Financial Conduct Authority.
An IPS is controlled by all its members and must be run on the principle of one member, one vote.
These include countless small groups and societies, and larger ones such as housing associations. Many credit unions and building societies were set up as Industrial and Provident Societies but now have their own specific legislation.
A trust is a legal arrangement where one or more ‘trustees’ are made legally responsible for holding assets such as land, money, buildings or shares that are placed in trust for one or more ‘beneficiaries’. The trustees are responsible for managing the trust.
Trusts can be used for a range of purposes: by families to pass on assets through generations, for pension schemes, or for charitable purposes, where the beneficiaries will be a specified group of people in society. However, because often only the name of the trustee is disclosed publicly, they can also be used to shield people’s finances from public scrutiny and to hide criminal activities such as tax evasion and money laundering.
A unit trust is a form of collective investment constituted under a trust deed. Unit trusts are highly regulated in most jurisdictions.
Note that so-called investment trusts are not actually trusts at all but incorporated companies. Investment trusts issue a fixed number of shares when they launch, which are then bought by investors. A professional fund manager then invests that money in the shares of other companies. A mutual fund is just one form of investment trust. ‘Investment fund’ is often used synonymously with ‘investment trust’.
A charity is not a legal form but a status conferred on a not-for-profit organisation whose purposes are to provide a ‘public benefit’ and who fall under the charity criteria set by the Charities Act 2006. Such organisations can take a number of different legal forms, including associations, trusts and companies limited by guarantee. They are regulated by the Charity Commission of England and Wales, the Charity Commission of Northern Ireland and the Office of the Scottish Charity Regulator.
Don’t assume that because an organisation has charitable status its behaviour will necessarily be ethical: there are all sorts of dodgy charities around.